Chapter 13 and IRS tax returns and refunds

You must file the prior four years of returns when you file the bankruptcy petition

The Internal Revenue Service will be advised the moment you file a bankruptcy. The IRS will advise the court and the trustee if tax returns for the prior four years have not been filed. Section 1308(a) requires the debtor to file all the tax returns for the four years before the date of the petition. The IRS will report to the court and file a claim in Chapter 13, but many state tax departments do not.  This is just part of the rules you need to know when you file a Chapter 13.

How You Can Keep Tax Refunds in Chapter 7 or 13 bankruptcy

Chapter 13 Bankruptcy and Tax Refunds

Even if you don’t owe taxes and the tax was paid or discharged in bankruptcy you are required to file these returns and submit a copy to the Trustee. The only exception is when you earn below a certain income, and a return is not required to be filed.

Occasionally even if you didn’t file the return, the IRS could file a “substitute for return” for you estimating your income and not applying any deductions. These returns become official if you don’t object to them, but since you did not sign them, they don’t count. Substitute returns do not apply towards the 10-year statute of limitations and three year bankruptcy time limits. Those time limits allow you to discharge the tax debt when you timely file signed returns.

Timely submitting Tax Returns and Confirming a Chapter 13

A Chapter 13 plan cannot legally be confirmed until timely, signed tax returns are filed 11 U.S.C. § 1325(a)(9). Any case may be dismissed for not timely filing tax returns or keeping records. 11 U.S.C. § 1307(e). If all required tax returns are not filed by the date first set for the meeting of creditors, the trustee may hold open the meeting to allow additional time to file the return. 11 U.S.C. § 1308(b)(1).

Returns not filed for prior years are past due at the time of the petition. Some trustees will permit the debtor an additional 60 days after the date first scheduled for the meeting of creditors within which to file the required returns. Others just dismiss the case.

IRS tax extensions do not count in a Chapter 13 Bankruptcy

Returns must be filed even if you can get an extension under the IRS regulations to file your return. For example returns for 2018 must be filed by April 15, 2019, or 60 days after the date first scheduled for the 341 meeting. The trustee’s deadline for filing the tax returns is not changed by any extension of time granted by the IRS for filing the returns. The trustee will file a motion to dismiss the case after the expiration of the deadlines in the absence of evidence in the record. Evidence can be an amended proof of claim or an affidavit of the debtor that all required tax returns are filed

Eastern and Western Districts of Kentucky Taxes and Chapter 13

Both Districts require the debtor to use his best efforts to repay his debts. The Eastern district will require the Debtor to live by a strict budget which turns over all of the unnecessary and disposable income.

Eastern District of Kentucky Lexington

The Eastern District looks at tax refunds and inheritances at the time of confirmation.   The Trustee will not require you to turn over refunds if your history of refunds is normally small. If every year you get a large income tax refund it will want you to annually turn over the refund.

Western District of Kentucky Louisville.

The Western District requires your refund to be turned over every year regardless of the amount.  But they allow you to keep the earned income tax credit and deduct from the refund for the cost of tax preparation and the cost of any income tax that is due from the refund.

Each spring the Debtor is also required to file a budget. Normally most of my clients look at the budget they had at the time of filing.  Very little ever changed from the original Schedule I and J on the bankruptcy petition.  If their income goes up, their expenses go up.

There are very few exceptions to keeping a tax refund from the Trustee. It is possible a child is ill, and the refund was used to pay for medicine or a transmission. In such cases, the Debtor risks having the case dismissed if the refund is not turned over. It doesn’t matter if you needed the refund for a furnace.  The judge may or may not approve even a severe need to use the refund.  The debtor may or may not be allowed to catch up and increase the plan payments to pay back the refund.  But there are methods planning how to keep your refund.

The Federal tax rules in local Bankruptcy courts

The Federal statutes and rules apply in all of the courts. But each district has its own interpretation of what the federal rules mean.  Every judge has his way of executing the Federal statutes.   In the military, the President would declare the mission which needed to be clear. But Generals and officers decided the strategy and tactics of how to get the job done.

As a result, each district has its own way of doing things.  You will see different methods of ensuring the maximum amount is repaid during a Chapter 13 plan. This may be done with annual reporting or not.

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Nick C. Thompson

Nick used to work for the banks before he went to law school.He was married to the president of the Mortgage Bankers Association and worked in the state tax department as a prosecutor.He was also the assistant county attorney in Bullitt County.
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