At this time of year, many people filing Chapter 7 bankruptcy lose their not-yet-received income tax refund to the bankruptcy trustee.

The generally applied rule here in eastern Oklahoma is that if a person files his income tax return, then files Chapter 7 bankruptcy before he receives his income tax refund, the Chapter 7 trustee will likely demand turn over of the refund (except for any portion due to the earned income credit) when the debtor receives it if the refund is of a significant amount (generally $1,500 or more).

This is why I always make sure that my clients who expect to receive an income tax refund know that they need to get their refund in hand and spend it on reasonable and necessary expenses before filing their bankruptcy case. Or if my client just can’t wait to file, I at least want them to be aware that they will likely lose their refund.

Now there’s another option to consider for people needing to file bankruptcy but expecting to receive a sizeable income tax refund thanks to the recent case of Weinman v. Graves, 609 F.3d 1153 (10th Cir. 2010).

A person planning on filing Chapter 7 bankruptcy may want to consider applying this year’s income tax refund to next year’s tax liability.

In July 2007, prior to becoming Chapter 7 debtors, James and Kathryn Graves filed their 2006 tax return. Pursuant to that return, the Graveses were entitled to a $3000.00 tax refund. Instead of choosing to receive a current refund of that money from the IRS, the Graveses elected to leave those funds on deposit with the United States and apply the overpayment to their future tax liability. Two months after filing their tax return, the Graveses filed for Chapter 7 bankruptcy protection. The Chapter 7 trustee attempted to force the IRS to turnover the tax refund pursuant to 11 U.S.C. sec. 542(a)(5) but the bankruptcy court held against the trustee. Strike one! The Chapter 7 trustee appealed and the Bankruptcy Appellate Panel (BAP) affirmed the lower court’s ruling. Strike two! The trustee again appealed and the Tenth Circuit affirmed the BAP. Strike three! The trustee appealed to the United States Supreme Court which denied cert.

The Tenth Circuit held that the Chapter 7 trustee could not force the IRS to turnover the tax refund at the time the motion was filed. Instead, the trustee was only entitled to the portion of the refund that was attributable to prepetition earnings and remained after the refund had been applied to the following year’s tax liability. The court reasoned that the debtors’ election to apply the refund to future tax liability was irrevocable under section 6513(d) of the Internal Revenue Code. Therefore, the debtors’ interest in the refund, and consequently the estate’s interest, was limited to the remainder of the refund, if any, after it was applied to the debtors’ 2007 tax liability.

The Tenth Circuit’s holding in Weinman may allow debtors to shield their tax refunds from the bankruptcy estate, reducing the pool of assets that creditors would otherwise have been able to reach absent the refund-application election. Bankruptcy attorneys should inform their clients who are considering Chapter 7 to consider electing to apply tax overpayments to future tax liabilities before filing for bankruptcy in an attempt to preserve the refund so that they can use it to reduce their post-bankruptcy tax obligations.

If you received unemployment benefits last year, remember in preparing your 2009 tax returns that the first $2,400 of those unemployment benefits is tax-free income.

Under last year’s American Recovery and Reinvestment Act (ARRA), every person who received unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when they file their income tax return this year.

For a married couple, the exclusion applies to each spouse individually.

Source: IRS.gov

Can payroll or employment tax liability be discharged in bankruptcy? It depends.

Payroll or employment taxes are comprised of two parts:

1. 1. the employer portion, and
   2. the employee portion.

Employer Portion of Payroll Taxes is Dischargeable – Sometimes.

The employer portion of the payroll tax is the tax which the employer owes directly to the IRS. The employer portion includes the employer’s obligation to match the employee’s 6.2% social security tax and the 1.45% Medicare tax.

The employer portion of the employment tax can be discharged in bankruptcy if:

1. there are more than three years between the date the 941 tax return was last due, including extensions, and the date that the bankruptcy was filed;
2. there are more than two years between the date the 941 tax return was filed and the date the bankruptcy case was filed; and
3. the employer did not willfully evade payment of the tax.

Employee (Trust Fund) Portion of Payroll Taxes is Never Dischargeable.

The employer is required to withhold the employee portion aka “trust fund” portion from the employee’s pay check and remit it to the Internal Revenue Service (IRS).

The employee portion of the tax is referred to as a trust fund tax because the employer is collecting the employee paid portion of the payroll tax from the employee in the capacity of a trustee for the IRS.

The employee paid portion of the payroll tax includes the 6.2% Social Security tax and the 1.45% Medicare tax.

Trust fund taxes are never dischargeable in Chapter 7 bankruptcy.

And in Chapter 13 bankruptcy, the plan must provide for full payment of all trust fund recovery taxes in order to be confirmed.

There is no escape from trust fund recovery taxes. However, trust fund taxes will become uncollectible if the 10 year statute of limitations expires without the IRS filing suit, regardless of whether the taxpayer files bankruptcy or not.

If you would like to speak with a knowledgeable attorney regarding payroll taxes and bankruptcy, contact me today to schedule a FREE initial consultation. Just fill out the Contact Dan form on the far right side of the page and click the Submit button and I’ll get back with you as quickly as I can. Or just pick up the phone and give me a call at 918-615-8260. I’ll answer all of your questions in plain English so that you’ll have the information you need to make the decisions that will help you the most.

A property tax is a tax imposed upon a person because of his or her ownership of property.

Here in Oklahoma, there are two types of property taxes:

1. Real estate taxes levied upon land owners by local municipalities, and
2. Personal property taxes levied against business owners by local municipalities for ownership of personal property used in connection with a business.

Property taxes are dischargeable in bankruptcy if:

1. the tax was incurred before you file bankruptcy, and
2. the tax was last payable without penalty more than one year before you file bankruptcy.

Remember, however, that liens survive bankruptcy.

Property taxes are secured with a statutory lien against the property that the tax is assessed against.

Therefore, if you want to keep the property that the property tax was assessed against, you must pay the property taxes even if the debt is discharged in bankruptcy or the taxing authority can foreclose on the property.

If you would like to speak with a knowledgeable attorney regarding the discharge of property taxes in bankruptcy, contact me today to schedule a FREE initial consultation. Just fill out the Contact Dan form on the far right side of the page and click the Submit button and I’ll get back with you as quickly as I can. Or just pick up the phone and give me a call at 918-615-8260. I’ll answer all of your questions in plain English so that you’ll have the information you need to make the decisions that will help you the most.

Interest and penalties on federal income tax debts are dischargeable if the underlying income tax is dischargeable.

In a Chapter 7 bankruptcy case, if the income tax is not dischargeable because it relates to a tax year where the due date for filing the tax return is less than three years before the bankruptcy was filed, then the penalty relating to the unpaid income tax is not dischargeable.

But if the events giving rise to the penalty occurred more than three years before the taxpayer filed for bankruptcy, then the penalty is dischargeable even if the related income tax is not dischargeable.

Therefore, penalties on trust fund taxes and taxes owed because a taxpayer filed a fraudulent return or is guilty of tax evasion are dischargeable even though the underlying tax is not dischargeable.

The interest on these types of taxes is not dischargeable but the interest assessed on the dischargeable penalty is abated.

If you would like to speak with a knowledgeable attorney regarding the discharge of taxes in bankruptcy, contact me today to schedule a FREE initial consultation. Just fill out the Contact Dan form on the far right side of the page and click the Submit button and I’ll get back with you as quickly as I can. Or just pick up the phone and give me a call at 918-615-8260. I’ll answer all of your questions in plain English so that you’ll have the information you need to make the decisions that will help you the most.

You may hear radio commercials offering the hope of eliminating income tax debts in bankruptcy. But it’s not as simple as it sounds.

For example, if the income taxes you owe are for one of the last three tax years, then they can’t be wiped out (discharged) in bankruptcy — you’ll continue to owe them at the end of a Chapter 7 bankruptcy case, or you’ll have to repay them in full in a Chapter 13 bankruptcy repayment plan.

If you need to discharge tax debts, Chapter 7 bankruptcy will probably be the better option — but only if your debts qualify for discharge (see below) and you are eligible for Chapter 7 bankruptcy (see “What Is The Means Test in Bankruptcy?”).

You can discharge (wipe out) debts for federal and state income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:

1. You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can’t help.

2. The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.

3. You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.

4. You pass the “240-day rule.” The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)

If your taxes qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. This is because bankruptcy will not wipe out prior recorded tax liens. A Chapter 7 bankruptcy will wipe out your personal obligation to pay the debt, and prevent the IRS from going after your bank account or wages, but if the IRS recorded a tax lien on your property before you file for bankruptcy, the lien will remain on the property. In effect, this means you’ll have to pay off the tax lien in order to sell the property.

If you would like to speak with a knowledgeable attorney regarding the discharge of taxes in bankruptcy, contact me today to schedule a FREE initial consultation. Just fill out the Contact Dan form on the far right side of the page and click the Submit button and I’ll get back with you as quickly as I can. Or just pick up the phone and give me a call at 918-615-8260. I’ll answer all of your questions in plain English so that you’ll have the information you need to make the decisions that will help you the most.

Several local organizations including the Community Action Project (CAP) are once again offering FREE tax preparation assistance to qualified Tulsa County residents.

CAP’s tax-preparation program is open to families that earn $50,000 or less and individuals who earn $40,000 or less. People who have been laid off in the past year also can take advantage of the free program.

Last year, the agency prepared more than 17,000 returns and helped clients get $29 million in refunds, said Linda Brock, the organization’s communications specialist.

Call 382-3333 to make an appointment at one of the following locations:

• Bank of Oklahoma, 1604 N. Lewis Ave.
• Community room Exchange Center, 4606 S. Garnett Road, Suite 100
• McClure Early Childhood Center, 6150 S. Yorktown Ave.
• Tulsa Educare, 2511 E. Fifth Place
• Eugene Field Early Childhood Center, 1120 W. 22nd St.
• Sand Springs Early Childhood Center, 1701 E. Park Road

What to bring:

• Photo identification
• Social Security cards for each member of the family
• W-2 forms for all jobs worked in 2009
• All 1099s for other income, if applicable
• Other tax-related documents
• Childcare provider name, address and tax ID number
• Voided check for automatic deposit
• Copy of last year’s tax return
• If married filing jointly, both spouses need to be present to sign return

Source: Tulsa World

As April 15 draws closer, I am getting quite a few phone calls and emails from people who are considering filing Chapter 7 bankruptcy but are worried that they may lose their income tax refund if they do.

Most of these people are depending on their income tax refund for necessary living expenses or are planning to use it to catch up on mortgage payments or car payments. Some are even wanting to use their income tax refund to pay their bankruptcy attorney’s fees and filing fees.

The answer to this question depends on the specific facts of your situation and where you file your case. The exemption laws that are available to protect an income tax refund vary dramatically from state to state.

Like everything else in bankruptcy, it is very important that you be completely open and honest with your bankruptcy lawyer about your income tax refund. I ask every client of mine whether or not they have filed their tax return and whether or not they have already received or are expecting an income tax refund.

In Oklahoma, if you file your bankruptcy case AFTER you get your income tax refund, and you spent your refund on exempt property, then your worries are over. It’s not an issue.

It would be all right to spend the tax refund on things such as food, clothing, household goods, home and vehicle repairs, catching up on your house payments, and contributing to retirement accounts.

But you could spend your tax refund in such a way as to create a problem.

For example, if you used the tax refund to repay a relative money you owed them, or to pay off one of your credit cards, that’s considered a “preferential transfer” where one creditor was treated more favorable than the others. And when that happens, the Chapter 7 trustee can force your relative or the credit card company turn over that money.

However, if you file your bankruptcy case BEFORE you get your income tax refund, you must disclose the tax refund in your bankruptcy documents as an asset.

And in Oklahoma, except for any portion of the tax refund that is attributable to the earned income credit, the tax refund is a non-exempt asset which means that it can be taken by the Chapter 7 trustee to be paid to your unsecured creditors.

Whether or not the Chapter 7 trustee will take an income tax refund usually depends on two things: 1) how large the refund is, and 2) what percentage of your unsecured debts would be paid by the refund. If the total amount is small and the percentage paid back would be insignificant, the trustee is likely to abandon the tax refund and allow you to keep it.

If you filed a joint tax return with your spouse, but only one of you filed bankruptcy, your tax refund will be prorated according to the ratios of you and your spouse’s incomes and the trustee would only be able to take the refund belong to the spouse who has filed bankruptcy.

If you file your bankruptcy after January 1, but before you received your refund, the Chapter 7 trustee can take your share of the entire refund.

If you file your bankruptcy petition before January 1, the Chapter 7 trustee may take a pro-rata portion of the refund attributable to the months before you filed your bankruptcy case.

For example, if you file bankruptcy on September 30, nine months of the year (January – September) is considered pre-petition (before the bankruptcy case is filed) and three months of the year (October – December) is considered post-petition (after the bankruptcy case is filed). In this example, the Trustee can take 75% of your refund, while you get to keep the other 25%.

Lastly, future tax refunds beyond the year in which you file your bankruptcy petition are not subject to being taken by the Chapter 7 trustee.

If you are considering filing bankruptcy but are worried about losing your income tax refund, contact me today to schedule a FREE initial consultation. Just fill out the Contact Dan form on the far right side of the page and click the Submit button and I’ll get back with you as quickly as I can. Or just pick up the phone and give me a call at 918-615-8260. I’ll answer all of your questions in plain English so that you’ll have the information you need to make the decisions that will help you the most.

With today being April 15, I thought it would be fitting to talk about income taxes and bankruptcy.

There are several conditions that if met will allow a debtor to discharge both state and federal income tax liabilities in a bankruptcy case.

1.  The taxes you owe must be for a tax year more than 3 years prior to the filing of the bankruptcy case from the date the return was due.

For example, if you filed a Chapter 7 bankruptcy on May 1, 2008, taxes that were owed for the years 2004 and before would be discharged if you filed the 2004 return when it was due on April 15, 2005. However, if you received an extension to file the 2004 return until October 15, 2005, then the 2004 tax liability would not be discharged unless you filed the bankruptcy case on or after October 16, 2008.

Be aware that filing your tax return early doesn’t change the dischargeability date. For example, if you filed your tax return before it was due, say on February 1, 2005, the tax debt would still not be dischargeable until April 16, 2008 because the law provides that the taxes are discharged when they became due, which is usually around the 15 of April.

Furthermore, you must have personally filed your income tax return. If the IRS completed a return on your behalf, the taxes owed are not dischargeable.

2.  Your income tax return must have been filed more than 2 years before the date you filed for bankruptcy in Chapter 7 cases.

“Filed” generally means the date the IRS received the return, not the date the debtor mailed the return. In a Chapter 13 case, the tax debt may still be dischargeable even when a return was filed after the bankruptcy case was filed.

3.  The IRS or the state must have assessed the tax debt at least 240 days before the date you filed your bankruptcy case.

The 240-day period is extended during the time an offer in compromise is pending, plus 30 days.

4.  Your income tax return must not be fraudulent, and

5.  You must not have committed any actions that could be considered willful attempts to evade the tax.

Some examples of fraud or willful evasion include concealing or transferring valuable assets, selling assets to friends or family members for less than the fair market value and losing, concealing or destroying financial documents.

The above information is only a basic overview of the topic of discharging income taxes in bankruptcy. You should not rely on it to determine whether or not your personal income tax liability is dischargeable. The law in this area is rather complicated and you should seek the advice of a knowledgeable bankruptcy attorney regarding your personal situation.

If you owe back taxes and would like to know more about how bankruptcy may be able to help you, contact me today to schedule a FREE initial consultation. Just fill out the Contact Dan form on the far right side of the page and click the Submit button and I’ll get back with you as quickly as I can. Or just pick up the phone and call me at 918-615-8260. I’ll answer all of your questions in plain English and give you the straight scoop on the pros and cons of bankruptcy as related to your specific situation.

False. While not all tax liabilities can be discharged (forgiven or wiped-out) in bankruptcy, some can.

If you owe income taxes to the Internal Revenue Service (IRS), the Oklahoma Tax Commission (OTC) or another state, those tax liabilities can be discharged by filing either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy as long as the following 5 rules are met:

1. The due date for filing the tax return was at least three years prior to the date you file bankruptcy,
2. The tax return was filed at least two years prior to the date you file bankruptcy,
3. The tax assessment date was at least 240 days prior to the date you file bankruptcy,
4. The tax return was not fraudulent, and
5. You are not guilty of tax evasion.

Determining whether or not the taxes you owe can be discharged in bankruptcy is not an easy task. You should seek the advice of a knowledgeable bankruptcy attorney regarding your specific situation.

If you owe back taxes and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation. I would count it a privilege to be able to visit with you in a relaxed and confidential environment where I’ll answer all of your questions in plain English and give you the straight scoop on the pros and cons of bankruptcy as related to your specific situation.