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TAX RETURNS, TAX LIABILITY AND TAX REFUNDS IN CHAPTER 13 CASES.

May 4th, 2014 by Robert Brandt   |   No Comments   |  Filed under Chapter 13 Bankruptcy

One of the things that is required of you while you are in chapter 13 bankruptcy (at least here in Alexandria, Virginia) is that you file your federal and state tax returns by April 15 during each and every year that you are in bankruptcy. Extensions are not permitted and the chapter 13 trustee Thomas Gorman will expect to receive copies of your returns by May 1st of each year. Otherwise expect him to file a Motion to Dismiss your case if you fail to do so. Copies of your tax returns should be sent to his Alexandria office located at 300 North Washington Street, Suite 400, Alexandria, Virginia 22314. No need to send them to me as well.

As for tax refunds, and the issue of having to turn over those refunds in excess of $250.00 to his office, here are a few things to keep in mind. First, if your case ends with the letters “RGM” which are the initials of Judge Mayer then you do not have to worry about turning over your tax refunds regardless of the amount during the 3/5 years that you are in bankruptcy. If your case number however ends with “BFK” which are the initials for Judge Kenney, then unfortunately those refunds will have to get turned over. It is just a matter of luck in other words. There are just two judges in the bankruptcy court in Alexandria, Virginia so your odds are 50/50. And to make matters worse, the answer is “no,” as in the tax refund that you turn over will not go towards paying down the amount you owe so as to get you out of bankruptcy sooner. Think of the refund as a bonus for the creditors.

Second, typically the very first refund that you get while in chapter 13 bankruptcy can typically get exempt/protected so you will not need to turn over that first refund during year one or year two of your case. Also, if yours is a 100% chapter 13 plan, then no need to worry about turning over your tax refunds.

Third, just because your case was assigned to Judge Kenney does not mean that you need to despair. One fairly simple “trick” to employ is to modify the number of withholding that you claim on your pay checks and reduce the amount in payroll taxes that you pay during the year, thus reducing or eliminating your tax refund. You may not get the usual refund that you are accustomed to, but then again you will have more money in your pocket during the year.

And what if during the duration of your chapter 13 bankruptcy you happen to owe taxes one year? Fortunately the IRS, the gentle giant that it is, will allow you to pay off that liability during the remaining months that remain in your chapter 13 bankruptcy case. They will file an amended claim to reflect the new amount owed instead of forcing you to write one big check. They will only grant you this courtesy just once however. If you end up owing taxes yet again during the life of your case they will expect you to make arrangements to pay it outside the confines of your chapter 13 plan. As for the state of Virginia, their policy is different. Any tax liability incurred after the filing of your chapter 13 case must be paid by you outside of the chapter 13 plan.

Finally, in case you are wondering, the IRS and Virginia cannot intercept your tax refunds while you are in a chapter 13 and apply it to a tax debt that existed prior to the filing of your case since that would violate the automatic stay. But, if you incur tax liability after the filing of your case and then in a subsequent year obtain a refund, then the post filing refund can be applied to the post filing debt.

 




The Law Firm of
Robert S. Brandt

1513 King Street
Alexandria, Virginia 22314
Phone: 703-342-7330
Fax: 703-229-4132

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    The Law Firm of
    Robert S. Brandt

    1513 King Street
    Alexandria, Virginia 22314
    Phone: 703-342-7330
    Fax: 703-229-4132