Bankruptcy

Chapter 7 Debtor Defers Income Tax Refund And Protects The Money From His Bankruptcy Trustee

By Jonathan Alper

A Chapter 7 bankruptcy debtor?s tax refund is non-exempt and is part of the bankruptcy estate. Except that a Florida bankruptcy attorney told me about a case in another district  where the bankruptcy debtor may have beaten ths system. The debtor filed his federal income tax return as he was preparing for Chapter 7 bankruptcy. He realized he would be eligible for a significant tax refund which would be lost to the trustee. So, when the debtor filed the tax return he check the box authorizing the IRS to apply the tax refund to future year?s tax liability. When he filed bankruptcy, the trustee demanded the tax refund. The debtor replied that he was expecting no refund. The issue went to court and was appealed all the way to the circuit court of appeals.

The appellate court ruled for the debtor. The court said the debtor had no right or ability to claim and turnover the tax refund because under the Internal Revenue Code the debtor/taxpayer?s election to defer the refund is irrevocable. Because the debtor had no right under the tax law to reverse his election and get the tax refund, so the trustee had no right to seek its turnover.

If you plan to file Chapter 7 bankruptcy before you file your 2010 tax return, and you are entitled to a significant refund,  you should tell the IRS not to send the refund and apply the amount to your future taxes. The trustee will not be pleased, but there is legal authority to back up your position. Graves No. 08-1462 10th Cir.

Full post as published by Florida Bankruptcy Law on October 11, 2010 (boomark / email).