Are My Tax Refunds a Part of the Bankruptcy Estate?

Whether or not to file for bankruptcy is always a difficult decision for any individual to make. The bankruptcy option is generally viewed as last ditch effort to clean the slate and start fresh. The refunds that an individual receives after they have filed their state and federal taxes are usually a big part of this fresh start. With their consumer debts no longer a worry, the refunds can be applied to something other than paying bills, like beginning a savings account to help avoid future financial difficulties. However, there is the possibility of a taxpayer’s refunds being considered as an asset; and, therefore, as a part of the bankruptcy estate. Therefore, it is important to know when an individual will be allowed to keep their refunds, and at what point they will be required to turn over any amount they receive as a refund to the bankruptcy trustee.

The determining factor in whether an individual’s tax refunds will be considered as a part of the bankruptcy estate is time. This applies to both the filing of the bankruptcy petition, as well as the filing of tax returns. The dates of these filings are what will control the decision on what should be turned over to the bankruptcy trustee. When a debtor files for bankruptcy, the trustee creates a bankruptcy estate, which is comprised of the debtor’s non-exempt assets and is used to pay off as many of the individual’s debts as possible. Any tax refund for taxes that were assessed prior to the filing of the bankruptcy petition, up to three (3) years prior to the bankruptcy filing, can be included with the bankruptcy estate. Even if a debtor attempts to put off filing their taxes for a long period of time, say a year or more, any refund that is realized as a result of that filing may still be included into the bankruptcy estate. Any refunds for taxes that are assessed following the bankruptcy filing are not deemed to be a part of the bankruptcy estate. The problem that arises is when tax returns are not filed until after the bankruptcy petition has been filed, but cover taxes that were assessed prior to the bankruptcy filing. In this situation, the bankruptcy trustee has the discretion of whether or not to include these refunds with the bankruptcy estate. Typically, if the refund was of any significant amount, the trustee will order the debtor to turn this amount over for inclusion into the bankruptcy estate. If a court determines that a debtor purposely delayed filing their tax returns in order to avoid including their refunds with the bankruptcy estate, the entire return can be included into the bankruptcy estate and a penalty may be assessed.

Something important that debtors need to know prior to filing for bankruptcy is that they may be held liable to the bankruptcy trustee for tax refunds that they have received prior to the filing of the bankruptcy petition. This is the case even if the refund has already been spent. In this situation, the debtor may be ordered by the bankruptcy trustee to make payments until the amount of the refund has been repaid. More than likely, this type of situation will not arise for any refund other than the most recent; however, it is possible that older refunds will have to be repaid since the trustee is entitled to demand inclusion into the bankruptcy estate for refunds for the previous three (3) years.

There are situations when tax refunds, or at least portions of them, will be exempt from the bankruptcy estate. For instance, if a debtor is married but filing bankruptcy as an individual, even if their refund is considered to be a part of the bankruptcy estate, only fifty percent (50%) of the refund would be affected. This is because the other fifty percent (50%) would be viewed as the property of the debtor’s spouse. Also, as stated previously, tax refunds for any subsequent year following the year in which the bankruptcy petition was filed will be the property of the taxpayer and should not be affected by the bankruptcy. Of course, this would only be the case for chapter 7 bankruptcy filing. If the individual was filing Chapter 13, they would be required to make continuous payments to the bankruptcy trustee. Therefore, they may be forced to use their tax refunds to help make their payments.

THIS ARTICLE CONTAINS GENERAL INFORMATION AND DOES NOT CONSTITUTE LEGAL ADVICE.

Are Tax Preparers Liable for Mistakes They Make When Filing My Taxes?

It is tax time again, and many of us are scrambling to finish our returns and get them filed with the IRS. Whether it is due to a lack of knowledge or time, many of us have become accustomed to hiring someone to prepare our taxes for us. While this is can prove to be very efficient for those individuals who choose to utilize this service, taxpayers need to be aware of the reality that tax professionals are capable of making mistakes, whether intentionally or by accident. These mistakes can prove to be very costly as the IRS is quick to assess penalties and attach interest for fraudulent returns. And in the end, it is the taxpayer who is placed at the mercy of the IRS and a potential audit. Therefore, it is important for individuals to know what options are available to them should they find themselves in this situation.

Some common mistakes that tend to arise when a tax professional is hired to prepare an individual’s return are the understatement of the individual’s income, or the overstatement of the deductions available to the taxpayer. These mistakes may be caused by any number of different sources; however, courts have determined that preparers should exercise the same degree of care that would be employed by a prudent member of their profession. So, if the information provided to a tax preparer appears incorrect or questionable, they have a duty to seek out any additional information needed to ascertain the truth. There are also instances in which a tax preparer includes fraudulent information on an individual’s return in order to obtain a larger refund for the taxpayer, in hopes of securing that person’s business the following year. If the preparer fails to take the additional steps required, or if they make a blatantly fraudulent addition or subtraction to a taxpayer’s return, they may be held liable for their action. In order for liability to attach, it must be shown that the mistake made by the preparer was done so knowingly or if it was due to reckless conduct. While it may be difficult to actually prove that the preparer had direct knowledge of the mistake they were making or that they had the intention of doing so, these factors can be inferred from their actions.

Generally speaking, if a tax preparer is found to have knowingly or recklessly included false information on an individual’s return, they may be found liable to the taxpayer for all fees associated with that mistake; this would include any interest and/or penalties assessed by the IRS, as well as any accountant and/or attorney fees that the taxpayer may have absorbed in an attempt to settle this situation. If it can be shown that the preparer’s actions were malicious or intended to cause injury to the taxpayer, then additional damages may be awarded. These damages can include payment for emotional distress that results from a tax audit.

It is important for taxpayers to know that large corporations that provide tax preparation services typically have policies in place that deal with these types of situations. Generally, it is common practice for these corporations to agree to pay any attorney fees and penalties and interest that result from mistakes made by their employees. They do this in hopes of avoiding any negative publicity that may result from a pending lawsuit. However, there is always the possibility that these companies may deny any liability. If you have hired a tax professional to preparer your return and a subsequent audit uncovers mistakes, you should be sure to contact an attorney to learn what your rights are and what options are available to you.

THIS ARTICLE CONTAINS GENERAL INFORMATION AND DOES NOT CONSTITUTE LEGAL ADVICE.

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The Powell Law Office strongly believes that individualized attention produces positive outcomes. That is why structure our services in such a fashion that the client is informed of every important decision in the legal process.