Tax Returns

[mclawdawg]

Hi all,

Really brief question. As you all know I've just begun my Chapter 13 Bankruptcy - I forgot to mention that I have been surviving by exempting my paychecks for the past 4 years. I always pay the IRS back when I do this btw, but so far for 2021 I've exempted 5 out of the 12 months this year. I'm going to change it back to claiming zero so I hopefully don't owe anything. Is this frowned upon or even allowed during bankruptcy??

Thanks all for taking the time to read this!

[justbroke]

Hopefully your Chapter 13 was filed with the appropriate exemptions in place. You do not want to get into a situation where you owe the IRS money. It could wreak havoc on your plan later if you don't keep up with your IRS annual payments.

Also, depending on the language in your Chapter 13 or what's required in your district, any refunds may automatically be4come property of the Chapter 13 bankruptcy estate. Usually there is language in the Chapter 13 plan of reorganization which reads that the debtor will surrender any and all tax refunds to the custody and control of the trustee for distribution to the unsecured creditors.

I would ask my attorney whether or not your actual taxes have been accounted in the Chapter 13 means test. Make sure that you haven't over or under-stated your witholdings. Some Trustees catch this and others may not.

Eventually the IRS will do the worse thing possible and tell your employer to do a mandatory withholding (2800C/2801C). This could be for more than simply claiming zero. You want to make sure you are having appropriate withholding taken and that it has been properly accounting in the bankruptcy.

[mclawdawg]

Thanks for the information justbroke as usual. I just changed my exemptions back to the normal amount zero and selected to pay in $25.00 more each paycheck to hopefully offset to prevent me from owing. I believe the tax returns in my case have to be filed with my attorney to see if my annual salary increases, I don't believe they mentioned anything about taking the tax returns.

I did mention this to my lawyer, but he didn't say anything and said I should consult a tax professional. I don't think he fully understood what I was trying to say. There's so much to keep up on with my busy life that it's easy to forget these things.

[justbroke]

I understand why your attorney doesn't want to talk about taxes because that's such a specialized area. Your attorney probably didn't want to give bad advice on the taxes. It reads as though you do not need to surrender tax refunds to the Trustee, which is a good thing if you overpay.

[mclawdawg]

Yeah so initially how I survived was I would exempt a few paychecks or pay less taxes on my checks. The IRS due date is right around when my company distributes a bonus in March. So I would just pay my taxes with some of the bonus. This way the money would help me significantly throughout the year. I know it isn't the right way of doing things, and that's probably how I ended up in this position that I'm in. I just did the math it looks like I'll owe for next year while in my Chapter 13 plan . I do however still have the $3000-4000, that I could use unless this is frowned upon. I feel like I have a good attorney but there's a ton of grey areas where I think I'm doing stuff wrong but I just forget to mention it. I'm exhausted from my normal life and this bankruptcy... already..

Looks like I'll have to let my lawyer know the whole scenario in depth now.

[justbroke]

The only issue is that it can put your Chapter 13 in jeopardy. A Chapter 13 only really works, smoothly, if there is consistent income with similarly consistent expenses. When things fluctuate or the debtor depends on a future event to rescue them (e.g. a bonus), that's when things go awry.

I can tell you that the only thing that probably save me from taxes during my Chapter 13, was that the IRS filed a mandatory notice with my employer. I did work with the IRS for the deductions and everything and the employer was then no longer to accept any W-4 that I filed. I was locked in! Don't let it ever come to that. (I was able to get the IRS to change it from 0 deductions to Married Filing Jointly with 10 exemptions. When they wanted to change it to 0 deductions, it would have killed my Chapter 13 plan.)

[mclawdawg]

I understand. Thank you so much again. I just changed my exemptions to zero so the full amount will be taken out in federal, along with the additional $50 i'll be giving them to offset it.

I won't be banking on future events anymore.

FYI: I did tell my lawyer and the trustee what my paychecks were (with taxes being taken out). The weird thing is I get to claim my daughter every other year for taxes. This is why I would change my W-4 around constantly. I won't be doing that anymore in a Chapter 13 plan. Having a family to take care of and Child Support to another household has made me do desperate, foolish things with money.

[justbroke]

I know exactly what you mean mclawdawg when it comes to changing around the W-4. I too had alimony (not child support), and depended on annual bonuses. It didn't work out for me by banking on future events.

[mclawdawg]

Yeah Alimony, same thing... or could be worse in the payment process. I just had the 341 meeting and it seemed like everything was going to go well. Now things just keep popping up like this. I'm sure this is only the beginning of what's to come. I still haven't got a confirmation if my payment is going to change or if the money in my account will be used to pay creditors.

I do know one thing though, If I survive this Chapter 13, I would love to show my gratitude to you my friend whom I've never met. God bless you & I'm sure this won't be the last post I make. justbroke if you ever need anything please let me know. Anything I can to do help.

[justbroke]

I wish you the best.

[mclawdawg]

I appreciate it. One last thing I forgot to mention. I am currently paying taxes that I owed from 2019 in the form of a $100 a month payment plan. I don't think my lawyer or the trustee picked this up. I thought I was done with this payment, but due to Covid-19 I believe they didn't take the payment out of my account for several months. I just noticed it recently, should I contact my lawyer asap about this? I've been paying on it... but I'm not sure why he didn't see that I owed from the taxes I sent in. I thought this was included. I know it's only $1000, but that's still money I owe on something.

I wanted to pay it off entirely with the money I had in the bank, but I didn't want that to raise any eyebrows with the trustee. Maybe he did catch it? I'm overthinking everything nowadays.

[justbroke]

If you have a payment plan that was started before you filed, that all should be part of the Chapter 13.

[flashoflight]

As JB mentioned, you MUST fix the withholding and amend your plan to reflect the corrected withholding for the rest of 2021 or you might as well give up on the 13 right now because you are almost guaranteed to fail.

How do you plan to deal with the withholding? The new W-4 calculator at the IRS is quite good at helping you catch up with a much bigger withholding for the rest of 2021. The larger withholding is actually good for your 13 because you will end up with no refund / no taxes owed for 2021 and it could stick for five years. If the trustee doesn't catch wind of what you're doing, you can dial back the withholding to normal amounts for 2022 by filing a new W-4 just after the last paycheck of 2021. In effect, you will be able to pocket the reduced withholding in your 2022 paychecks instead of giving it to the trustee. Trustees usually don't care about withholding because tax refunds have to be dedicated to the plan and many trustees have arrangements with the IRS to intercept BK filer tax refunds.

[mclawdawg]

@flashofflight Thanks for the information. Yeah I realized that I've gone half of the year without paying anything into federal taxes, which has left me with a bankroll of $3000 in my bank at the moment. This is combined from stimulus, bonus, tax exemptions. Very stupid of me not to change it earlier but with everything that has been going on it was the last thing on my mind then suddenly it popped up because I too am worried my plan will fail.

As of right now I received an objection in my confirmation for my Chapter 13. I've paid two months at $464.00 to the trustee but my plan hasn't been confirmed, so as of right now I just continue to make my payments and wait to hear from my lawyer. My lawyer hasn't said anything about a new payment plan or the $3000 in my account. So for the remainder of the year I plan on having 0 allowances & having them take out extra by using the calculator. I just changed it back for the next check so I want to see how much will be taken before giving the IRS more. I swear I'm done doing things the wrong way. This world is just so damn expensive nowadays. My budget for gas is like $250 a month and I've already gone over that thanks to the $3.00 gas prices where I'm from.