Just Another Reminder About Increasing Your W-4 Exemptions After Your 341

[justbroke]

Our lawyer said that they can exempt this years up coming tax return is this true?

Yes. This means that you have enough exemptions to exempt the tax refund. That is one of the ways to keep your refund. (Another way is to factor the refund into your "current monthly income" by taking your current year refund, dividing it by 12, and adding it as additional income.)

[justbroke]

What about if the refund is for the property tax payment? If UST took it put, how will I pay the property?

This is why you work with your attorney to exempt any potential refund, or you include it as income. The fact that you use it to pay property taxes, is still an overwithholding of money (if you scheduled the taxes as well).

Let's say that you have property taxes of $3,000/year (and you put this on Schedule J). However, on your Schedule I you show an overwithholding of payroll taxes of $3,000/year. You are double counting, unless you included the $3,000/year current year tax refund (used for taxes) as income on your Schedule I. It's that simple.

For a while, I actually argued about why the Tax Refund is not property of the Bankruptcy Estate. After reading many cases and seeing in Districts where the Trustee requires the current year refund to be factored into the income... I now see why it is income and property of the Bankruptcy Estate.

Of course there are divergent views on this, but it's just so crystal clear to me. So, I apologize that I see clearly now.

[Chowder]

There are rarely any cases now.

Also. I did not mean that any construal had an ounce of righteousness.

More that these instances could be used as threats, with no intention of pushing toward legal action.

[justbroke]

Also. I did not mean that any construal had an ounce of righteousness.

I like that word righteousness. Seems that many Trustees believe they are empowered by the BAPCPA and actually conduct themselves in the manner that... if they had to chose between righteousness and being within the law... they'd choose righteousness everytime.

More that these instances could be used as threats, with no intention of pushing toward legal action.

I think that's the thing. They use them as leverage -- yes, that's the word, leverage -- to get you to cave in.

Time after time after time, I read about attorneys who just roll over for the U.S. Trustee. It's either because they want to "stay on good terms with the UST" or because they are afraid of the costs of litigation, and perhaps humiliation amongst colleagues.

[RainMoM]

thank you just broke, I looked over my papar work and it looks I will be able to keep my tax return after all.. I need it !!

[bf2bf]

So if one files for Ch7 in March or April 2010, does the TT have claim to the 2009 refund or the 2010 refund, which will not be received until 2011, a year after the BK is filed?

[justbroke]

So if one files for Ch7 in March or April 2010, does the TT have claim to the 2009 refund or the 2010 refund, which will not be received until 2011, a year after the BK is filed?

They may have claim to any "overwithholdings" from January, and February 2010 (and maybe March). So about 25%. Your lawyer needs to make sure to defend that if the Trustee wants the refund. The lawyer needs to remind the Trustee that the petition was filed in April and that the Trustee would only be entitled to the first 3 months of 2010.

As for your 2009 refund, that would be tricky. Personally, you may want to wait to file until after you receive that refund. You can then use the 2009 refund (paid in 2010) to pay for your lawyer.

[bf2bf]

They may have claim to any "overwithholdings" from January, and February 2010 (and maybe March). So about 25%. Your lawyer needs to make sure to defend that if the Trustee wants the refund. The lawyer needs to remind the Trustee that the petition was filed in April and that the Trustee would only be entitled to the first 3 months of 2010.

As for your 2009 refund, that would be tricky. Personally, you may want to wait to file until after you receive that refund. You can then use the 2009 refund (paid in 2010) to pay for your lawyer.

Ok, so let say there will be a $6,000 refund for 2009, which would be received Feb. 20, 2010. Subsequently Ch7 is filed in April, 2010.
First, this $6,000 has to be included in the 6 month income for the means test, correct?
Then, if this money is used either for home repairs or medical/dental procedures, all of which are long overdue, will TT have any problem with this?

As far as TT wanting to have a claim on "over withholdings" for Jan to March, 2010, I don't see how in the world he can justify that post discharge.

I don't have a crystal ball and these withholding have not changed in years.
However, there could be a big lottery win or some other windfall which will wipe out any refund due OR there may be a huge medical bill or other event which will make the refund even bigger.

Or the person may be struggling on their current income after their 341 or their discharge and increases the exemptions to get a bigger pay check, which in turn may lead to a smaller or no refund. However, his intent was to increase his income and the possible (because of other still unknown events that may occur in the future) decrease in the refund is just one of the potential outcomes.

I don't think any of the above can be construed as fraud.

And since the BK filing takes a financial "snap shot" at the time of filing, why should the TT keep his tentacles in peoples financial affairs months after the BK is discharged? If the TT thinks he has a claim on Jan to March withholdings, he should bring it up at the 341 meeting and before discharge.

And as far as the "money in the bank" reference in one of the posts above, unlike money in a bank account, the taxpayer can't really predict the size of the refund, if any, that would be due at the end of the year. There are just too many variables and unknowns.
That is why I don't think the bank analogy and "hiding assets" claims by TT will work in withholding adjustments, and a TT will have a very hard time proving intent to defraud in these cases.

[justbroke]

Ok, so let say there will be a $6,000 refund for 2009, which would be received Feb. 20, 2010. Subsequently Ch7 is filed in April, 2010. First, this $6,000 has to be included in the 6 month income for the means test, correct?

Some Districts/Trustees require you to include it as income on your Means Test. I can't tell you which ones do and which ones don't.

Then, if this money is used either for home repairs or medical/dental procedures, all of which are long overdue, will TT have any problem with this?

No. If you use the money for necessities, for providing shelter, for medical needs, or food stockage... they will not bother you. It's also suggested that this is good to user on your Attorney too!

As far as TT wanting to have a claim on "over withholdings" for Jan to March, 2010, I don't see how in the world he can justify that post discharge.

This is where everyone gets it wrong. You absolutely have to think of the money the IRS is "holding" is just like a Bank holding the money for you. It's fair game. That's why your Attorney would exempt the future refund!

I don't have a crystal ball and these withholding have not changed in years. However, there could be a big lottery win or some other windfall which will wipe out any refund due OR there may be a huge medical bill or other event which will make the refund even bigger.

Lottery doesn't matter! Lottery occurred after you filed. Anything that happened after you filed doesn't count (for the most part, and I don't want to get into "totality of circumstances" type discussions as there are plenty of those on this board). Since overwithholding of your income by the IRS happened PRIOR to filing, it is fair game.

As a matter of fact, the Bankruptcy Code allows the Trustee to go after money you receive by inheritance or bequeathed up to 180 days after filing!!! The lottery isn't included in that part of the Code.

Or the person may be struggling on their current income after their 341 or their discharge and increases the exemptions to get a bigger pay check, which in turn may lead to a smaller or no refund. However, his intent was to increase his income and the possible (because of other still unknown events that may occur in the future) decrease in the refund is just one of the potential outcomes.

I don't think it will ever come to fraud because the Trustees just don't have the time to police ever single tax return. My point earlier was for someone who intentionally knew there was overwithholding and they purposefully, to keep money from the Trustee, did this. I'm not talking about a person who does so to put food on the table. I'm talking about actual fraud. So I don't mean to scare you.

And since the BK filing takes a financial "snap shot" at the time of filing, why should the TT keep his tentacles in peoples financial affairs months after the BK is discharged? If the TT thinks he has a claim on Jan to March withholdings, he should bring it up at the 341 meeting and before discharge.

You have to go back to "overwithholdings" are basically someone else holding on to "your" property. That property existed at the time the Bankruptcy Estate was created upon you filing your petition and asking for relief.

And as far as the "money in the bank" reference in one of the posts above, unlike money in a bank account, the taxpayer can't really predict the size of the refund, if any, that would be due at the end of the year. There are just too many variables and unknowns.

Doesn't matter about predictability. The IRS doesn't even define income as that which is predictable.

That is why I don't think the bank analogy and "hiding assets" claims by TT will work in withholding adjustments, and a TT will have a very hard time proving intent to defraud in these cases.

Very easy time. If you adjusted your W-4 prior to filing to over-inflate your income, in order to have less money available in calculating your disposable income, and then adjust it after your 341 Meeting to recoup the money and so that the Trustee won't get any part of it. That is outright fraud. Very easy to prove.

No for the person who doesn't know and adjusts their withholdings after the 341 Meeting, and having not purposely modified their withholdings prior to filing in order to lower their perceived net pay... I wouldn't hold them guilty of fraud.

I'm specifically addressing knowingly adjusting withholdings so as to keep money from the Trustee (period).

I have only read a few cases on this, and it is rare. However, to advocate adjusting withholdings to keep money from the Trustee... is just wrong. The proper way to keep your refund is to exempt it or otherwise income your prior tax refunds (averaged) as part of your income... as is required in some Districts already.

[Chowder]

And as far as the "money in the bank" reference in one of the posts above, unlike money in a bank account, the taxpayer can't really predict the size of the refund, if any, that would be due at the end of the year. There are just too many variables and unknowns.
That is why I don't think the bank analogy and "hiding assets" claims by TT will work in withholding adjustments, and a TT will have a very hard time proving intent to defraud in these cases.

If the debtor is still employed at the end of 09, at about the same wage, and same withholdings, as 08, he would have a pretty close idea what his 09 return would be.

It's trickier to predict when the debtor has a business. While consistent annual receipts will result in similar returns, there is the occasional curveball in IRS code changes. My return went from a fairly regular mid four figures to a low five for 08. Still this return was not even mentioned by the Trustee. Also no mention of future returns. Within a few days I was listed a no asset in Pacer.

Like we've talked about before on this thread. Some Trustees, except in cases of clear fraud, will not try to prove intent. Rather simply threaten the debtor into paying.

Still, IMHO, I think the likelihood of a Trustee actually pursuing fraudulent withholding adjustments, is extremely remote.

[justbroke]

Like we've talked about before on this thread. Some Trustees, except in cases of clear fraud, will not try to prove intent. Rather simply threaten the debtor into paying.

I have only found 3 cases on this... so it isn't something they are really on top of. However, some Trustees have gone far enough to require debtors to average their return and include it as income in the CMI calculation. I think this gives the UST more protection for those who would do the shuffle.

Still, IMHO, I think the likelihood of a Trustee actually pursuing fraudulent withholding adjustments, is extremely remote.

Extremely Rare! It was just a good discussion and we were able to see the sides of the issue and how people feel about it.

I know this is a hot topic. I myself was very very upset that the Trustee got my tax return every year (in a Chapter 13). So, I read case after case after case and I finally understood the issue. I think that the attorneys and the Trustee should be very upfront about this so that people understand this issue better.

[bf2bf]

...
No for the person who doesn't know and adjusts their withholdings after the 341 Meeting, and having not purposely modified their withholdings prior to filing in order to lower their perceived net pay... I wouldn't hold them guilty of fraud....

Ok, so then we agree that for most people, adjusting their withholdings after their 341 or after the discharge to increase their disposable income, so they can more comfortably afford to pay their bills and living expenses, does not in any way constitute fraud.

... My return went from a fairly regular mid four figures to a low five for 08. Still this return was not even mentioned by the Trustee. Also no mention of future returns. Within a few days I was listed a no asset in Pacer...

So you're saying that your tax refund in '08 (which you received in '09) was over $10,000 and the trustee never even mentioned anything about it?
Was that refund already received or still pending? Was it included, counted anywhere?
What was the chronology of your BK filing, 341 and discharge?

[justbroke]

Ok, so then we agree that for most people, adjusting their withholdings after their 341 or after the discharge to increase their disposable income, so they can more comfortably afford to pay their bills and living expenses, does not in any way constitute fraud.

No. A debtor already filing bankrutpcy with no money, already must have adjusted their W-4 to decrease withholding before filing! They don't say "even though I can't eat, let me inflate my withholdings prior to filing so I can use a larger tax liability on my Schedule I so that I otherwise qualify for a Chapter 7 discharge".

I am against one... if you know that the number on your Schedule I includes overwithholding and you know that you did not include any average refund in your income (line 1) on Schedule I and you know you will get a refund.

There's just no really clear way to explain it as clear as I understand it. Even when I use the Bank analogy, one may feel that it should be when you remove it from the Bank, not when you put it into that Bank.

I'm only talking about clearly manipulating withholdings to hide money. I'm not talking about a person who believes that their withholding, at the time the Schedule I is done, is accurate, and alter adjusts that withholding via their W-4. My contempt is for someone who would knowingly manipulate their W-4 in order to hide property or to otherwise keep money out of the Trustee's hand when they know that they never properly disclosed it to begin with.

It's really a complex topic, and it is very rare that anyone who actually did do so, would be caught.

[Chowder]

So you're saying that your tax refund in '08 (which you received in '09) was over $10,000 and the trustee never even mentioned anything about it?

Yes. More then double the past 2 years, and not a peep.

Was that refund already received or still pending? Was it included, counted anywhere?

The refund was direct deposited too long ago to be combined in the six month average. The Trustee had two years returns so was informed.

What was the chronology of your BK filing, 341 and discharge?

60 days post 341, imminent.

The point is, the noticeably larger return could have, according to theory, made a portion of 09's return an asset.
Seemingly it's not, or it's too little to be of consequence. And I'll go out on a limb and say most withholding modifications would be considered likewise.

[bf2bf]

Thanks to all for the informative discussion.
There is a lot of first hand invaluable experience in this forum, which is greatly appreciated by newbies like me.