Defer tax refund

[patches]

Our accountant told my hubby that even though we have a refund coming for the 09 tax year, that we can "Defer" that refund into next year - in other words, if we think we will make a higher income next year, we can defer that refund into the 2010 tax year. Apparently, there is a loop hole permitting this in the bankruptcy law. I have not talked to him yet to find out what section of the bk law permits this, but has anyone here heard of this?

thanks!

[tyson24]

I really do not know anything about the tax laws and how they relate to BK, but is the trustee taking your tax refund? If so, I would think you would owe your tax refund regardless. If you find out about that loophole, please let us know. But would this not piss off the trustee?

[justbroke]

You will not find a section of the BK law because there isn't one.

There is no loophole. The Trustee will clearly see that you had a refund and "applied" it to 2010. That money is an asset to the Bankruptcy Estate depending on when you file. Never talk about bankruptcy procedure and process, with an accountant. There are attorneys who specialize in this area. This is why they require tax returns to not only be filed and up to date, but also to provide copies to the Trustee.

If your sole intent of applying your 2009 refund (overpayment) to tax year 2010, was solely to hinder, defraud, or delay creditors, that's the definition of bankruptcy fraud.

Having wrote all that, you are better off taking the refund and spending it on necessities... before filing. I'm starting to think that you filed pro se and not through an attorney.

[despritfreya]

While OP is apparently from Florida, I imagine that the issue has already been ruled on.

In the 9th Circuit we have Nichols v. Birdsell, 491 F.3d 987 (9th Cir. 2007). Trustee can recover a pre peition refund left with the taxing agency that was to be applied to a post petition tax debt.

Des.

[patches]

We are not pro se, we have a lawyer, it was a suggestion made by our accountant after he talked to a client of his that is a Bankruptcy judge.
He assumes that we may have to pay next year and rather than have the refund go to creditors he asked his other client - the judge - who
told him what I outlined here.
I called my attorney of course. I would not just do something like that without full review.
The attorney told me that the trustee can claim NEXT YEARS take refund, if there is one and if there isn't then it is a wash and there is no payout to the Trustee.
This is IRS code. So in effect if we feel we will make more money next year in our business and will have to pay taxes, we are fully within our rights to defer the refund
to be applied as a credit against our taxes payable then.
HOWEVER, a trustee could view that as trying to shield assets and it may cause them to red flag the file for procedures or appraisals or what have you. In effect they
could get the idea that we are not above board. This is not something I care to imply just by exercising a right we do have, but it can and does happen and I can
understand why. I imagine there are lots of people who try to hide things and this could look like that. I don't wish to be painted with that brush. It simply is not
worth the brain damage to defer against future taxes. If we have future taxes, we will simply pay them when they are due at that future point.

Regardless of all of that, it is a legitimate thing that one can do. It is unfortunate that a right such as that has to be viewed through the prism of a nebulous
move to protect an asset. I understand it and as such, we certainly won't take advantage of that option that is open to us.

The Bankruptcy judge that our accountant spoke to, was quite right. It would just look bad and that's not worth it.

[despritfreya]

Patches,

I am not going to second guess your attorney but. . .

My quick research of bk law originating out of Florida (if that is where you are from) found this:

In re Taylor, 386 B.R. 361 (Bankr. S.D.Fla., 2008)

"This case presents the narrow legal question as to whether an insolvent taxpayer's election of an irrevocable waiver of a net operating loss carryback under the Internal Revenue Code, made within a year prior to the filing of his bankruptcy petition and which creates a future benefit for the taxpayer, can be avoidable under the Bankruptcy Code as a fraudulent transfer under 11 U.S.C. § 548 and recovered in accordance with 11 U.S.C. § 550(a) for the benefit of the estate. I conclude that such an election does constitute a fraudulent transfer and that it may be avoided by the Trustee notwithstanding the purportedly irrevocable nature of the election under the tax code."

This Taylor decision, which is not directly on point and is not "binding" in all cases in Florida, cites favorably to the case in my district that eventually resulted in the case I cited earlier.

I believe (unless there is "binding" authority) this means that your attorney cannot guarantee that you will get to apply your 2009 tax refund to your 2010 tax liability when that 2010 taxes become due in April, 2011. Nor can he guarantee that you will get to apply 100% of any 2010 refund to taxes that will be due in 2011. I would recommend that if your attny says this is a slam dunk, you get it in writing.

The reality is your Trustee can go after the refund. Whether he will or not will depend on the amount and how aggressive he and/or your attorney are. I hope you get to keep and apply the refund.

Des.

[justbroke]

I am with Dee on this. If at the time you file, the IRS is "holding" a refund "to be applied", would make that money part of the Bankruptcy estate plain and simple. Why even entertain the issue. The "IRS" code of allowing a carryback, carryforward or even applying a current year refund to "next year", is not the Bankruptcy Code and the Bankruptcy Code supersedes in these issues. The true question is... whether the money is part of the Bankruptcy Estate that is created at the time that you file. This issue has been mostly settled as Dee points out. (Although the case in Florida is a carryback based on a net operation loss (NOL), it has the same net affect if you don't "apply" it in the current year.)

I hope you can keep it, and it's an insignificant amount for the Trustee to pursue (costs to pursue). However, this is a strategy where you are in a gray area and you may be "tested" by the Trustee. Again, if your "sole" purpose is to keep the Trustee and creditors from getting it, that's bankruptcy fraud. Whether the Trustee will pursue such act, is up to the Trustee.

It is actually not a legitimate thing to do if you a.) know you're filing for bankruptcy, and b.) are doing so -- carrying the refund forward -- solely to keep it out of reach of creditors of the bankruptcy estate. It is the textbook definition of bankruptcy fraud. I know you don't want to commit fraud, but what you described is textbook.

Now, if you said... I already filed my 2009 taxes and I elected to carry the refund forward to tax year 2010 since I expect to owe taxes. But, several weeks/months later, I needed to file bankruptcy, what's the impact? That's a totally different discussion. In my opinion.

[patches]

I was not entertaining the issue, I was researching the issue. This afternoon after speaking with my attorney and hearing his advice which was NOT to attempt to defer it to my benefit in the 2010 taxation year, along with the discussion of how something like this could appear, I already decided not to entertain it, which I think I posted somewhere here. My accountant brought it to my attention because he heard it from a bankruptcy judge and I thank him for thinking of asking the question of the judge as he was only trying to help me. He would never advise me to commit fraud and in fact, he did not advise me to do it, he advised me to check it out with my lawyer, which I did. When I posted this I had not talked to my attorney and wondered if anyone knew about this. As for the sole intention being to keep the trustee from getting it, no that was not how my accountant broached the subject. Next year we will enter our 3rd year in business and hope to grow it. If we do, we will very likely have to pay. I asked my accountant months ago to sit with me in November/December to help me be more efficient in managing our books, to teach me regular maintenance tasks in quickbooks and to finally start a payroll so that we, if we do well, can hire at least a part timer to take some of the stress off working 7 days a week for the past 2 years of summer from April - September just to tread water and survive. At that time he told me we should look for ways to lower taxes as he thinks we may have to pay next year. We have had 2 years of refunds now and the business is starting to grow. This is the basis on which he mentioned it to me today. That if I could defer that refund, it could help us in the next taxation year. He is after all, our accountant and that kind of thing is what we pay him to do for us.
If the bankruptcy judge he spoke to was wrong or was not conclusive or voicing opinion, I would not know as I did not speak with him. My accountant was looking out for our interests and I am happy for that.
He advised me to speak to our attorney about it, which I did.
The attorney did not suggest that it would be a fraudulent thing to do. Just that the trustee could claim the refund for the estate, next taxation cycle, or even simply add the value on the value of the estate. Not that it was in any way illegal or fraudulent. Granted, it could look like there was another motivation. As I mentioned in my earlier post, I understand why. That doesn't mean that because people do try to fraudulently misrepresent themselves, that this topic is a about that.
Sad part is, no one would ever believe it was for perfectly legitimate business purposes and again, I can certainly see why. They'd always think it was to try to keep it from the trustee as the sole motivation.
Another reason why I wouldn't do it. Beside the fact, that my lawyer didn't advise it.

Secondary question here not necessarily about defering a refund.....if someone had a perfectly legal manoever that would indeed keep an asset in their hands and away from their creditors, is that fraud?

[justbroke]

Secondary question here not necessarily about defering a refund.....if someone had a perfectly legal manoever that would indeed keep an asset in their hands and away from their creditors, is that fraud?

Yes, if it was intentionally done, but that's sometimes hard to prove. This is why it doesn't come up too often. I would just avoid any impropriety and not have the Office of the United States Trustee (OUST) poking through all your financial information with a forensic accountant. I'm not afraid of the IRS poking at my tax returns. I'm afraid of the OUST! The OUST can pursue -- and often win -- making all the debt on your bankruptcy schedules (and prior to filing) non-dischargeable for life! IRS can't do that.

Now, in my opinion of course, if you deferred a tax refund so that it's applied to the next tax year, this may be only considered an "avoidable" transfer. (Highly likely that it's only that.) Perhaps my term fraud was strong, but whenever I hear an intentional move to hinder or delay collection from a creditor or the Trustee, that means fraud (in the normal meaning of the term). It's probably a fine line, but there's a difference between taking the tax refund and putting it into an IRA, and just having the IRS hold onto it to apply to a future "potential" tax liability that doesn't yet exist. If I were the Trustee, and I'm not, that's what I would argue.

And certainly in your defense, if the question is just asked as "I had this refund from 2009 and I applied it to 2010, but am now filing bankruptcy", would yield a different response, I would hope, than asking "I'm about to submit my 2009 taxes and have a sizable refund. I'm also about to file Bankruptcy and don't want the Trustee/Estate to get it. So, I'm thinking about applying the 2009 refund to my 2010 taxes so that the Trustee/Estate can't get at it."

I know you want to do the right thing and kudos to your accountant for trying.

[patches]

I agree just, my husband and I both said, we'll pay if we owe next year, why do something that will make us look like we are trying to pull one over, when we aren't.
We have these professionals around us and everyone has an idea. lol! I check them out and think about them long and hard, my better judgement always wins out.
I never take something at face value even from a professional and just enact it. He's a good guy to have at tax time, but I rely on my bankruptcy attorney for this
kind of thing.

This is a great resource to have and I thank everyone who provided input and opinion.

[AngelinaCatHub]

I agree just, my husband and I both said, we'll pay if we owe next year, why do something that will make us look like we are trying to pull one over, when we aren't.
We have these professionals around us and everyone has an idea. lol! I check them out and think about them long and hard, my better judgement always wins out.
I never take something at face value even from a professional and just enact it. He's a good guy to have at tax time, but I rely on my bankruptcy attorney for this
kind of thing.

This is a great resource to have and I thank everyone who provided input and opinion.

Sorry, but I could not stand reading this book. Once getting the jest of this, I have to agree with all who commented in that: Your bk is stressful enough, next, it will trigger a suggestion of fraud, next at the least, it will keep your case open for another year at least even after discharge. All that is not worth just getting it over with. You can still purchase a substantial amount of exempt stuff out of your tax return and surrender what is left up to $599 and then get on with the new start. My two cents. 'Hub

[tcreegan]

Hi all,

Just a cautionary tale: This is IRS code. ...but is it BK code?

They are not one in the same, and in a BK....BK code trumps IRS code.

Tom in Colo

[patches]

Sorry, but I could not stand reading this book. Once getting the jest of this, I have to agree with all who commented in that: Your bk is stressful enough, next, it will trigger a suggestion of fraud, next at the least, it will keep your case open for another year at least even after discharge. All that is not worth just getting it over with. You can still purchase a substantial amount of exempt stuff out of your tax return and surrender what is left up to $599 and then get on with the new start. My two cents. 'Hub

After reviewing it with my attorney this afternoon, this is the conclusion I came to which I posted here a number of times. One cannot make a decision about something which they know nothing about. I asked here and asked my attorney later on. As for not being able to stand reading this book, I'm not certain what that meant, but certainly this thread, if that is the book, was opened up to understand what I was being told. I'm not sure why some are continuing to tell me not to do this when I have already stated that I am not going to do it and why I am not going to do it. It isn't worth it to me. I posted what my husband and I thought after speaking with our attorney. That post was quoted in your reply.
I needed to increase my knowledge on the subject before I could make an informed decision. That is what this book is about for me.
Like many here, I have never done this before. Investigating things is what I thought this forum was all about. Are there some things that shouldn't be asked?
Maybe I misunderstood the meaning of your post and if I did I apologize.

[patches]

Hi all,

Just a cautionary tale: This is IRS code. ...but is it BK code?

They are not one in the same, and in a BK....BK code trumps IRS code.

Tom in Colo

I am seeing that is the case. Thanks Tom in Colo. I think our accountant thought it was BK code because he was talking to a BK Judge.
Our lawyer actually told me that in our conversation today, that it was IRS code and had nothing to do with the BK code.
It's all very clear to me now.

[justbroke]

Sometimes my posts are too wordy. Perhaps that's the book reference.