Reducing tax refund on purpose

[JoeBankrupt33]

I'm helping a friend with his taxes and he declared BK in October of 2010. The trustee said he would abandon any tax refund less than $1000 and also return about $380 in assets already paid to the trustee. His refund, using the most advantageous method, would be $1179.

So, can I choose to omit certain itemized deductions to reduce his refund to under $1000? Using this method, the itemized amounts would have to drop below the standard deduction as well.

I've read where people have contemplated filing like this then amending their tax return after the bankruptcy case is closed, but he doesn't want to do that, he just wants to get his amount low so the refund will be abandoned.

Could this backfire?

[AngelinaCatHub]

I'm helping a friend with his taxes and he declared BK in October of 2010. The trustee said he would abandon any tax refund less than $1000 and also return about $380 in assets already paid to the trustee. His refund, using the most advantageous method, would be $1179.

So, can I choose to omit certain itemized deductions to reduce his refund to under $1000? Using this method, the itemized amounts would have to drop below the standard deduction as well.

I've read where people have contemplated filing like this then amending their tax return after the bankruptcy case is closed, but he doesn't want to do that, he just wants to get his amount low so the refund will be abandoned.

Could this backfire?

Yes it could. However, rather than lose the over-payment, and then also do an amended tax report after discharge which could be considered fraud, you can put your taxes towards the next years tax liability. I would certainly address the lawyer for this situation in any case. 'Hub

[JoeBankrupt33]

Just to be clear, he is not planning on amending. I agree, that is fraudulent. He is only contemplating filing with less than optimal deductions.

I'd also like to hear opinions on puting the overpayment toward next years tax liability (1040 line 75).

[DesdemonaB]

Hello

Take from someone who must "abondon" her tax return for 2010.. ask your friend the following question... you just bk'ed the following amount (fill in the blank) are you truly talking about 179.00 dollars? Are you kidding me? My UST asked for only one thing, my tax return for 2010. I will walk it to her office, hand it to her on a "rented by the hour" sliver plater and say THANK YOU.

[newbie2]

Hello

Take from someone who must "abondon" her tax return for 2010.. ask your friend the following question... you just bk'ed the following amount (fill in the blank) are you truly talking about 179.00 dollars? Are you kidding me? My UST asked for only one thing, my tax return for 2010. I will walk it to her office, hand it to her on a "rented by the hour" sliver plater and say THANK YOU.

Amen!

[daylate]

From a tax perspective you can not take deductions-IRS doesn't care. Now if the trustee is sharper than a dull tack, I would have to say that the deductions skipped would have to be something that could vary significantly from year to year such as medical expenses or charitable deductions-otherwise they will probably ask and who knows where that would go. And if his deducts are less than standard then that could raise an issue also.
Now if the trustee will only take 179 of the refund I agree with above, but I'm thinking if it is above 1k they would take it all, just not the excess. Much different game then. These are jsut my opinions and are not based on any experience.

[tobee43]

i agree with daylate.....and while the irs may not care...(and they don't)...actually....if they always owe you..( and i do not suggest anyone does this), but if THEY the irs always owe YOU...they can even care less if you file late....of course if you owe them, that's another story.

i would never think of excluding the deductions if they resulted in a small refund to hide from the trustee...it really could back fire and why?? it's not like it's a million bucks....shoot....i would a few thousand just to get my bk done...which i did...whether in the form of a tax refund or paying an atty....do the "right" thing.

[JoeBankrupt33]

It's not just $179 that the trustee will take. If the refund is over $1000, the trustee takes 75% of it (because he filed in October) plus the $380 that was already paid for other assets. If the refund is under $1000, the trustee abandons everything.

Sometimes, bankruptcy is not about doing the "right" thing, it is a game. How many people out there pre plan and adjusting their withholding or reduce their income for 6 months to get under the means or pay $500 debts to their relatives just prior to filing or buy a stock pile of exempt items to reduce their cash (this list can go on and on)? None of those are illegal and I propose that none of those are immoral either, they are simply working within the constraints of the law.

[DesdemonaB]

It's not just $179 that the trustee will take. If the refund is over $1000, the trustee takes 75% of it (because he filed in October) plus the $380 that was already paid for other assets. If the refund is under $1000, the trustee abandons everything.

Sometimes, bankruptcy is not about doing the "right" thing, it is a game. How many people out there pre plan and adjusting their withholding or reduce their income for 6 months to get under the means or pay $500 debts to their relatives just prior to filing or buy a stock pile of exempt items to reduce their cash (this list can go on and on)? None of those are illegal and I propose that none of those are immoral either, they are simply working within the constraints of the law.

Yes Joe you are correct, BKing can be a game. BUT what your friend is missing is the big picture here, they had to pay 380.00 and right now as it stands they might have a refund of 1179.00 in which they believe the UST will claim 75% of. So if I do my math that’s 380 + 1179X.75=884.25 for a total of 1,264.25 due in exchange for a (fill in the blank) discharge.
My personal response to your post was only to say, come on you are asking people who are losing homes, cars, family possessions, and much larger tax refunds to help you friend “cheat” the system just so they get to keep their refund. ME I filed, and like I said I have no problem walking my refund right to my UST and give her a big fat THANK YOU.

[NewPage]

Yes it could. However, rather than lose the over-payment, and then also do an amended tax report after discharge which could be considered fraud, you can put your taxes towards the next years tax liability. I would certainly address the lawyer for this situation in any case. 'Hub

Hold the phone; I thought that could not happen?? Or is it a matter of your location? Because I'm sure I was told here that I could not elect to do that....which is why we are paying a bunch of things with our refund before my filing!

[daylate]

While not an attorney, that just doesn't seem like it is going to fly in this case. By applying to next years taxes you are effectively taking possession of the $ (at least logically). I don't see a trustee letting you do that. Heck everyone would do that if permissible to avoid having the trustee take it.

[tobee43]

it depends on when you file......hhm has a great post about it...it usually starts in oct. when the trustees really take notice with respect to taking one's take refund...

now...that being said....we filed a time AFTER taxes BUT before we rec'd our return.......our atty advised us to spent the money immediately.......if not sooner....so i thinnk it depends on a few things...first we were a no asset..both unemployed...homeless after losing our house after 30 years...losing our car...losing our everything...selling every thing we had to eat...kinda bk....and we were NEVER questioned by the trustee about the money we rec'd nor how it was spend...and it was over 10k.....AND by the time we sat in front of our trustee....that money was long gone.

and PP was correct it's a chess game to be played carefully...and most importantly HONESTLY...and truthfully...and you can apply them to next year...and it will send up a "flag" one just doesn't need when ones plate is that full....just food for thought.

[discouraged]

And what makes your friend think the trustee isn't smart enough to look at the other year's and wonder if something fishy is going on. I really don't understand why people aren't thinking like desdemona. Put this into prespective - how much debt did your friend get rid of? I'm sure it had to be well over 1,300. Why would anyone take the chance of losing what they gained for a few thousand dollars?

There have been some high profile bk frauds in the news (look at the current one in the news section). Who would even want to go there?

[msm859]

Actually what I don't understand is why people are not adjusting their W-4's so that less money is withheld so that they get a smaller refund. Ideally, your W-4's should be set so you do not owe anything AND you get zero refund. This would then become a non-issue.

[NewPage]

Sure that's the ideal situation msm, but -- sometimes people *need* the chunk of money, rather than getting say an extra amount each pay check.