Filing Chapter 7 and Tax Returns

[IBroke]

Hi folks!

A short question:

I do know that the Trustee is going to request the recent tax-returns my mother filed. However, I'm wondering what "recent" actually means. So far, she has the returns for 2009, 2010 and 2011 available and is planning on filing in January. Now, if she would file in January, can the trustee also demand the return for 2012? The problem is that my mother is self-employed and she won't get a refund and filing for 2012 would actually mean an additional $2K or so out of pocket - money we don't have right now because we have to pay the attorney so we were planning on obtaining a tax-extension for the 2012 tax-year.

So, to sum it all up, how soon can a trustee demand the 2012 tax-return? On January 1st 2013, in April 2013 when the filing-timeline expires or in October 2013 if we should get an extension?

Would it make a difference if we would squeeze in my mothers BK filing-date into this year rather than January 2013?

Providing proof of income for 2012 with bank-statements and detailed job-documentation is no problem at all - so we can show her income for 2012 (and the 6 months prior to filing) without a return.

I'll contact our attorney as well but was curious about what you guys think. Thanks in advance for your input!

[justbroke]

Yes, the Trustee "could" ask for the 2012 tax return. The code reads that you need to file a return for the "most recent tax year ending immediately before the commencement of the case". A tax year is January 1 to December 31 for individuals. So, if you file after December 31, then that would fit the requirement for a return for the immediately preceding tax year. However, the code only reads that the "filed" return needs to be provided to the Trustee.

Even if this were not the case, the Trustee would still want the Tax Return anyhow, so they can attempt to declare any "tax refund" as property of the estate. In the case where the tax year just ended, the Trustee will just keep the case open until the tax return is completed. The Trustee will probably "not" allow you to file an extension and delay the case by filing an extension . The tax return may be a requirement anyhow.

It will not matter when you squeeze! The Trustee is looking for refunds and will require a 2012 Tax Return whether you file in December 2012 or January 2013. You may be able to show that there would be no refund, based on prior years, and that the Tax Return will not be filed for some time. This is something that only the Trustee can answer.

Short answer is that while they'll take the 2009, 2010 and 2011 returns since they were "filed" -- for purposes of complying with the debtor's duties -- the Trustee "may" want to see the 2012 return to insure that there is no overpayment.

From 11 USC 521 (Debtor's Duties)..

11 USC 521(e)(2)(A)(i) not later than 7 days before the date first set for the first meeting of creditors, to the trustee a copy of the Federal income tax return required under applicable law (or at the election of the debtor, a transcript of such return) for the most recent tax year ending immediately before the commencement of the case and for which a Federal income tax return was filed

[IBroke]

Thanks for the info, justbroke!

Wow, that really sucks. I have no idea how we should come up with the additional $2K in that short period of time.

Personally, I wouldn't mind if the case would remain open for that period of time - but considering that we want to discharge the second mortgage as well, I highly doubt we have that much time before the ruling might be overturned.

I simply don't see the sense in that. My mother never received a tax-refund and never will. She is self-employed and there are no taxes withheld over the year. An additional tax-return is a liability for her and not an asset.

Now, if I understood correctly, the trustee could always ask for the 2012 return - but the code would require the 2012 return when she would file in January but not when she would file in December?

[justbroke]

The code only requires that the "filed" return from the prior tax year is provided. So, if she had not "filed" the 2012 tax return with the IRS prior to filing for bankruptcy, then only the 2011 tax return would be required under the code (11 USC 521). However, the Trustees are looking for tax "refunds" this time of year. The Trustee may decide to keep the case open until the 2012 tax return is filed so that the Trustee could determine if there is anything that could be administered to the unsecured creditors.

So, based on the prior years tax returns (the Trustees usually require the last 3), the Trustee may not want to see the 2012 tax return and may just decide to file a Report of No Distribution. You won't know until a specific Trustee is assigned. You just need to remember that this is the time of year that Trustees enjoy. The "low hanging fruit" is in fact the tax refunds and there is really no way to know, in advance, which Trustee you'll be assigned and whether the Trustee is aggressive.

[btbeme]

Methinks if the paper trail shows no tax refund in the last three years and not a lot has changed in this year (regarding income, withholding, etc) then the Trustee will likely not bother with further exercise. As Justbroke says, it depends on the Trustee, but the Trustee will have plenty of evidence that there hasn't been one before and will have access to payroll records showing more of the same, and Trustees don't generally like to wast their time.

I am not aware that a Trustee has the power to force a tax return to be filed at any particular time, and if the case is held open I am certain the Trustee will let you know what paperwork would satisfy their curiosity.

[IBroke]

The code only requires that the "filed" return from the prior tax year is provided. So, if she had not "filed" the 2012 tax return with the IRS prior to filing for bankruptcy, then only the 2011 tax return would be required under the code (11 USC 521).

Thanks for the clarification. I assume they set it up that way because that makes sure that the financial picture provided is somewhat current.

However, the Trustees are looking for tax "refunds" this time of year. The Trustee may decide to keep the case open until the 2012 tax return is filed so that the Trustee could determine if there is anything that could be administered to the unsecured creditors.

So, based on the prior years tax returns (the Trustees usually require the last 3), the Trustee may not want to see the 2012 tax return and may just decide to file a Report of No Distribution. You won't know until a specific Trustee is assigned. You just need to remember that this is the time of year that Trustees enjoy. The "low hanging fruit" is in fact the tax refunds and there is really no way to know, in advance, which Trustee you'll be assigned and whether the Trustee is aggressive.

I'm not a tax-expert but I simply can't figure out how it should even be theoretically possible for my mother to receive a refund. As I said, she is running her own business and the only time a year she is paying a penny in taxes is when the tax-return is due. Now matter how much she made - the self-employment tax always leads to a payment due to the IRS - even if her income is less than her deductions. Hopefully, the trustee can understand that as well.

That is something I will discuss with the attorney as well.

[IBroke]

I am not aware that a Trustee has the power to force a tax return to be filed at any particular time, and if the case is held open I am certain the Trustee will let you know what paperwork would satisfy their curiosity.

This is also very interesting. Theoretically, my mother could file an extension to October 15th 2013 as early as the first week of January 2013 and file a few days later for BK. How a trustee could disallow such an extension would be very interesting, too. He could keep the case open - but I don't think he could force her to file earlier.

[justbroke]

With the business records, the Trustee may back off. Trustees actually have broad powers and can dismiss a case if you don't follow an order of the Trustee, especially around requests for records! One of the major components of 11 USC 521 is debtor compliance with the Trustee.

I'm just preparing you for the likelihood of needing a tax return. If you are lucky, the prior tax returns (the past 3 tax years) and the business records may be enough to scare of the Trustee. The real fact is that this time of year is ripe for Trustees wanting tax returns and tax refunds!

[IBroke]

I'm just preparing you for the likelihood of needing a tax return. If you are lucky, the prior tax returns (the past 3 tax years) and the business records may be enough to scare of the Trustee. The real fact is that this time of year is ripe for Trustees wanting tax returns and tax refunds!

Thanks, justbroke!

If I would be a Trustee, I'd certainly do the same. However, if I would know right from the start that it is virtually impossible that a refund may be issued, I would back off. After all, the word "refund" actually means that you must have paid some sort of tax before in order to get something back in the first place. And the way my mother is running her small business (no employees), that is simply impossible.

[justbroke]

Well, there are refundable tax credits, so you do not need to actually have had taxes withheld in order to have a refundable overpayment. In any event, the Trustee, if smart, would back off. It's not worth waiting for nothing.

[TheBajan]

it sounds like your mom has her documents ready to file but not the money to pay the taxes due. She could file (even in January 2013) and put off paying the taxes. Regardless of when she files, penalties and interest will begin accuring from April 15 even if she files an extention. The tax due date doesn't change no matter when she files so if she is putting off filing b/c she can't pay the tax, it won't change how much she will owe. Suggest that she go ahead and file as early as possible but wait to pay the tax until she originally planned to pay it. The amount will still be the same.

Just my two cents.

Best wishes,
The Bajan

[HHM]

JB, don't put too much credence in the "and filed" part of the code. The issue has been litigated.

As for right now, Oct, 2012, the "required" return is 2011, regardless if the debtor actually filed the 2011 return. As you pointed out, the trustee may keep a case open to see the 2012 return for tax refund purposes, but the 2012 return is not the "required" return.

What has been litigated and sometimes trip-up debtors and attorneys is when a case is filed between Jan 1 and April 15. Unfortunately, the required return is that prior year return, regardless if it has been "filed". For example, if a debtor files BK Feb 12, 2013, the "required" return is 2012 because 2012 is the tax year immediately preceding the BK case. If the debtor does not comply, the case gets dismissed. Extensions don't matter, the fact that return is not due until April 15, doesn't matter.

The code section in question is 521(e)(2)(A)(i). The courts focus more on the phrase: "for the most recent tax year ending immediately before commencement of the case...

The courts have been pretty clear, on Jan 1, that means the tax return is due 7 days before the trustee meeting for that prior year, regardless if it has actually been filed, regardless if the debtor files an extension. Now, as a practical matter, most trustees will not start dismissing cases until mid to late February so the debtor has time to gather the info.

[IBroke]

it sounds like your mom has her documents ready to file but not the money to pay the taxes due. She could file (even in January 2013) and put off paying the taxes. Regardless of when she files, penalties and interest will begin accuring from April 15 even if she files an extention. The tax due date doesn't change no matter when she files so if she is putting off filing b/c she can't pay the tax, it won't change how much she will owe. Suggest that she go ahead and file as early as possible but wait to pay the tax until she originally planned to pay it. The amount will still be the same.

Just my two cents.

Thanks, TheBajan!

That sounds like the best option. I found this on google:

http://blogs.hrblock.com/2012/04/11/...s-file-anyway/

What if you can’t pay the IRS by April 17?

The following scenarios created by The Tax Institute at H&R Block show the financial impact of three tax payment options. These scenarios assume an original balance due of $2,000 and the taxpayer paying the balance in full by Oct. 15, which is the deadline to file a return for those who got an extension to file.

File now, pay later = $2,090 – If a taxpayer can’t pay what is due April 17, the least expensive option is to file a return or extension on time and pay by Oct. 15. The additional cost is approximately $90 in failure-to-pay penalties and interest.

Well, since our balance due might indeed be about $2K, we can certainly live with a $90-penalty.

So my mother will file in January. Perfect!

Thanks for all your input, folks!

[ld2366eh]

I agree with The Bajan. I filed my taxes last year at the beginning of Feb. and didn't write a check until April 15th. You can file early and not pay until the due date...

[justbroke]

That's what I thought HHM. In any case, the Trustee has broad powers also in 11 USC 521 making the debtor comply with any request for records and documents.