As we approach the end of the year, keep in mind that tax season is around the corner. We are now in November and now chapter 7 trustees are starting to make claims on tax refunds that will not be due until the first of the year. So as you build your cases, keep in mind your client’s potential 2014 tax refund. payday loans online same day
Here is an example:
Last week I was in the Riverside meeting of creditors with Trustee Lynda Bui. The debtor was called forward to the examination. The debtor had significant equity in her home. Therefore she had to use the CCP 704 exemptions. The case was filed in October. Trustee Bui saw that the debtor had received a large refund for the 2013 taxes.
Trustee Bui asked the debtor if she expected to receive such a large tax refund for 2014, which would not come to the debtor for approximately 5 or 6 months.
The debtor said that there was no changes in her income and expenses and that she did not know what her tax refund would be. The Trustee estimated that the 2014 tax refund would be about the same as she received in 2013. Since the client could not protect the potential tax refund, the Trustee was making a claim against that potential refund as accrued prior to the filing of her case.
Trustee Bui said that the bankruptcy estate was due all the tax refund that was accrued prior to October 2014. So she was making a demand of 3/4th of the tax refund that the debtor would get next year. The debtor would keep the amount of the pro-rated tax refund that she accrued after October 2014 until the end of the year.
So for this tax year the debtor would have to split the tax refund with the trustee. The Debtor was warned not to spend the tax refund if the check should be sent to her. Then the trustee would use those monies to pay some of the creditors of the estate.
The practice pointer here is to counsel your clients on the potential tax refund that can be taken by the trustee here in 2013, when the actual checks will not be cut until after the taxes are filed.
In addition, the Chapter 7 Trustees have the power to send to the IRS an “intercept” letter in which the tax refund is sent DIRECTLY to the Chapter 7 Trustee upon request.
So tell you clients about this provision if you cannot exempt their 2014 tax refund. This way you client can make other arrangements to replace the monies. Many clients use the annual tax refund to pay their property taxes, if the Trustee may take that tax refund, they will want to know ahead of time to make other plans.
In the case of the debtor in front of the Trustee Bui, she understood the Trustee’s point and agreed to cooperate, but she was still confused on how she got into such a bind.