Another tax return story….
The debtor goes in front of the trustee and says she is married. She only filed the chapter 7 petition by herself, her husband did not file with her. In the petition it says that she is married. However when the debtor sent the tax return to the trustee, she only sent the tax return that she filed. The trustee asks her if her husband files a tax return. She says “yes”. “Well then let’s continue this hearing and I want to see his tax return as well”. So the meeting of creditors was continued to see the husband’s tax return, even though he was not filing for bankruptcy.
Why did the trustee ask for his tax return?
Two reasons, one is to see if all of the non-filing debtor’s income is listed on schedule “I” and on the means test. The debtor is entitled to file by herself, but all the family income must be listed in the petition to see if she qualifies for a chapter 7 bankruptcy.
The trustee is also checking to see if the husband is getting a tax refund as well. Even though the husband is a non-filing spouse, the tax refund on HIS tax return could be part of the bankruptcy estate. This is a community property state and all the income (tax refund) is part of the bankruptcy estate and must be exempted. So the trustee asked for the husband’s tax return to see what , if any tax refund was coming into the family besides the tax refund the debtor was entitled to , if any.
These are to bankruptcy reasons for asking for the non-filing spouse’s income, but there may be another reason for asking for the husband’s tax return. There could be fraud involved. The husband and the wife may have filed two separate tax returns and both claimed themselves as “head of household” This is a scheme in order to get a bigger overall tax refund.
The bankruptcy trustees in our division have been instructed to turn over those tax returns to the Attorney General on possible tax fraud issues..
The Practice Pointer: if your client is married and files a tax return by herself, this is a red flag for you. If she has tried to defraud the IRS, this scheme will come back to haunt her. If she only has a tax return for herself, ask for the husband’s as well to review and then counsel her if she should file a bankruptcy as it may open her up to an investigation by the Attorney General.