Tax Refunds In Bankruptcy

Many of my clients want to know if they can keep their tax refunds after the file bankruptcy.  For many people, the tax refund is an important source of revenue and income during the year.  It is possible a file bankruptcy and keep your tax refund, but you must follow the proper procedure.  Additionally, if you owe the IRS any money, it may not be possible to protect your tax refund this year.  However you can use the bankruptcy discharge to protect future tax refunds.

First of all, it is important to understand that your tax refund is property of the estate.  That means that your tax refund must be listed on the schedule B of your bankruptcy petition.  Schedule B as were you list all property the estate.  However, listing your tax refund on schedule B of the bankruptcy petition does not mean to the chapter seven trustee gets to keep all or part of that refund.  In many cases you are able to protect your tax refund with an exemption.   If you fail to list your tax refund, they may lose your right to claim an exemption, and the chapter to seven trustee may be able to take your entire refund.  In addition, failing to list the property on schedule B is grounds for denial of discharge.  Therefore, it is very important but you check your bankruptcy petition to make sure that the tax refund is listed.

Anything that you list of property B can be protected with an exemption on schedule C.  Exemptions allow you to protect your interest in property of the estate that otherwise be recoverable by the chapter seven trustee.  Depending at what time of your case is filed is also possible pro  rate the amount of the tax refund is actually property of the state and has to be listed on schedule B.  Further, part of your tax refund may actually be a benefit of Social Security and can therefore be exempted in its entirety.  For example the earned income credit is actually benefit of Social Security and therefore cannot be taken by the chapter seven trustee.

Even if your taxes can be discharged in bankruptcy, the IRS may still be able to take your tax refund.  This is because the IRS has with called the right of set off and recoupment.  The right of setoff and recoupment, basically, means that the eye Ross and cancel the debt that you ought to act with the doubt that it owes you.  This is because the tax refund is it that the IRS owes to you.  When you owe the IRS, and the IRS owes you, the IRS has the right to cancel the debt that it owes you by not paying your tax refund.   The right of setoff and recoupment has nothing to do with whether the tax debt can be discharged in bankruptcy.

One way to try to avoid the IRS’ exercise of set off and recoupment if the file your bankruptcy before you file your taxes.  If no tax return is been filed, then the IRS does not have a record of owing you tax refund.  If all of your taxes are dischargeable in your bankruptcy, then the IRS may not take your tax refund.  However if the IRS has any reason to believe that owes you a  tax refund, then it may still claim his right to set off and recoupment.  Unfortunately, if you owe the IRS money, then the IRS will do whatever it can to collect from you, even if the debt is dischargeable in your bankruptcy.

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