Bankruptcy filing catches refund on unfiled tax return

03 Feb Bankruptcy filing catches refund on unfiled tax return

The bankruptcy estate consists of not only assets in the possession of the debtor but also their rights to stuff they don’t yet have. So if you will be entitled to a refund for 2009’s taxes and you file before you receive the refund, that right to payment is part of the bankruptcy estate.

My clients often seem to think that they don’t have to disclose the refund if the return hasn’t been filed, or even if it has been calculated in a filed return but not received. They seem to think the right to the money doesn’t exist if it hasn’t yet been paid to them. Not so! The right to the money exists even before you’ve calculated how much it is.

What if you haven’t prepared the return and know if you’ll get a refund? Schedule it as “possible tax refund”, or amend the schedules to disclose it as soon as you know.

You may be able to exempt the refund under the exemptions scheme available in your filing and keep it for yourself, but the right to the refund must be disclosed. One of the basic rules governing the treatment of assets is list it or lose it. Assets that aren’t disclosed may not be exempted and aren’t deemed to be abandoned to the debtor when the case is closed.

Other kinds of intangible rights that often get omitted from the bankruptcy schedules are rights to insurance proceeds; inheritances; accounts receivable; rights to reimbursement or repayment from a closely held corporation and legal claims, whether or not the case has been filed. Leave this sort of asset off the schedules and you may lose the asset to the trustee or lose the right to claim an exemption you would have been entitled to if you disclosed the asset in the first place.

Taxes on unfiled return deductible in means test

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.
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