Tax Refunds and Bankruptcy

Tax season is right around the corner.  A common question is, “What will happen to my tax refund?”  The timing of your bankruptcy filing is important.  If you have NOT received your tax refund yet and file for bankruptcy, the tax refund can later be taken by the trustee appointed to the bankruptcy case.  

The best way to avoid having the trustee take your tax refund is by spending the tax refund first before filing for bankruptcy.  It is important that your tax refund is spent on normal expenditures – rent, mortgage, food, car payments, utilities, etc.  Do NOT spend it on luxury items such as jewelry or vacations.  The trustee can possibly ask for documentation on how the tax refund was appropriated.

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Are Income Taxes Dischargeable in Bankruptcy?

Income taxes can be discharged only if they fully meet certain criteria:

1) You must have filed a return for the tax year(s) you want discharged.
2) The return was FILED at least 2 years before the date of your bankruptcy filing.
3) The tax return itself was DUE at least 3 years before the date of your bankruptcy filing.
4) The IRS has NOT audited your liability within 240 days of the date of your bankruptcy filing.
5) You did not willfully evade paying the taxes.  This means you did not try to hide or falsify the numbers in your return, or illegally attempted to avoid paying taxes.

It’s important to remember that liens placed on your home by the IRS are NOT lifted by a bankruptcy filing.  Wage garnishments and frozen bank accounts are lifted, however.