Turnover of tax refunds in the event of bankruptcy | law of the free man


Case: In re SheikhCase No. 19-80436-TLM (Bankr. ED Okla., March 4, 2022)

This case concerns an intersection of tax law and bankruptcy law related to tax refunds. Specifically, it examines whether and when Chapter 13 debtors are required to remit tax refunds to the trustee.

Here, the debtor filed for Chapter 13 bankruptcy on April 25, 2019 and initially confirmed a plan on February 18, 2020. For reasons unrelated to the issue at hand, a bankruptcy appeals board overturned confirmation and remanded the matter to the Bankruptcy Court on November 23, 2020. A second confirmation occurred on the Debtor’s first Amended Chapter 13 Plan, resulting in the Amended Plan being confirmed in February 2021.

After filing the case, the debtor paid post-petition income taxes to the IRS for the 2019 tax year. To avoid rejection of his bankruptcy case, on March 2, 2021, the trustee and the debtor have agreed to issue an order requiring the debtor to make payments to the IRS of $100 per month beginning March 28, 2021, until the payment of taxes for 2019. For the 2020 tax year, the debtor was entitled to a refund for overpayment of taxes to the IRS in the amount of $3,625 plus interest, as well as a refund from the Oklahoma Tax Commission (“OTC”) of $207. From this overpayment, the IRS deducted $771.74 for taxes still owing for 2019.

Upon notification of the 2020 tax refunds, the trustee directed the debtor to remit the tax refunds in accordance with the terms of the confirmed Chapter 13 plan. After lengthy discussions between the trustee and the debtor’s attorney, the trustee demanded that the amount owing for the 2020 tax refunds be $2,070.01, calculated as follows:

Overpayment for the 2020 tax year: $3,625.00

+ Interest on overpayment: $38.01

+ State Tax Refund: $207.00

Less exempt stimulus payment: $(1,800.00)

Net tax refund requested by the trustee: $2,070.01

Focusing on the “net tax refunds” wording found in the plan, the trustee insisted that the only credit allowed was earned income tax credits, drawing this conclusion based on the following wording plan :

The Debtor(s) will timely file all required tax returns and provide the Trustee with a complete copy (including all attachments) of each tax return (state and federal) filed during the Plan Term within fourteen (14 ) days following the filing of the return and will remit to the Trustee all net income tax refunds, less earned income tax credits, received during the term of the Plan. Income tax refunds will be paid to the Trustee in addition to the Plan payments listed above.

Since the amount was not paid immediately, the trustee filed a motion to dismiss. The debtor responded, arguing that the debtor should only be required to return funds received from the IRS and OTC that he actually receivedcalculated by the Debtor as follows:

Overpayment for the 2020 tax year: $3,625.00

+ Interest on overpayment: $38.01

+ State Tax Refund: $207.00

Minus amount offset by IRS for 2019: ($771.74)

Less exempt stimulus payment: $(1,800.00)

Net tax refund requested by the trustee: $1,298.27

Rephrased, the debtor argued that he should not be required to remit the amount compensated by the IRS for 2019 taxes because he did not receive those funds. The debtor, of course, argued that “net” means the amount actually paid to the debtor since the debtor cannot return what he has not received.

Finding no ambiguity in the wording of the plan, the Court easily concluded that “net” means what remains after deducting all charges, expenses or losses. The Court found unconvincing that the specific reference to earned income tax credits in any way altered the allocation of other deductions to achieve “net income tax refunds”. . The Court further reiterated that it “[did] do not believe that a debtor can return funds that he has not received. The Court therefore concluded that the Debtor’s calculations were correct and that he therefore had to remit only $1,298.27 of his 2020 tax refund – the amount that was actually received.


While this case does not offer a great deal of opportunity for debtors to withhold tax refunds, it does provide some relief knowing that debtors cannot be compelled to hand over more than they actually receive in the form of tax refunds. ‘tax. While scenarios can be envisioned that could limit the scope of this opportunity, it should at least be kept in mind that there may be opportunities to structure one’s tax position in a way that prevents tax refunds from occurring. being levied by trustees in a Chapter 13 bankruptcy case.

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