Four Things to Know About Your Tax Refund in Bankruptcy

IRS file cabinet (2)It’s that time of year, consumers are preparing to file their income taxes.  For some, having mortgage interest deductions, dependents as deductions, and things like the Earned Income Tax Credit can mean a large refund even if your income is relatively modest.  Keeping your income tax refund in your pocket, and out of the Chapter 7 Trustee’s pocket, is a realistic goal.  The National Consumer Law Center just released a review of key pointers to keep in mind at tax time.  You can read the entire article here.

Delays in IRS Processing

The article warns that the IRS is expecting delays in processing refunds where the Earned Income Tax Credit is involved.  Last year’s refunds were similarly delayed.  In fact, the IRS is saying that where the tax refund involves Earned Income Tax Credit, or the Additional Child Tax Credit, the consumer should not expect to see their refund until February 27, 2018, even if the refund involves money not associated with these programs.

RACs Are Very Costly

RACs are financial products designed to take tax preparation fees out of the consumer’s refund.  But the article explains that your refund won’t arrive any faster that it would if you get the refund directly from the IRS.  In the RAC, the refund goes into a special bank account set up for this purpose.  The article explains that the consumer winds up paying many extra fees, such as a fee for opening and closing the bank account, the tax preparation fees themselves, then any add-on fees the preparer can dream up, ranging from $25 to several hundred dollars.  Consumers spent more than $500 million for these products and related fees last year along.

RALs, Maybe Even Worse?

These are loans secured by the refund.  Consumers are lured in by a promise of “free” tax preparation and an “advance” on their refund.  But to get the “free” tax preparation service, consumers are obligated to use a designated preparer.  The prepare again adds on their fee, plus additional fees, including a premium for getting the money sooner than the IRS direct deposit.  But consumers can pay hundreds of dollars for the earlier receipt, despite the fact that the IRS refund may only be a week or two later.  In addition, the article points out that most consumers would be better off preparing the taxes themselves, using free or low-cost tax preparation software, or free services like the Volunteer Income Tax Assistance program.  This makes them ineligible for the RAL, but could save them hundreds of dollars in the long run.

Beware of Unscrupulous Tax Preparers

Very few states regulate the training, or competency of income tax preparers (Ohio does not).  While most consumers believe that tax preparers must be licensed or regulated, this is not true.  Ask your preparer:

  • What kind of training have you had in tax preparation? Have you attended formal training?  Where and when?
  • How long have you been preparing taxes? How many returns have you filed?
  • Do you have credentials such as a law license, CPA, enrolled agent certification or other certificates?
  • How much will the preparation cost me? Will I be charged more if I get an advance or loan?

Again, the article reminds consumers that organizations such as the AARP offer consumers free or inexpensive tax preparation.

In Ohio, the portion of your refund which is attributable to the Earned Income Tax Credit is completely exempt, which means the Chapter 7 Trustee cannot take it from you.  Nevertheless, you can do things with your refund which transform it from an exempt asset, to a non-exempt asset, and thus cause complications with your refund you want to avoid.  Consult with your bankruptcy attorney to understand what to avoid here.

Blake Brewer is an Ohio attorney who is a designated a federal debt relief agent in bankruptcy matters.  He does not give tax advice or prepare income tax returns.  While reading this summary does not create an attorney client relationship, you can contact him by email at or call him at 216-642-8234 to schedule an appointment to review  options for bankruptcy protection.  If you are considering bankruptcy protection, do not delay as the passage of time can seriously affect your rights in any legal proceeding.

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