Category Archives: Taxes

Bankruptcy tax refund.

Bankruptcy tax refundBankruptcy Tax Refund.  This is an article about what happens when there is a tax refund and the IRS files an offset.

Here’s an example of what happens.  A debtor filed a chapter 13 bankruptcy.  After the filing the IRS retain a portion of the debtors income tax return.  The Debtor sought to recover his bankruptcy tax refund, retained by the IRS in his chapter 13.  The IRS had retained a portion because it had been set off by the IRS against a priority tax liability. In re Jones, 359 B.R. 837 (Bkrtcy. M.D. Ga. 2006).

Judge Walker analyzed the three different approaches to this issue:

(1) the majority view that an IRS setoff under $553 is not permitted by the bankruptcy court for exempt property. See In re Jones, 230 B.R. 875 (M.D. Ala. 199); In re Alexander, 225 B.R. 145 (Bkrtcy. W.D. Ky. 1998);

(2) The minority view, that the setoff by the IRS is allowed, See In re Wiegand, 199 B.R. 639 (Bkrtcy. W.D. Mich. 1996); or

(3) An emerging view that the “overpayment” by the Debtor does not become a “refund” until and unless all setoffs have been applied, See Beaucage v. U.S., 341 B.R. 408 (D. Mass. 206); In re Baucom, 339 B.R. 504 (Bkrtcy, W.D. Mo. 2006); In re Pigott, 330 B.R. 797 (Bkrtcy, S.D. Ala. 2005).

The Court in this case chose the third options, premised on 26 U.S.C. S6402, which specifically allows setoffs from “overpayments”. From the characterization of the claim as an “overpayment”, it follows that the setoff is allowed and, after it is applied, only then does any excess become a ‘refund” which is an asset of the debtor, or the bankruptcy estate.

For more information about Bankruptcy and Taxes  – contact Cynthia Remboldt, at the Remboldt Law Firm at 404-348-4081. FREE consultations can be scheduled by calling 404-348-4081.  Evening and Weekend hours are available to meet with an attorney.  If bankruptcy turns out to be the best way to move forward considering your alternatives, goals and financial challenges, payment plans are available if you need them.

Are Taxes Dischargeable In Bankruptcy?

Are Taxes Dischargeable In Bankruptcy?Are taxes dischargeable in bankruptcy? The short answer is “sometimes”.  If the debts are relatively old and they meet several other conditions, the taxes are dischargable in a bankruptcy; however, you may have to file a complaint in the bankruptcy court to have a Judge determine the dischargeablity of the taxes debts in order to have the IRS honor the discharge.

Generally speaking, for taxes dischargeable in bankruptcy, you must meet all of these conditions:

1         You filed a legitimate tax return.

2         The tax returned was filed at least two years before filing bankruptcy.

3         The tax liability you want to discharge was due at least three years before filing bankruptcy.

4         The IRS has not assessed your liability within 240 days.

5         You did not willfully evade payment of a tax.

A couple of additional notes.  Penalties for the taxes dischargeable in bankruptcy are also dischargeable, if the taxes are dischargeable in bankruptcy.  But courts are split as to whether you can discharge tax penalties of nondischargeable taxes.

However, if the taxing authority has put a lien on your property, the lien will remain after your bankruptcy.  You will have to pay off the lien before you can sell the real estate will a clear title even if the tax was discharged.

As you can see it’s COMPLICATED!  If you are considering bankruptcy because of your tax debts, consider a consultation with a bankruptcy attorney experienced in discharging taxes in a bankruptcy.

A word of caution, if you get a loan to pay taxes what would otherwise not be discharged in bankruptcy, you can not eliminate that debt in a chapter 7 bankruptcy. You can’t turn nondischargeable taxes in a bankruptcy into a discharageable debt in a chapter 7 bankruptcy. A chapter 13 might be a better alternative for you in this case.

For more information about Bankruptcy and Taxes  – contact Cynthia Remboldt, at the Remboldt Law Firm at 404-348-4081. FREE consultations can be scheduled by calling 404-348-4081.  Evening and Weekend hours are available to meet with an attorney.  If bankruptcy turns out to be the best way to move forward considering your alternatives, goals and financial challenges, payment plans are available if you need them.

Bankruptcy and Tax Refunds

Bankruptcy and Tax RefundsBankruptcy and Tax Refunds. After a bankruptcy, can I keep tax refunds or can I use my tax refunds to pay my bankruptcy attorney? If you have this question you should seek advice from a Bankruptcy Attorney. Here’s what happened in In re Bailey, 380 B.R. 486 (6th Cir. BAP 2008).

After filing their case, the Debtors received tax refunds derived from pre-petition earnings. On advice of counsel that the funds were exempt, they used part of this money to pay their counsel’s attorney fee. The Trustee subsequently filed a turnover motion under section 542(a), and the Bankruptcy Court ruled for the Trustee, finding the funds were not exempt and ordering the Debtors to pay the entire amount, including what they had paid their attorney. Appeal was taken to the BAP.

Writing for the BAP, Judge Gregg first found that the erroneous advice of counsel regarding the bankruptcy and tax refunds did not crate a defense to the turnover action. Further, turnover was appropriate because the tax refunds was property of the bankruptcy estate which was in the Debtor’s possession during the pendency of the bankruptcy proceeding.

The Court noted that under pre-1978 Code law, as held by the Supreme Court in a 1948 case, tax refund turnover would not be permitted if the defendant did not have possession of the tax refund when the turnover action was filed. However, under the 1978 Code amendments, the Trustee’s recovery rights were expanded in section 542 to include recovery of “such property, or the value of such property”. The addition of the words “or the value of such property” where held to specifically apply to this situation, where the Debtors are in control of property and are liable for its unauthorized transfer.

For more information about Bankruptcy and Taxes  – contact Cynthia Remboldt, at the Remboldt Law Firm at 404-348-4081. FREE consultations can be scheduled by calling 404-348-4081.  Evening and Weekend hours are available to meet with an attorney.  If bankruptcy turns out to be the best way to move forward considering your alternatives, goals and financial challenges, payment plans are available if you need them.