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.