Tax Question

[willsurvive]

Hi,

Our case was discharged last month, but still open (we have assets). Anyway, we owe the IRS around $3000 for employer taxes for a failed business. When we filed our 2008 taxes, we had $5600 coming back. We assumed that the IRS would take their share (they always do!) and then send the remainder to the trustee. Well, I called the trustee's aid today, and they have the full amount of $5,600 in hand. I'm really frustrated because now we probably will have a tax bill forever with a payment plan. Do we have any options on this? I put a call into my lawyer and waiting to hear back.

THank you!

[justbroke]

Perhaps you misunderstand.

A short review about just what is the automatic stay (11 USC 362) iis appropriate as it explains this issue, I believe, clearly.

When you file, an automatic stay is imposed by a section of the Bankruptcy Code (11 USC 362). This makes it, basically, contempt of court if a creditor seeks to take or withhold "property of the estate". This automatic stay applies to everyone, including the federal government.

So, let's say you file your taxes after you filed for your bankruptcy, but before your discharge (which is your case). Let's say you are due a refund (let's say $5,600 as in your case). That $5,600 refund is property of the estate. Let's say that you have back taxes of $3,000 (as in your example). The IRS just can't use their right of setoff to take that $5,600 to pay the $3,000!!! That would be a violation of the automatic stay!

What the IRS can do in that situation is one of two things. First, "temporarily" hold the refund while simultaneously filing a Motion for Relief from the Automatic Stay and asking if they can apply their right of setoff and keep the money. Second, they can just turn the money over to the Trustee since the money is "property of the estate". In your case, it appears that the IRS decided to do the latter. The Trustee may decide to just give it back to the IRS but it's up to the priority of the creditors awaiting payment.

Since the IRS is a priority unsecured creditor, they will be paid before all other priority creditors. However, the Trustee will take his/her "percent" fee, that the IRS won't see the entire $3,000 owed. (The Trustee will also keep his/her commission too.) This assumes that there are no other creditors with a higher priority than the IRS. You are not going to see any of this money, as the Trustee will distribute it to the other creditors in priority order. Again the Trustee will take his/her commission.

I hope that my explanation helps.

[JoeBankrupt33]

Well, actually, with $5600, the IRS should get their entire $3000. You need to make absolulety sure that the IRS files a claim, and that way, they will get paid first.

The trustee will get 25% of the first $5000, and 10% of the next 45k plus some expenses, like photocopying and postage. So, the trustee should get about $1310 plus some extra charges, so maybe about $1500 total. This gets paid first. So, there is $4100 left that will pay the IRS, then another $1100 left that will pay unsecured creditors.

I think you'll be OK on this one.

[justbroke]

(I made a slight math error above, thanks for pointing it out. Should have read that the IRS will more than likely see the entire $3,000 from the Trustee.)

[willsurvive]

Ahh, okay. I get it now, and that makes complete sense. Thank you for explaining it.

What do I need to do to make sure the IRS files a claim? Do I just call them? I would assume they would just do it, but I don't want to assume wrong.

As a side note, we have 2,450 coming back in earned income credit, so it's likely there will not be much money left over after paying the IRS off.

Again, thank you for your insight, it has eased my mind since my lawyer hasn't returned our phone call.

[justbroke]

If the IRS doesn't file a claim (and they will, they are just slow), the Trustee can file one on their behalf (most likely) or you can file one for the IRS. I had to do this for my taxing authority (property taxes) because they didn't file by the time allowed.

[JoeBankrupt33]

Just another note - if you check in Pacer, a claim does not update the last date of filing. I usually only check out what is going on if that date changes, but one time, I found a docket entry because a claim didn't have a signature on it. So, I went to check my claims, and my tax (state of CO) was in there. As it turns out, it was also incorrect because they had some old taxes as a priority - glad I checked, and CO fixed their mistake.