Chapter 13 conversion to Chapter 7 and tax debt

[Taxed2Death]

Beware the TAX MAN!

I filed for Chapter 13 Bankruptcy protection in 2000. At that time I owed a past tax debt from 1998.

In 2004, I converted my Chapter 13 to a Chapter 7.

The 1998 tax debt was not discharged (even though it was five years old) because it was under the automatic stay during my Chapter 13.

After my Chapter 7 closed, the IRS added penalties and interest for the years my debt was in the Chapter 13.

For five years, I have disputed these added charges with the IRS.

The IRS has refused to provide any supporting documenation to prove they have a right to add these charges.

These additional charges are not even listed on my IRS account transcript.

I have been to the Taxpayer Advocate Service twice, and they have been no help in validating these charges.

Can anyone provide the Internal Revenue Code or Bankruptcy Code statutes that permit the IRS to add charges after the close of a Chapter 7?

By the way, my Chapter 7 Schedule E list the IRS claim as the same amount claimed during my original Chapter 13.

Is the IRS required to revise this claim amount to include these charges in my Chapter 7?

The IRS acts like my bankruptcy never happened!!!

No one can beat Uncle Sam...

[zeezee]

I thought taxes were not dischargeable in bankruptcy?

[Taxed2Death]

There are a few instances where tax debts can be discharged in bankruptcy, one of them being a tax debt that is 3+ years old at the time of filing.

In my case, the tax debt was only two years old at the time I filed my Chapter 13.

When I converted from a Chapter 13 to a Chapter 7, the tax debt was five years old, but the three years during the Chapter 13 don't count because the IRS was prevented from collecting the debt due to the automatic stay.

What makes this frustrating is that the IRS apparantly gets the benefit of both rules, keeping the debt from discharge by calling it "new" and adding penalties and interest to it by calling it "old." It seems like the IRS should only have it one way or the other.

My attorneys claimed the purpose of this rule is to keep debtors from "hiding out in the 13!" Basically, the law prevents a debtor from seeking protection under the automatic stay which keeps the IRS from collecting, and then getting a complete discharge through a Chapter 7 after the debt is more three years old.

I have found the bankruptcy code that permits the "tolling" of the debt and prevents it from being discharged, I just can't find the code that allows the IRS to charge penalties and interest for this time.

Normally, in a Chapter 13, the IRS cannot add penalties and interest unless the debtor drops out. When I converted from a 13 to a 7, my attorneys told me it was like the the 13 never happened and it was considered one bankruptcy instead of two.

Can any BK or tax attorneys clarify this for me?

When I asked my bankruptcy attorneys after the close of my case, they said this was out of their scope?

[zeezee]

I see. Interesting. I'm sure one of the knowledgeable guru's will be along with what you need!

[HHM]

You will want to look at 507(a)(8).

The timeline for dischargeability of a tax debt is tolled while a stay (i.e. automatic stay) is in effect, e.g. while a chapter 13 is pending. And since your chapter 13 was not discharged, just like other creditors, the IRS gets to add back interest and penalties from the date of the original petition. It's not specifically written about interest in penalties, it is implicit in the fact that the BK was never completed. The BK 13 prevents additional penalties and interests to be charged during the pendancy of the chapter 13, BUT, you MUST make it to discharge for that benefit to stick. In the event a chapter 13 is dismissed, ALL creditors get to basically act as if the chapter 13 never happened, minus any payments they received from the chapter 13 trustee.

When the automatic stay terminates in a 13, (even on a conversion, realize that a conversion relates back to the original filing date of the 13), it really is as if the BK never happened. That automatic stay is temporary. When you make it to discharge, then a permanent injunction takes it place. But if you don't make it to discharge, you are f'ed.

Sorry to say, you have been fighting a losing battle.

[Taxed2Death]

Thank you HHM.

You are the first person in five years who has provided this information despite my efforts. In my research, I have read the 507(a)(8) code many times; however, since I could not find the specific language written into the code to grant the charge-back of penalty and interest to creditors, I assumed it wasn't in there.

I suppose it does not matter that the IRS did not update or revise its original claim from the chapter 13 to include these additional charges. The amount of the claim in the 7 is the same as the 13. However, the amount the IRS is asserting after the chapter 7 is several thousand dollars more than the claim.

I have found information in the IRS manual that states the IRS is not required to re-file a claim in a no-asset case provided it receives notice to this extent from the bankruptcy court; however, I have found no such notice in my discovery efforts. Could this be a loophole?

Interestingly, the IRS transcripts don't even quantify these charges, it simply moves from the original assessment date to the current date as if the bankruptcy never happened.

I assume the IRS is not communicating with me due to other "legal wrangling" I have asserted during my bankruptcy (I would love to get your opinion about these as well, but do not want to dominate your time and attention). It seems like a simple letter from the IRS supporting its actions would have been sufficient to bring the matter to a close years ago.

Anyway, thanks for your insight.