Motion to Modify Stay from IRS

[irishonyx33]

Hello. My husband is in a Chapter 13 due to tax debt. (technically, I guess we both are since we live in a community property state, but I am listed as non filing spouse). Our entire payback (which is not 100%) is going to the IRS and State with nothing left for unsecured debt. The amount we are paying back to IRS/State is not the entire amount he owed. I don't know the correct legal terms but our attorney did something with the tax liens so that my husband only owes the value of our assets ( I hope I am explaining correctly). Our trustee said we could keep any returns.

We received a copy of the Motion to Modify Stay to Allow Setoff of Tax Refunds in the mail. I have a couple of questions. First, is there any viable reason to object to this? We need the money for a car...would that be something that would be considered? We have been saving and were looking to get a car for about 8k to get us through the BK. We dont want a car note so this puts us about 3k short. If we have to, we'll just hope our current car can hang on for a couple more months and save the rest...just worried how likely that is. (our current car has 220k miles on it)

Next, I filed injured spouse. This tax debt is entirly my husbands pre-marital tax debt. I paid no taxes last year because I am a SAHM. Because we live in a community property state, is the tax refund assumed to be 50% mine so we might receive half of the refund?

Finally, can we adjust withholdings so we don't overpay taxes throughout the year without getting permission? I plan to mention all of this to our attorney this week ...just looking for any insight. Thanks for any information.

[lrprn]

I noticed your question has 70 views without an answer yet. That's probably because the question you are asking depends on a deep depth of IRS tax knowledge in a community property state with a bankruptcy involved filed by a single filer. That makes your situation complicated and atypical.

It's great that you plan to talk to your bk lawyer this coming week because you are going to need your lawyer's input to get a reliable answer. Please come back and let us know what your lawyer tells you after you talk.

[AngelinaCat]

You need to call your IRS representative and talk with him/her, and see what that person suggests.

We, 'Hub and I, had a pre-existing debt to the IRS, which was not discharged with our CH7 BK. The IRS stopped/suspended our arranged payments while we were in the CH7. After we were discharged, the IRS contacted us about re-instituting our payments.

You can also talk with your attorney. However, I can tell you that OUR attorney was absolutely useless, when we tried to talk to her about our IRS debt. We just went on about our business...

Good wishes to you

[irishonyx33]

Wouldn't any objection to modify the stay need to be submitted to the bankruptcy court? Forgive me if I misunderstand...but what would I be asking of the IRS rep? The taxes that are owed are being paid in the plan. Do you believe the IRS is asking to offset because of what our lawyer did regarding the tax lien, making it worth only our assets? (I'm sorry, really wish I could remember what our atty called it)

[justbroke]

Yes objections get served on the movant (the party that filed the motion) and then filed with the court. The question for the IRS is whether or not that since they are provided for in the plan, would they withdraw their motion to offset.

I had only owed the IRS about $3K when I filed (and most of that was due to a bad 1099-MISC that a company erroneously filed). The IRS never offset any of my refunds in my Chapter 13.

I have never seen where the IRS sought to offset a refund in a Chapter 13. This is strange because the IRS, in a Chapter 13, is entitled to priority on their claims. The IRS is entitled to an "priority" unsecured claim and a "general" unsecured claim. The IRS may also have a secured claim; which seems to be your case.

If you don't have enough money to pay the entire IRS claim, the IRS must receive their "secured" claim and their "priority" unsecured claim over the life of the Chapter 13. Your attorney did something known as "valuing" or "bifurcating" the secured claim. This splits it into a "secured" portion and an unsecured portion. The attorney is making sure that the unsecured portion, if you are not in a 100% plan, will be discharged at the end. This is a good attorney.

Very interesting though. First time I've heard of this, but the option is there (for the IRS).

(I can't help with the 50% community property state issue, but you may be able to file an "injured spouse" claim with the IRS. Since your Trustee isn't interested in refunds, you should certainly speak with your attorney on the injured spouse point. It may or may not work.)

[irishonyx33]

Thanks all for your answers...I really appreciate your time. Is it possible that the court will deny the IRS's motion to modify the stay because the taxes are being paid through the plan? I understand my situation seems unique so you may not have an opinion on that, but can't hurt to try. Again...thanks for the insight.

[justbroke]

I can't predict what the IRS will present to the court in order to have the motion granted and your taxes used to offset the non-dischargeable balance.

I think that the IRS is using its "pre-petition" rights to offset (setoff) the pre-petition arrears against the pre-petition overpayment. Your attorney may want to make sure that the IRS is not trying to claim more of the pre-petition overpayment than they should. For example, if you filed 10/1/2011, then the IRS would only be entitled to seek offset of 3/4ths of any overpayment (e.g. 9 / 12).

That's just a total guess on my part, so don't take it as what the IRS' position is. When was the Chapter 13 filed? Did the Motion specify for which tax year they are seeking an offset... just 2011?

[HHM]

This situation is odd, I have not heard of the IRS making such a motion. But I can see why they might. Usually, a chapter 13 plan is filed under 1327 of the BK code, that section vest bankruptcy estate property back to the debtor. As such, future refunds belong to the debtor, so perhaps the IRS is asking the court to allow it to exercise its non-bankruptcy remedy to take future refunds.

They could be arguing that they are secured creditor (e.g. tax lien) and as such, they have a security interest in the tax refund and therefore should be able to exercise their right over the refund upon confirmation.

[justbroke]

It would be interesting to see the IRS' position on this, HHM. I know that they have rights to offset pre-petition debt with pre-petition overpayments. However, if this is an offset of pre-petition debt with post-petition overpayments... this could get interesting.

[irishonyx33]

The plan was filed in April of 2011 and confirmed Auguest of 2011. The motion states we have tax liabilities for 2005, 2006, and 2008 and it says "...setoff the refund of the debtor for the year 2011 against the prepetition priority liabilities of the debtor". The modification motion also says the IRS filed a Claim No. 3 on Spet 28, 2011 in the amount of $23,866.08. But if If I am reading correctly, Chapter 13 data says $7357.08 to the IRS is priority, and $16,509 is unsecured. I am assuming this is the split from the valuing my attorney did you were talking about justbroke?

[justbroke]

The IRS will usually file their claims with both a priority unsecured amount and a general unsecured amount. The latter being non-dischargeable. The general unsecured amount represents penalties and interest on penalties. The priority portion is the actual tax due plus interest.

I'm not an expert on the IRS and the intersection of the IRS code and the bankruptcy code. I do not know if the IRS can offset post-petition overpayments for pre-petition debt. So, the question is, can the IRS be allowed to take any portion of the refund attributable to your overpayments post petition. In other words, they would only be allowed to offset the withholdings from 2011 pro-rated based on the date that you filed; or about 25% (3 months out of 12 since you filed in April 2011).

Very interesting though... very interesting. I don't want to speculate any more. Let's see what your attorney says.

[HHM]

Okay, that makes a little more sense, the IRS CAN take a refund for a tax year that has already passed. Not sure why I brain farted this issue, it is fairly common. However, what through me off was the IRS going to the trouble to actually do the motion, the code simply allows them to do it.

This article explains it

http://www.**********.com/blog/2011/...13-bankruptcy/\

For JustBroke, the applicable code sections are Internal Revenue Code 6321 and Bankruptcy Code 362(b)(26).

The article does give this bit of wisdom...there was no way you were keeping that refund anyway; had you not filed BK, the IRS would have kept it.

[irishonyx33]

Thanks for the information HHM. I fully expected this for the 2010 taxes we filed in 2011, but was surprised by them keeping the taxes this year. When we filed 2011 taxes, I did file as an injured spouse. I will still talk to my attorney and see if that coupled with the fact that we are in a CPS will allow us to receive half of the refund.

Thanks again.

[justbroke]

HHM, I think that the IRS still needs the motion because the pre-petition money would be considered property of the Estate. The IRS is still required to seek permission to offset. I just can't figure why the IRS would go through the trouble even to offset it with a confirmed plan in place.

[irishonyx33]

My attorney only had time for a brief conversation, as she was due in a meeting. She basically mirrored what HHM stated. She also doesnt seem to think they are going after my half of the refund because the motion only lists my husband, but she will still send a letter requesting my half. We do not need permission to adjust out withholdings, which she suggested we do so this isnt an issue next year. Paying off the IRS early with the tax offsets is only going to make cash available to the unsecureds, who are currently not scheduled to receive anything in the plan.

So just for clarification, although it may be rare, the IRS can request a modification to the stay every year for the duration of the plan?