Two Questions RE: IRS Debt and Attorney Fees

[simplelife]

Hi Everyone,

I have two specific questions. I have asked my attorney via email (along with other questions), and he avoided these two; and, I called the trustee's office today and got very vague answers. So, I thought someone here might be able to shed some light.

#1) If attorney's fees are higher than what he has asked to be included in plan, will we be responsible for them after the Chapter 13 is completed?

#2) Our main reason for filing was large IRS debt. When we filed, we were told that penalties and interest would stop, and that the debt would be paid in full as long as we completed our plan successfully. However, we have had some people tell us that the IRS can still come after us for accrued penalties and interest even if we finish the plan. The rep at the trustee's office told me that the IRS can do whatever they want; but she believes it's rare for them to do that. What are your thoughts?

Thanks so much,
simplelife

[despritfreya]

Welcome to the forum.

As it relates to the attny fees, you need to look at your fee agreement. No way for us to tell.

As it relates to the taxes, there is not enough info.

What kind of tax (income or payroll or sales)?
What tax years?
Were returns filed on time, if not, were they filed more than 2 years before filing the bk?

There are other factors but let's start with the above.

Des.

[simplelife]

Thank you Des.

The attorney fee agreement allowed for an hourly charge for everything our attorney ($325/hr) and his assistant ($100/hr) has worked on for us, after the upfront costs. We are up to nearly $11,000 not including the $3,500 and miscellaneous fees that we paid outside of plan to begin our Chapter 13. He has requested allowance of $7,500 to be paid through the Plan. So, I am just wondering what happens to the amount not accounted for? He has to go before the judge in September for "Clarification of Order on Application for Compensation".

We have both income and payroll taxes included in the Plan. The income are for 2010. The payroll are for the end of 2009, and all of 2010. We filed income tax returns on time. Payroll tax returns were late...hence, large penalties we incurred (a hard lesson learned on our part). However, they were not filed more than 2 years before the bankruptcy filing.

The IRS filed a lien on our home for the payroll taxes prior to our filing. I am concerned about what happens to this lien after the plan is completed, God-willing! I have gotten mixed or vague answers.

Thank you for any input you may have. I know it is complicated.

[despritfreya]

I do have comments but must finish my work at the office. I will come back to this either tonight or early tomorrow morning.

Des.

[despritfreya]

The attorney fee agreement allowed for an hourly charge. . . We are up to nearly $11,000 not including the $3,500 and miscellaneous fees that we paid outside of plan to begin our Chapter 13. He has requested allowance of $7,500 to be paid through the Plan. So, I am just wondering what happens to the amount not accounted for? He has to go before the judge in September for "Clarification of Order on Application for Compensation".

Your attny does what we do. He charges hourly and estimates the cost at the beginning. Since he is hourly (not a “no-look” fixed fee) he must file an Application for Approval of Compensation. Once his fees are approved, if the Plan does not cover them he will either add them to the Plan and correspondingly increase your Plan payments or, if your Plan has already been Confirmed, work something out with you for payment of the additional amount. If your Plan has been Confirmed and you cannot pay him directly he may suggest modifying your Plan to pay it over the balance of the remaining months you may have.

We have both income and payroll taxes included in the Plan.

Interest WILL run on the payroll taxes and WILL survive the entry of your Discharge. Interest should not be running on income tax and should not be an issue when the case is over. Same for the penalties. Get a copy of the IRS Proof of Claim. It will show three categories 1) Secured due to the tax lien; 2) Priority Unsecured and 3) General Unsecured. In the vast majority of cases and assuming the tax returns were properly filed, anything listed as General Unsecured will be discharged. Anything listed as Secured will be paid through the Plan WITH interest. Anything listed as Priority will be paid through the Plan WITHOUT interest. Again, there is a specific Code provision that allows interest to run on Priority taxes that are 940/941 type tax and that interest survives the bk.

Payroll tax returns were late...hence, large penalties we incurred (a hard lesson learned on our part). However, they were not filed more than 2 years before the bankruptcy filing.

The fact that the tax is more than 3 years old doesn’t matter since the payroll taxes are never dischargeable.

The IRS filed a lien on our home for the payroll taxes prior to our filing. I am concerned about what happens to this lien after the plan is completed.

Again, look at the Proof of Claim. The amount listed as Secured should match the value of your equity in all property. Whatever the amount, it will be paid through the Plan with interest and sometime after your discharge is entered the lien should be released.

As a side note, your Plan when it was formulated, only gave an estimate of your tax obligation. Since there was no way to know the exact amount owed the overall funding of your Plan can and will be different at the time of Confirmation. Most of the time Plans are under-funded. Sometimes they are over-funded. I just had one where I was way off on the trust fund portion of the IRS’s claim. Fortunately I was able to tell my client that the Plan payment was going down.

Des.

[simplelife]

Thank you so much for taking the time to explain all of this! It is somewhat clearer to me now. I have looked at the IRS proof of claim, and understand what you mean by the three categories.

I have questions related to the fact that it took 20 months for our Plan to be confirmed. Does this mean interest was still accruing on the Secured payroll tax debt, even though we had been making payments through the plan all along? And, why did the Trustee only disperse two months' payments towards that debt, rather than 20 as was paid towards the Priority unsecured income tax debt? This seems strange since there is a large balance in our account that could have been used to pay more. And, this may sound like a stupid question; but, will the Trustee pay the payroll tax interest accrued as the Plan progresses? Or will we be responsible for that balance after the Plan is completed?

I left a message for my attorney earlier today, also. Hoping he can help clarify the details of Secured amount "matching the value of the equity in all property", etc. As it stands, the Secured amount is close to the total of the original tax lien.

We recently submitted a Post-Confirmation Amended Plan, which was confirmed. This was mainly due to the fact that Attorney's fees needed to be added in. Our payments went up from $970 to $1,200.

Thanks again for your time! Happy to hear you were able to tell your client their payment was going down! That's nice for a change!

[despritfreya]

I have questions related to the fact that it took 20 months for our Plan to be confirmed. Does this mean interest was still accruing on the Secured payroll tax debt, even though we had been making payments through the plan all along?

Yes, however once the Trustee begins disbursing the funds, after the attny is paid, unless you have other debt (mortgage arrears, auto loan), a large payment will go to the IRS for the secured claim so, in the end, it all evens out.

why did the Trustee only disperse two months' payments towards that debt, rather than 20 as was paid towards the Priority unsecured income tax debt?

Cannot really answer this but. . . with the exception of “adequate protection payments” as provided for under your local rules to secured creditors, the Trustee has no authority to disburse funds until the Plan is Confirmed.

will the Trustee pay the payroll tax interest accrued as the Plan progresses? Or will we be responsible for that balance after the Plan is completed?

The Trustee will pay interest on that portion of the payroll tax that is “secured”. The higher the secured amount the more interest paid on the principal owed and the less you will owe when the case is over. This leads me to the next point.

I left a message for my attorney earlier today, also. Hoping he can help clarify the details of Secured amount "matching the value of the equity in all property", etc. As it stands, the Secured amount is close to the total of the original tax lien.

Be careful here. If the IRS has listed its secured claim as being greater than the equity in all of your property, you may not want to argue over it if the secured tax is payroll tax. Secured claims are paid interest. Unsecured are not. The more you pay under the category of “secured” the less you pay under the “priority unsecured” category and the less you will have to deal with when the case is over. Got it???

Des.

[simplelife]

I think I got it! What was worrying me most is having some "big surprise" at the end of our bankruptcy...such as finding out we still owe the IRS a large amount of interest. However, from what you've said, it seems that I shouldn't be panicking! I guess the bottom line is that I need to be reassured from time-to-time that filing Chapter 13 was the best option for us, even when things don't work out exactly as we had expected.

Thanks again for explaining, and easing my mind a bit!

Just a thought: The attorney has only been paid a little through the Plan so far. Could that be why the Trustee is holding off on paying Secured IRS debt to make sure there is enough when his fees are approved? Because he asked his fees to be paid in 12 month time frame.