Tax refund when you owe back taxes

[nazstar]

I've read several tax refund posts so sorry if this was already answered.... We have a refund coming to us this year of anywhere from $3000-6000. But we owe back taxes for last year to the tune of $16,000. My hope was that the IRS would just take the refund and apply it what we owe. We will be filing this summer. I can't imagine the trustee having an issue with that, right? I don't think that he's gonna go after the IRS for that amount and claim it was preferential or anything?

Also, if we are filing in August/September and are discharged in the Fall, can he also go after next year's return or will the same thing happen - - IRS will just put it towards the balance. We are hoping that between this year's return and next year's return AND the payment plan we are on with the IRS, that we can knock this out in 2 years.

Lastly, if I have an unexpected check from earnings and use that to pay the IRS, is that considered preferential? I may be wrong here, but I can't see the IRS bowing to a trustee and giving it back to them to distribute to CC companies.

[phoenyx]

I would definately recommend speaking with some bankruptcy attorneys to get more definitive advice. Most bankruptcy attorneys will provide initial consultations for free.

Before the IRS issues a refund check, their computer generally looks for outstanding taxes, and forcably applies as much as is needed toward outstanding taxes, and only issues you an actual refund if there is any refund left over.

If your automatic stay is in effect before the IRS processes your refund, I don't know for sure if this has any effect on them applying your refund toward outstanding taxes - but I would assume it doesn't.

If a taxing authority has filed a tax lien against you, it becomes a secured loan on all your property.

Taxes without liens that are not dischargable are considered "priority" unsecured debts, meaning they get first dibs over all other unsecured creditors.

Taxes without leins that are dischargable are considered unsecured debts, and get the same treatment that other unsecured creditors get.

From your post, it sounds like your taxes are not dischargable because the tax is due on a tax return more than three years ago.

Given that, I don't know for sure, but since those taxes will be treated as "priority" unsecured debts, I would be shocked if a trustee could make a preferential treatment claim on a refund applied to back taxes since the IRS should get first dibs over other unsecured creditors first anyway. For the same reason, I would be somewhat suprised if a trustee could make a preferential treatment claim on a payment that you made toward back taxes.

If the trustee could make a valid preferential payment claim, they would be doing so under federal bankruptcy law -- so the IRS would have to honor it.

The bottom line is that you don't have control over whether the IRS applies your refund toward your back taxes. However, I strongly recommend speaking with a bankruptcy attorney before mailing them a check on your own. Not only to avoid any potential problems with the trustee, but also to see if you might be able to set up an Officer in Compromise with the IRS for a lesser amount than is due.

[no_it_all]

Since the IRS are priority unsecured creditors they are first in line anyway...They will keep the refund and apply it to your back taxes owed.