IRS, Past Due Taxes and Bankruptcy

[LynnD]

I filed Chapter 7 bankruptcy pro se and am due to be discharged next week. I have back owed taxes from 2002 and I meet the criteria for it to be discharged (or so I believe). I called the IRS because I wanted to see what they would say in regards to me filing my tax return. I am due a return this year but don't want them to take it to offset my past due taxes.

She told me that the taxes are NOT dis-chargeable in bankruptcy and they would stop trying to collect while I'm in bankruptcy (but would take any refund if I filed now) and they may adjust the penalty and fees but I would still owe the past due taxes after the bankruptcy was discharged. I told her I didn't believe that to be the case and she told me I need to call the insolvency department with IRS to get clarification.

I called that number but they won't even talk to you unless it has been 30 days post discharge.

Anyone who has claimed past due taxes on bankruptcy have any input into this??? I don't mind waiting to file my taxes BUT now I'm starting to rethink will they be discharged or not??

[HHM]

2 issues....and why didn't you just get a lawyer.

1. If you get your tax refund, the BK trustee is entitled to it unless the refund is solely from Earned Income Credit (Form 1040 Line 64a) or Additional Child Credit (Form 1040 Line 65). Otherwise, CO provides no other exemption for tax refunds.

2. The IRS is pretty good about updating records (albeit very slowly) on discharged taxes and don't dispute when the discharge is obvious. You called the correct office of the IRS, Insolvency. If the taxes are dischargeable and no tax lien, you would normally receive the refund.

Possible Scenarios
1. Taxes are discharged, Trustee gets refund.
2. Taxes are not discharged, Trustee gets refund.

Let's run through the tax discharged rules.
1. 3 year rule: if we are talking about 2002 tax year, then yes, you are 3 years beyond the tax return due date (April 15, 2003)
2. Did you actually file the tax return, if no, stop..taxes not discharged, if yes, was it more than 2 years before your BK filing date?
3. At any point did you ever file an Offer in Compromise or request a collection appeal with the IRS, if yes, these events and the length of time they are pending stop the various time lines from running.
4. Was any new tax assessed in the 8 months preceding the BK (not likely given the tax year involved), but still, need to evaluate

[LynnD]

I didn't get a lawyer because I couldn't afford a lawyer. Simple as that.

1. The BK trustee has already told me he does NOT want my tax refund at my 341 meeting and I confirmed this by emailing his assistant and have the email reply confirming this.

2. Your 2 scenarios are not correct in this situation because as mentioned above, the Trustee has already said he does not want my tax refund, copy of tax return.. nada. (additionally, the bulk of my return will come from the two methods you mentioned--EIC and the Child Credit)

I already know the rules regarding discharge and I meet each and everyone of them. Over 3 years, filed on time, did not request appeal or offer in compromise, no new taxes were assessed, no attempt to defraud government.

I am assuming you are saying that if the tax discharged rules are correct and knowing i filed Chapter 7, that the IRS agent was incorrect in her statements that only the penalties and fees will be adjusted and I will still owe the taxes?

[HHM]

Correct, the IRS agent at the regular contact numbers for the IRS have no training on BK issues and just assume taxes cannot be discharged, so that person is wrong.

To be fair...I did say the trustee gets the refund UNLESS the refund is due to EIC and Additional Child Credit, which apparently is your situation. So, I will add the caveat to the 2 scenarios, "unless exempt."

In any event, you should be fine.

[LynnD]

Thanks so much!

The Trustee never inquired or asked anything about my tax refund and if I even expected one. He did look at the two previous years. The previous years I allowed my ex husband to claim my children so I did not get a refund. (perhaps he just assumed it would be the same this year) So I suppose what I'm getting at is the Trustee didn't want my tax return period. He never asked about my filing this year or if I would expect a return. In the 341, he told several other people he wanted their tax return (copy) and any refund. I specifically asked if he wanted that information from me and he said no. Now we both know that in my case the bulk of my return will be EIC and child tax credit so he would have released it anyway BUT if my return would not been a result of those two things, he still didn't say he wanted it.