My head is about to 'splodey!

[CarrieOakey]

I owed back taxes from 1999 and they were included in my no asset Ch 7 filing; I filed my 2008 return after I filed the Ch 7 and it indicated a refund was due for overpaid 2008 taxes; the anticipated amount was listed as an exemption in the bankruptcy.

I went online earlier to check the status - I wasn't sure whether the refund would be released to the trustee or anything - and then had to call IRS and was informed that the refund had been applied to the 1999 debt, even though they are aware of the Ch 7 filing.

Having spent the past two hours on the phone (to various departments), I still don't have an answer - are they somehow exempt from the automatic stay? As far as I'm aware there is no lien on any property (largely because I don't own any property) but IRS has taken every tax refund since 2002 to satisfy the 1999 dept. There is still an outstanding amount on the 1999 debt (thus trying to discharge same in the Ch 7).

Would appreciate any help, as I'm driving Google and myself completely insane trying to find out whether or not they had the right to apply this year's refund (which again is listed as a exemption) to the 1999 debt even after filing Ch. 7.

[justbroke]

This is normal for the IRS when you owe them... even if you're in Bankruptcy.

Yes, the IRS is entitled to use a "right of setoff" in order to recover money from any future refund. However, the IRS will generally just "hold" your money (basically put a freeze on it), and then file a Motion for Relief from the Automatic Stay. Don't be surprised if you get that motion soon. It's basically so that they can keep that money.

A "claimed" exemption on the refund only protected you from the Trustee's claws, not the IRS' reach. I'm guessing that you didn't list the IRS debt on Schedule F as "Unsecured Debt"?

[CarrieOakey]

I did list it as a debt though - it fulfilled all 5 criteria.

[justbroke]

I did list it as a debt though - it fulfilled all 5 criteria.

On which Schedule did you list it?

Did you list it on Schedule F? (It makes a difference. If you put in on Schedule E... that's an issue.) Also I would wait another 2 weeks, then contact the IRS' Bankruptcy Department. Do not talk to anyone else at the IRS except for the Bankruptcy/Insolvency Department. Ask them what flag they put to hold the refund.

[CarrieOakey]

Oh...crap...

I don't have the copies in front of me - is there a simple difference between E & F so I can understand a bit more?

They've already applied it to the 1999 debt, even though the taxes were filed after the bk was filed.

I iz confused lol\

ETA: if it is listed in the wrong schedule, can I amend the appropriate schedule to correct this?

Many, many thanks for your help

[justbroke]

I believe, but I'm no lawyer so this isn't legal advice, that putting it on Schedule E makes it a priority unsecured debt. I thought it may matter, but the real kicker is that I believe you need to take other action. You probably need to file a Motion to Determine Dischargeability to ask the court to discharge the tax debt. I don't know if you do this by contested matter (motion) or by complaint (adversary proceeding).

I would first make sure the IRS Bankruptcy / Insolvency Department is aware of your BK and ask what their intent is. They may just have a temporary hold on it, as they did mine this year (they released my entire refund even though I owe money).

Do you know they applied it, or are you guessing? If they applied it, I think you would have to file a Motion to Compel and perhaps the motion to determine dischargeability. These are not "light" tasks to accomplish for the average pro se filer. My initial blush is that those taxes are dischargeable (the 1999 ones).

[CarrieOakey]

Thanks so much again!

They did actually tell me today that it had been applied to the 1999 debt; I had called a couple of weeks ago though (after I filed the Ch 7), and the Bankruptcy division (the Insolvency..something something, right?) has been aware of the filing since the day after I actually filed.

I've gone back through a couple of bankruptcy books (Nolo and another which has several pages cached at Amazon) and they both say that even though it's a no asset case the past due taxes needed to be on Sched E. They also made the point of differentiating between 7 and 13, with it being far more critical to list it in the right area if you're a Ch 13, the implication being that there are no assets to distribute (and still wouldn't be as I exempted the anticipated amount) thus it's a non-issue.

If the worst comes to the worst, I believe I can amend the schedules to reflect this, yes?

[JRScott]

You should be able to amend your filing. You probably should do so before your 341. They might be taking advantage of you since you filed pro se .

[justbroke]

JRScott is right on the taking advantage.

Personally, I would look through the Calendar for your particular District and see if there are some cases related to dischargeable tax debt and how those were accomplished.

I found one Florida case (may or not be relevant) specifically looking at dischargeability of tax debt. In that case, the Debtor had to file an adversary proceeding to determine dischargeability. While the case I'm pointing to was all about dischargeability, the United States didn't want the debtor to receive a discharge due to some tolling that occurred from a prior bankruptcy. After reading some more (see the IRS guidelines below) I believe that making it a priority debt (listing in on Schedule E) makes it non-dischargeable. You may need to do 2 things... first, amend and move it to Schedule F because it's not entitled to priority, and second, you may need to file a motion to determine dischargeability.

http://pacer.flmb.uscourts.gov/pdf-new/53912218.pdf

So, again, I think you need to take the step to ask the court to determine dischargeability of the tax debt. It won't just go away.

Here are a few more similar cases...

http://207.41.17.67/Judges/file_attachment/90-3323-dds_170508_104522.pdf

http://207.41.19.15/Web/bap.nsf/0/C60D5A28C261F55088256F59000072AE/?opendocument

I hope all this helps, and here's some light reading...

The IRS' own rules on this... in English! http://ftp.irs.ustreas.gov/pub/irs-wd/0603001.pdf

http://findarticles.com/p/articles/mi_qn4180/is_20020314/ai_n10067332/

http://www.iurillolaw.com/docs/discussion_of_the_bankruptcy_reform_act.pdf

[CarrieOakey]

Argh, what a convoluted mess!



First, thank you both so very much for just having the patience to wade through this; I'm going to research further as you suggested.

My trustee meeting is early next week; I won't be able to file an amendment to schedules E & F by then but I can absolutely take the amended papers with me to the meeting.

I realise that trustees cannot give legal advice, but in your experience can they give a yes or no answer to the question "If I want the tax debt to be discharged should I amend the petition?", and might s/he answer the question of "does the trustee normally intercept tax refunds in this area?"

I do keep seeing websites (and the NOLO book) saying that it really only becomes an issue if you're a ch. 13, and that a no asset ch. 7 makes the amendment thing moot, the theory being that I have no assets anyway and thus there's nothing for the trustee to take to pay creditors, because the amount of the refund would still keep me well below the exemption limits and I would still remain a no asset case.

ETA: the 1999 taxes were not filed late - they were filed either before April 15 of that year, or on April 15 itself, so they've never been filed late. Is this a factor?

Again, thank you for your time and your patience - and if I'm beating a dead horse or becoming irritating with the questions I won't be offended if you tell me to sod off and get a lawyer

(the next part is just a summary of what we've been discussing - it's only for my reference so I can keep everything in one post)

1. Pro se ch 7 petition filed (no asset) and IRS notified as they are listed as a creditor; IRS confirms verbally that they have received notice.
2. Tax debt from 1999 fulfills all criteria to be discharged
3. Currently not sure under which schedule the taxes are listed, but I believe I did use E (grr..NOLO told me to!)
4. 2008 taxes filed post-bk showing refund.
5. Refund amount listed as an exemption
6. IRS takes refund and applies it to the 1999 debt which confuses me because what I'm reading says they can hold it, but can't apply it to an old debt until the bk is discharged.
7. Carrie goes slightly insane

[justbroke]

First, thank you both so very much for just having the patience to wade through this; I'm going to research further as you suggested.

You're welcome.

My trustee meeting is early next week; I won't be able to file an amendment to schedules E & F by then but I can absolutely take the amended papers with me to the meeting.

I would file it before the meeting. (You will need $26 to file this. You will need a check or exact change.) If the 341 Meeting is in the Courthouse, file the two updated schedules with the Clerk before going into the meeting. Bring 3 copies and have the Clerk file stamp all of them. Give one copy to the Trustee at the 341 Meeting when you're at the table.

I realise that trustees cannot give legal advice, but in your experience can they give a yes or no answer to the question "If I want the tax debt to be discharged should I amend the petition?", and might s/he answer the question of "does the trustee normally intercept tax refunds in this area?"

I do not know if they'll answer that or not as it has a hint of legal advice.

I do keep seeing websites (and the NOLO book) saying that it really only becomes an issue if you're a ch. 13, and that a no asset ch. 7 makes the amendment thing moot, the theory being that I have no assets anyway and thus there's nothing for the trustee to take to pay creditors, because the amount of the refund would still keep me well below the exemption limits and I would still remain a no asset case.

The amendment thing they are talking about is post discharge and close! They are not talking about an active case! Taxes are very specific and you don't want to re-open your case later ($260) just to file a motion or complaint to determine dischargeability of the tax! There's a recent First Circuit court ruling that reads that you must get the schedules right, and that nothing is discharged unless it's on the schedules properly!!! (HHM posted the article from Bankruptcy Law Network yesterday)

1. Pro se ch 7 petition filed (no asset) and IRS notified as they are listed as a creditor; IRS confirms verbally that they have received notice.

Good

2. Tax debt from 1999 fulfills all criteria to be discharged

Good

3. Currently not sure under which schedule the taxes are listed, but I believe I did use E (grr..NOLO told me to!)

NOLO and other places are talking about taxes that are entitled to receive priority under the Bankruptcy Code. Since this tax is over 3 years old, and you filed the return (or the tax was assessed) more than 240 days ago.... it is not entitled to priority and is not excepted from discharge.

4. 2008 taxes filed post-bk showing refund.

$$$

5. Refund amount listed as an exemption

Only stops the Trustee from taking it as an asset. More specifically, it's no longer property of the Bankruptcy Estate.

6. IRS takes refund and applies it to the 1999 debt which confuses me because what I'm reading says they can hold it, but can't apply it to an old debt until the bk is discharged.

They may be in trouble (violation of automatic stay) and you could file a Motion for Order to Show Cause and for Sanctions. Simply making them, the U.S., appear and say why they took property of the Estate. Oh, but wait... you exempted it, so it's not property of the Estate. See how this gets more confusing!!!

7. Carrie goes slightly insane

Well, the tax part is one of the more confusing and most daunting tasks for a pro se filer/debtor. The United States is a tough creditor.

ETA: the 1999 taxes were not filed late - they were filed either before April 15 of that year, or on April 15 itself, so they've never been filed late. Is this a factor?

Yes and no. The rule is that the tax must have been assessed 3 years prior. Since you filed before on on April 15th, then the tax was due or assessed on 4/15/2000. (I'm assuming you mean 1999 taxes for which you filed in April, 2000.) That means, that they became "subject to" discharge on 4/15/2003. Even if you had filed late... as soon as the IRS "assessed" a tax on you, the three years starts then. You have absolutely no issue on filing. Even if you filed in 2005, you'd still be okay.

Now, this is just "me" thinking out loud. I'm thinking the IRS took the money for these reasons.

• You listed the 1999 IRS tax liability as a Priority Unsecured Debt on Schedule E. This means that they are entitled to receive any distribution from the Trustee as well as use their right of setoff since the tax would be considered non-dischargeable. The IRS would normally file a "Motion for Relief from the Automatic Stay" in order to exercise this right of setoff.
  
• You exempted the refund. Since you exempted it, it's not property of the Estate any longer. So, the IRS considers the refund "fair game". Could explain why they applied it to your 1999 tax liability and that they did not file a motion for relief from the automatic stay. Pure speculation on my part!

[CarrieOakey]

I'm going to amend Schedules E & F - tax debt will be included in Sched F; I'll have to do this the same day of the meeting but it will be done come heck or high water.

Once this is done will the tax refund be "taken" from the 1999 account and held by IRS until discharge? Given to the trustee instead?

The exemption issue does still confuse me a little - is this what happens?

If I exempt the amount: Trustee can't have it, but IRS can?

If I remove the amount from exemption: Trustee can "hold" it till bk is discharged (that's right, isn't it?), but can IRS still keep it even though the schedules have been amended?

Does this entire matter depend on the Schedules more than the list of exemptions?

[justbroke]

Once this is done will the tax refund be "taken" from the 1999 account and held by IRS until discharge? Given to the trustee instead?

Not sure. Again, you may need to file a motion to compel them to return the funds and/or a motion to determine dischargeability. Merely updating the schedules, is not going to make things happen, IMHO.

The exemption issue does still confuse me a little - is this what happens? If I exempt the amount: Trustee can't have it, but IRS can?

Yeah, the Trustee would keep it as it's an asset! You do not want to remove the exemption!

If I remove the amount from exemption: Trustee can "hold" it till bk is discharged (that's right, isn't it?), but can IRS still keep it even though the schedules have been amended?

Trustee won't hold it, Trustee will keep it if it's not exempt. The Trustee would then use it to pay... priority unsecured debt and then general unsecured debt (since you put IRS on Schedule E as priority unsecured debt, it would go right back to the IRS)! Talk about circular!

Does this entire matter depend on the Schedules more than the list of exemptions?

It's both! First, the Schedules determine what type of debt it is. The Exemptions determine what "assets" are protected in whole or in part by underlying State or Federal bankruptcy exemptions.

It's just my opinion, but I believe the combination of exempting the refund (making it not part of the bankruptcy estate and outside the reach of the Trustee) combined with putting tyhe taxes on Schedule E, making them priority unsecured debt that must be repaid (non-dischargeable), allowed the IRS to do exactly what they did.

Even if you fix the schedules, I personally believe that you need to take another step to motion the court to determine the dischargeability of the (now) Schedule F tax liability from 1999.

[CarrieOakey]

I honestly can't thank you enough for your help

I'm going to go ahead and change E & F and find out about filing a motion to decide dischargability and/or motion to show cause.