Large IRS Claims May Complicate and Delay Bankruptcy Proceedings

On behalf of William Bible at Law Office of W. Thomas Bible, Jr.

When filing for bankruptcy, it’s important to have a clear understanding of how your debts and assets will be treated. Many types of debt are discharged in bankruptcy, while others are not. Some assets and personal property items are allowed to be kept, while others have to be surrendered.

One Tennessee man’s bankruptcy case became more complicated than was likely expected, due to large claims by the Internal Revenue Service. In In re Winters, the United States Appellate Panel of the Sixth Circuit was petitioned, in part, to review the decision of the United States Bankruptcy Court for the Middle District of Tennessee, which found in favor of the Commissioner of the Internal Revenue Service. In that decision, the lower court held that the over $250,000 owed to the Internal Revenue Service was nondischargeable, meaning that it would not be discharged in the bankruptcy, and the debtor would still be responsible for paying it off.

The debtor originally filed for Chapter 7 bankruptcy in 2011. Financial problems plagued the debtor for years, prior to the bankruptcy filing. The large claim by the Internal Revenue Service was one of three. In 2009, the debtor received a Notice of Deficiency from the Internal Revenue Service, indicating that he owed over $170,000 in taxes and fees from the 2004 tax year. In 2011, he was notified of additional amounts owed, including $165,000 in taxes and fees from 2007, and $130,000 from 2008. The debtor challenged all three Notices of Deficiency in tax court.

Due to the fact that the tax liabilities were challenged in separate proceedings, the bankruptcy proceeding was delayed until a final determination as to the exact amounts owed to the Internal Revenue Service.

The debtor claimed, on appeal, that the 2004 tax claim should not be entitled to priority status because the Internal Revenue Service failed to bring the claim against him within the three-year statute of limitations, required by law. The Commissioner of the Internal Revenue Service argued that the law provides an extended, six-year statute where the debtor omits over 25 percent of their gross income on their tax return. Because there was a separate proceeding to determine the exact amount owed, it was impossible to determine whether the amount owed was based on an omission that would result in the longer statute of limitations.

Pending the determination of the tax liability by the other court, the Appellate Panel stated that “until [an appropriate] determination is made, the statute of limitation, priority, and nondischargeability issues cannot be resolved.” The Appellate Panel reversed the decision of the lower court, which held in favor of the Internal Revenue Service, and sent the decision back to the lower court. Effectively, the determination as to the dischargeability of the 2004 tax claim would be left for another day.

When bankruptcies include complicated issues of debt, including debt to government entities like the Internal Revenue Service, it is important to have an experienced attorney on your side, to assist you in navigating the complicated legal process that is often involved. If you have filed for bankruptcy, or are considering filing for bankruptcy, contact an experienced lawyer today.

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