LITIGATING
TAX LIABILITY IN BANKRUPTCY COURT
The
Bankruptcy Court has the ability under 11 USC 505 to make a
determination of a Debtors tax liability even if it has
already been decided by the Internal Revenue Service.
Having a determination made of how much tax a debtor owes is
a relatively simple process, compared to pursuing the
administrative remedies available outside of Bankruptcy.
Many times
clients come do not contest assessments, audits or other
liability assessed by the IRS until it is too late to file
the appropriate appeal or court action. In many cases,
these taxes have become fully
assessed and there is little that can be done about them,
without paying the assessment and then filing a claim for
refund internally with the Internal Revenue Service.
Outside of Bankruptcy, the taxpayer has few options to have
the validity of the tax re-determined.
One way to contest the validity of the tax, outside of Bankruptcy, is to
file an Offer in Compromise with the grounds being
"Doubt as to Liability". This will also get
another look at determining whether the tax is actually due.
Another way to have an additional opportunity for a
re-determination of whether taxes are owed is to file a
Request for Audit Reconsideration with the IRS.
If neither of those options is feasible or not successful, then
the taxpayer must file a Court Action in order to seek a
refund. This option is usually an option for cash strapped
taxpayers.
Bankruptcy Court provides a viable alternative to the
administrative remedies set forth above. It is a
comparatively simple process to have a judicial review of
whether the tax assessment is correct.
If the Bankruptcy Court will hear the issue of whether the
amounts claimed are due, then the client gets completely new
opportunity to have a Court make a determination about
the validity of the tax, penalty or interest.
Once the Bankruptcy is filed, there are 2 basic ways of
getting the issue before the Bankruptcy Court:
In Chapter 13,
the Internal Revenue Service will file a Proof of Claim.
Once it has been filed, follow the usual procedure to object
to a Proof of Claim.
In Chapter 7, if the case is a no asset case then it will be
necessary to file Adversary action against the IRS. In
an asset case the Internal Revenue Service will file a Proof
of Claim. An Objection to Proof of Claim can then be filed.
The ability to have tax liability determined by the
Bankruptcy Court can be a powerful tool to assist in
resolving those taxes that the Debtor really doesn't owe,
but for some reason have been assessed and the various
protest periods have run.
11 USC 505 provides in its relevant part:
(a)(1) Except as provided in paragraph (2) of this
subsection, the court may determine the amount or
legality of any tax, any fine or penalty relating to
a tax, or any addition to tax, whether or not
previously assessed, whether or not paid, and
whether or not contested before and adjudicated by a
judicial or administrative tribunal of competent
jurisdiction.
(2) The court may not so
determine -
(A)
the amount or legality of a tax, fine, penalty, or
addition to tax if such amount or legality was
contested before and adjudicated by a judicial or
administrative tribunal of competent jurisdiction
before the commencement of the case under this
title; |
This
means that the Bankruptcy Court may, in its discretion
determine whether any tax is owed by the debtor. As a
practical matter Bankruptcy Judges will usually hear the
matter and determine whether the tax claimed by the IRS is
actually owed.
Contact Us:
The Tax Group LLC
dba
Attorneys Tax Group
82 E. State St. Suite E
Eagle, Idaho 83616
1 877 TAX CREW
1 877 829 2739
Fax:208 938 8503
Martelle Law Offices PA
208 938 8500
webmaster@attorneystaxgroup.com
