I assume you mean to say that the refunds are being offset to pay delinquent federal and state income taxes owed. Not all income tax obligations are dischargeable in bankruptcy. As a general rule income taxes owed on returns filed less than 3 years prior of the date of your bankruptcy petition or that were assessed less than 240 days prior to filing your bankruptcy petition are not dischargeable. If the tax obligations were not dischargeable then you still end up owing all of the tax debt — tax, penalty, and interest. The IRS and state tax agency would still stand in line with your other creditors, though, to get paid out of any assets the trustee collected to pay creditors. So it may be that the court directed that some of the funds in your bankruptcy go to pay at least the tax portion of the debts you owe to the tax agencies. But if the debt was not discharged, you still owe any balance left over after those payments were applied. If you are unsure whether the taxes were discharged or not, contact your attorney and ask him/her this question: were my federal and state tax debts discharged in my bankruptcy? If the answer to that question is no, then you still owed any balance still due on those debts when the bankruptcy was over and the IRS and state may offset your future refunds to collect it.

