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  1. #1

    Default Suing the IRS in a Chapter 7 Bankruptcy

    My question involves bankruptcy in the state of: NY

    Chapter 7 lawyer wants 1.5K additional to sue IRS. Debt from 2013, filed in 2014.

    I don't fully understand the strategy, except she said it's to insure against future IRS collection efforts.

    My concerns: one, is this kosher; and two, what are the unintended consequences this could have between me and the IRS in the future?

  2. #2
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    Default Re: Chapter 7 Bankruptcy Lawyer Wants to Sue IRS Separately

    It makes no sense. Unless you have some legitimate tax dispute on what you owe (other than just inability to pay), such a lawsuit isn't going to do anything. Further, there's no "prophylactic" suing.
    $1500 might cover a filing in tax court and a simple hearing, but a case in District Court is going to entail way more than that.

  3. #3
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    Default Re: Chapter 7 Bankruptcy Lawyer Wants to Sue IRS Separately

    I suspect that the lawyer is describing a fee to hold an adversary proceeding in the bankruptcy court to dispute the amount of money owed or its dischargeabilty.

  4. #4

    Default Re: Chapter 7 Bankruptcy Lawyer Wants to Sue IRS Separately

    Quote Quoting Mr. Knowitall
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    I suspect that the lawyer is describing a fee to hold an adversary proceeding in the bankruptcy court to dispute the amount of money owed or its dischargeabilty.
    Thanks for your reply.

    Words of attorney were clear. "Sue the IRS"...so lawyer is planning on the IRS arguing that the debt is NOT dischargeable?

    Quote Quoting flyingron
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    It makes no sense. Unless you have some legitimate tax dispute on what you owe (other than just inability to pay), such a lawsuit isn't going to do anything. Further, there's no "prophylactic" suing.
    $1500 might cover a filing in tax court and a simple hearing, but a case in District Court is going to entail way more than that.
    Thanks for your reply. There is no legit tax dispute.

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    Default Re: Chapter 7 Bankruptcy Lawyer Wants to Sue IRS Separately

    Quote Quoting BritishBulgary
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    Words of attorney were clear. "Sue the IRS"...so lawyer is planning on the IRS arguing that the debt is NOT dischargeable?
    You will have to ask your lawyer what he means.

  6. #6
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    Default Re: Suing the IRS in a Chapter 7 Bankruptcy

    Quote Quoting BritishBulgary
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    My question involves bankruptcy in the state of: NY

    Chapter 7 lawyer wants 1.5K additional to sue IRS. Debt from 2013, filed in 2014.
    Is the amount that is owed what was shown on the return you filed? Or did the IRS do an audit or other adjustment resulting in the tax now owed. And is this an income tax liability (Form 1040) or some other kind of tax?

    If this is income tax and the amount owed is what is shown on the return then the tax generally is subject to discharge if the bankruptcy petition is filed more than three years after the return was filed, which would be the case here. Fraud, of course, is one of the big exceptions to discharge, but that would have required that you had provided false information to the IRS. If this is income tax, though, it does not seem likely that what your lawyer has in mind is an IRS challenge seeking to exclude the tax liability from discharge. You said that the lawyer plans to sue the IRS; that suggests the lawyer plans to initiate an adversary action rather than responding to a motion filed by the IRS. (An adversary action is essentially a lawsuit filed within the bankruptcy action and is heard by the bankruptcy court.)

    Quote Quoting BritishBulgary
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    I don't fully understand the strategy, except she said it's to insure against future IRS collection efforts.
    The phrase "insure against future collection efforts" could cover several different possibilities, depending on the facts of the liability, the assets you have, and the details of the bankruptcy proceeding.

    One of the things that most people filing bankruptcy do not know is that while the discharge order removes the personal liability of the debtor for the debts that are discharged it does not result in vacating any liens that arose against the debtor prior to filing the bankruptcy petition. The IRS has an automatic lien on all assets and rights to assets of the taxpayer that arises from the date of the assessment of the tax. The IRS may perfect this lien by filing a notice of the lien in the office specified in state law for such filings. For most states, that office is generally the same place that judgments would be recorded. Absent some order of the court, that lien will still attach to any pre-petition assets of the taxpayer that the taxpayer still has once the bankruptcy is concluded. So, for example, if your home is exempt in the bankruptcy and the federal tax lien (FTL) attached to the home prior to the bankruptcy filing, then that lien would still remain attached to the home after the discharge is entered and the automatic stay is lifted. In that case the IRS could collect the tax from the home either by seizing and selling it (which is not real common, but can be done) or by simply collecting from the proceeds of sale when the house is sold.

    So one possiblity here is that the lawyer has in mind trying to strip the lien off of exempt assets that you had at the time the petition was filed to avoid the IRS collecting from those assets once the automatic stay is lifted.

    Another possibility is that the lawyer expects that there will be enough money in the bankruptcy to pay the actual tax and interest owed, but wants to challenge the penalties to get them abated to avoid the IRS collecting for those penalties from those pre-petition assets.

    There could be other possibilities, too. You'd need to ask your lawyer precisely what she has in mind here. You want to know that before you plunk down money to start this. I can tell you that $1,500 won't last long in an adversary proceeding, so there would need to be a significant benefit here to justify doing it. If you want some feedback after your lawyer says what the particular claim would be, you can ask that here and I might be able to provide some helpful comments for you. Note, too, that depending on what the lawyer has in mind, you might need a tax lawyer to do the actual adversary proceeding. Most bankruptcy lawyers do not have a real deep knowledge of tax law after all. You say the liability is just one year. How much is actually owed?


    Quote Quoting BritishBulgary
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    My concerns: one, is this kosher; and two, what are the unintended consequences this could have between me and the IRS in the future?
    Well, I'm not one that is very knowledgeable on what the rules are for what is kosher. But certainly there are legitimate adversary actions against the IRS that can be taken in bankruptcy. Whether what you lawyer wants to do is actually something that might succeed is something I cannot tell you without the details of what she has in mind and the details of your situation. The IRS is involved in litigation all the time as I recall the IRS has the largest number of lawyers of any federal civilian agency other than the Department of Justice and there is a special court devoted to just hearing income, estate, and gift tax cases, the U.S. Tax Court, which gives you a pretty good idea of just how much tax litigation there is. (Which is good for my practice.) The IRS is a huge organization and one adversary hearing in a bankruptcy isn't something that will create some kind of grudge against you by the IRS later on. If you have a reasonable shot at succeeding with the action your lawyer has in mind and the benefit will justify the cost to do it then go for it. You don't need to worry about somehow angering the IRS.

  7. #7
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    Default Re: Suing the IRS in a Chapter 7 Bankruptcy

    You do have the right and should fully understand what your lawyer wants to do in your name. The lawyer is the best person to help you understand.

  8. #8
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    Default Re: Suing the IRS in a Chapter 7 Bankruptcy

    BB,

    I read your comments here after I made the longer post.

    As I stated, meeting the multiple test to discharge taxes is not the definitive answer. You may think your taxes meet that test but, certain actions taken by the taxpayer or the government while the various time periods are running, will toll those time periods because the taxing agency is unable to attempt to collect. Things that you or the government can do to screw up the time periods:

    1) the government files a substitute return because you failed to file your own;
    2) you file for bk (even if eventually aborted - serial bk filings) before certain time periods run;
    3) request an Offer In Compromise before the time periods run; and
    4) have a tax lien recorded against you prior to filing bk.

    You indicate on this thread that there are no “disputes”. If that is the case, there should be no reason to file such an adversary proceeding in the bk case. A letter to the proper bk unit of the taxing agency after the discharge is entered asking for confirmation that the taxing agency is abating the tax should suffice. If a question pops up, at that point you can file the appropriate adversary in the bk court. As to “unintended consequences” for filing such an adversary - there should be none. Either the tax was or was not discharged.

    Des.

  9. #9
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    Default Re: Suing the IRS in a Chapter 7 Bankruptcy

    If you don't understand the advice your lawyer has given you, should you (1) ask your lawyer to clarify the advice, or (2) ask complete strangers who know absolutely nothing about you or your situation to explain the advice?

  10. #10
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    Default Re: Suing the IRS in a Chapter 7 Bankruptcy

    The OP has clearly selected door #2.

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