8.3 Litigating Tax Issues within the Bankruptcy

If the debtor owes federal taxes, name the IRS as a creditor. Use the following address for your bankruptcy schedule: Internal Revenue Service, c/o Centralized Insolvency Operations, P.O. Box 7346, Philadelphia, PA 19101-7346. The telephone number for this IRS unit is 800-913-9358. Priority tax debt should be listed on Schedule E unless secured by a lien.1 Non-priority tax debt should be listed on Schedule F. Be careful to list dischargeable non-priority tax debt on Schedule F so as to avoid an admission of non-dischargeability. In Louisiana, be sure to claim the Earned Income Credit and refundable Child Tax Credit portions of any tax refund claim as exempt.2 List any pending tax refund claims as assets.

If you dispute a proof of claim by the IRS or its “secured” status, first try to resolve the matter with the IRS insolvency advisor. Resolution at this level could obviate the need for litigation.

An adversary proceeding is not required to discharge a tax debt. However, a debtor can only be certain that a tax has been discharged by filing an adversary proceeding and obtaining a judicial determination of the dischargeability of the debt. Before filing an adversary proceeding, call the IRS attorneys. They may be willing to abate the tax. Adversary proceedings and motions against the IRS should be served on the Attorney General, the local United States attorney, and the designated IRS office.3

A bankruptcy court may also have jurisdiction to determine a tax liability if the taxpayer has not fully paid the tax. For example, you may persuade the bankruptcy court to determine whether the taxpayer should have received an Earned Income Credit. This can be done by filing an 11 U.S.C. § 505 motion to determine tax liability.4 Tax refund claims may be heard by the bankruptcy court even where the taxpayer has not met the jurisdictional requirements for district court litigation, i.e., full payment of the tax deficiency, or has missed the deadlines for Tax Court review.

Chapter 13 bankruptcy debtors, unlike Chapter 7 debtors, have standing to litigate any refund lawsuits in their own names.5 The trustee will seek to recover tax refunds won by a Chapter 13 debtor as “disposable income” that must be included in the plan. However, there may be challenges to the trustee’s action depending on your jurisdiction and the facts of the debtor’s financial situation.6

• 1See 11 U.S.C. § 507. Secured debt is listed on Schedule D.
• 2In Louisiana, both the Earned Income Credit and refundable portion of the Child Tax Credit are exempt from seizure. Id.
• 3Fed. R. Bankr. P. 7004(d)(4).
• 4Fed. R. Bankr. P. 9014; In re Luongo, 259 F.3d 323 (5th Cir. 2001); In re Taylor, 132 F.3d 256 (5th Cir. 1998).
• 5See, e.g., Cable v. Ivy Tech State Coll., 200 F.3d 467, 472–74 (7th Cir. 1999).
• 6See, e.g., In re Freeman, 86 F.3d 478 (6th Cir. 1996).