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What If the IRS Collects on a Discharged Debt Post-Bankruptcy?

I have been involved in several matters over the years where a client informed me that the Internal Revenue Service resumed collection of income taxes which were discharged in a bankruptcy case. The question of whether income taxes can be discharged is better left to another post. However, the main point to be made here is that an individual can take legal action to protect his or her rights. An individual can take legal action against the Internal Revenue Service to obtain a judgment requiring the IRS to return any money or property unlawfully collected from a debtor post-bankruptcy as to a federal income tax debt which was discharged in the debtor's bankruptcy case.

In the United States of America, the Equal Access to Justice Act (EAJA) authorizes the payment of attorney's fees to a prevailing party in an action against the United States absent a showing by the government that its position in the underlying litigation “was substantially justified. A bankruptcy case can be reopened by the Debtor by filing a motion and setting a hearing date. Some Courts, such as the U.S. Bankruptcy Court for the Southern District of Alabama, provide a “negative notice” procedure where the Debtor provides a notice on the motion which informs the respondent that they have 21 days to respond or otherwise object. The Court will issue an Order to reopen the case and waive the filing fee to reopen the case so long as the request is properly submitted by the Debtor or the Debtor's attorney.

Once the bankruptcy case is reopened, the Debtor can file an Adversary Complaint against the Internal Revenue Service. The allegation would be that the Internal Revenue Service violated the Discharge Order issued under 11 U.S. Code Section 727 ( in a ch 7 case) or 11 U.S. C. Section 1328 ( in a ch 13 case). The Debtor should include a claim for all of the Debtor's costs and attorney fees related to the filing and prosecution of the Adversary Complaint under the above-mentioned Equal Access to Justice Act, which specifically allows the Court to award attorney fees to the Debtor as part of it's Order. The Debtor would also make a claim in the Adversary Complaint for all of the money and property seized by the Internal Revenue Service after the date of the Debtor's bankruptcy discharge, if in fact the seized funds and property were applied by the IRS to a discharged tax debt.

Bankruptcy and tax law can be very complex. It is a good idea to contact an attorney who is familiar with bankruptcy and tax law, and experienced in bankruptcy litigation to address this type of issue. Please feel free to contact attorney Kevin Ryan in Mobile Alabama to schedule a free office or telephone consultation. (251) 241-5234 / website: