Bankruptcy Court Tax Claim Litigation

Filing a Claim on behalf of Taxing Agency

Although issues surrounding the filing of tax claims normally occur in the context of a Chapter 13 or Chapter 11 case, in a Chapter 7 case, where there are non-exempt assets and a tax claim which is either secured or not dischargeable, it is important for the debtor to file a Proof of Claim on behalf of the taxing agency to ensure that the proceeds resulting from the sale of the non-exempt assets are applied toward the non-dischargeable tax claims; otherwise, the trustee will disburse the funds to the creditors whose claims were dischargeable leaving you with a surviving tax claim to contend with after the bankruptcy. The debtor has 30 days after the expiration of the time for filing a Proof of Claim by the taxing agency (180 days) within which to file one on its behalf.

Objecting to Taxing Agency Claims

It is common for the taxing agencies to often file an incorrect Proof of Claim so that it becomes necessary to dispute the nature or amount of the tax claim asserted. For example, oftentimes, the taxing agency will file their Proof of Claim as secured when in fact their claim is unsecured or under-secured (because the lien was filed in the wrong location or there is no property or only property with limited equity to which their lien attached). Other times, the taxing agency might file their Proof of Claim based on an estimate because of the taxpayer’s failure to file a timely tax return. In addition, the taxing agencies routinely adds penalties to their Proof of Claims even though the law does not require payment of them in certain bankruptcy cases.

If a taxing agency Proof of Claim is disputed, our tax bankruptcy litigation attorneys will assert the correct claim amount and if unable to resolve the dispute with the Insolvency Unit of the taxing agency informally (and cause them to file an amended Proof of Claim), we will prepare a formal Objection to the Proof of Claim which then becomes a “contested matter.” The ability of the debtor in bankruptcy to adjudicate disputes involving tax claims by filing an objection to the claim, avoids the necessity of having to file a complaint and litigate the matter as a more costly adversary proceeding (although many bankruptcy courts may nonetheless require an adversary proceeding if the dispute relates to the lien rights of the taxing agency).

Thus, in many instances, the Claim-Objection process is an appropriate way to dispute the tax liability itself, the character of the tax claim (dischargeable or non-dischargeable) or penalties and interest related to the tax claim.