Where’s My Refund?

For those taxpayers lucky enough to receive a federal tax refund each spring, it has generally become an event many people rely on to satisfy other debts and obligations.

It might be considered a matter of “right”. Even those individuals who file for Chapter 13 relief generally consider their tax refund to be their property, whether received or not, since they simply overpaid taxes into the system.

What happens then if an individual files for relief under Chapter 13 but has not received their tax refund yet? In the case referenced above, the IRS did not issue the refund when expected, so the Debtors brought an action against the IRS alleging injury due to the wrongful delay of their tax overpayments. In their complaint, the Debtors alleged that the conduct of the IRS resulted in a violation of the automatic stay among other claims.

An “automatic stay” operates to stay any act by a creditor to obtain possession of property of the individual’s estate or to create any lien against such property. The stay is effective against all entities including the IRS.

In the case referenced above, the Debtors allege that the IRS violated the stay by exerting wrongful possession and control over their refund. This “control” occurred when the IRS, in compliance with the stay, instituted its V-Freeze on all automated action involving the individuals. On its face, the Debtor’s allegations “make it plausible that strong coercive pressure was being brought to bear on the Debtors to pay their nonpriority tax liability” (See Harchar, 2008 WL 2746872, at *). However, after reviewing the IRS procedures with respect to the V-Freeze, it was clear that the “freeze” not only prevented the mailing of collection letters but also had the effect of delaying the distribution of their tax refund pending a manual approval by an Internal Revenue Service agent.

The Court recognized that “the Debtors were inconvenienced by not having their 1999 tax refund more expeditiously issued…but inconvenience does not, as the Debtors would seem to suggest, equate with ‘control’ for purposes of the …stay violation.” (See Harchar, 2008 WL 2746872, at *33).

Because of implementation of the V-Freeze policy by the IRS, as a means to comply with stay actions, the Court found that the IRS exercised “reasonable restraint” in its actions and did not “place affirmative pressure on the Debtors to coerce them…”(See Harchar, 2008 WL 2746872, at *38). In the end, the Debtors were desperate to receive a tax refund and did not realize that their actions in filing for Chapter 13 would lead to bureaucratic delays within the IRS.

Before filing for bankruptcy in April….make sure your check is in the mail!!

Posted by: Kevin K. Malof

Categories: Bankruptcy & Banking Law