IRS Tax Debt and Bankruptcy

IRS Tax Debt and Bankruptcy – Slomka Law Firm Opens a New Door

      In a recent hearing before a Federal Bankruptcy Judge in Atlanta, Attorney Howard Slomka argued and won a small victory on a path that could spell a major change for bankruptcy debtors facing tax debts.   (While the case and argument are a matter of public record, given that the case is still pending and the issue will require future briefs and ruling, I feel it is not responsible to disclose either the Judge or the debtor’s name.)

    Filers under Chapter 11 or Chapter 13 each must submit a reorganization plan.  While the plans allow for some flexibility as far as how much to pay creditors, it has long been accepted law that if the IRS files a priority tax claim, that claim must be paid in full.  Treating the IRS at 100% has defeated many bankruptcies, especially for debtors facing huge tax deficiencies.

     In the current case, a company filed for Chapter 11 protection because it faced a judgment lien and almost $1 Million in IRS debt.  Of this amount over $500,000 was due as a priority debt.   Because the company is small, paying back $500,000, even over a five year period, is not possible.    Based on this economic reality, the United States Trustee filed a Motion to Dismiss the case.

     Mr. Slomka argued to the Judge an obscure argument, that the IRS must consider the pending offer in compromise which might reduce the tax debt by 90%.   If it were accepted, then a Chapter 11 plan would be feasible.  Citing case law from other jurisdictions, and the policy of the bankruptcy code, he stated that when the IRS refuses to negotiate with those in bankruptcy, it both frustrates the purposes and Congressional intent of the law, and it violates the law against bankruptcy discrimination.

      The Judge declined to grant the Trustee’s motion to dismiss, and asked Mr. Slomka to file a motion which would compel the IRS to accept the offer in compromise at a lower number.   While the debtor still has a way to go, a new pathway to bankruptcy discharge is now under review by the judge.  Significantly, the IRS has indicated its acceptance of the theory, so I hope to report a final order in the coming months.