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Iowa Debtor Beats IRS Claim in Bankruptcy Court

BankrLaw

After a person files for bankruptcy, their creditors must file a document known as a “proof of claim” if they wish to get paid anything from the assets of the bankruptcy estate. As the debtor, you have the right to object to this proof of claim. Of course, you need to have a valid reason for the objection, such as the claim states an incorrect amount or the creditor failed to provide proper documentation.

Appeals Court: Pre-2017 Rules Did Not Require Debtor to Serve Objection to IRS Claim on the Attorney General

All debtors must file a proof of claim. This includes government creditors, such as the Internal Revenue Service (IRS). That said, the rules applicable to government proofs of claim may differ than for those filed by private creditors. And failure to comply with these rules may result in a court overruling any objection you file.

A recent decision from the U.S. Eighth Circuit Court of Appeals, In re Nicolaus, offers an example of where the rules actually worked to the debtor’s advantage. The debtor in this case filed for bankruptcy here in Iowa. The IRS subsequently filed a proof of claim for approximately $93,000 in penalties related to a prior tax matter.

The debtor objected to the IRS claim. He did so by filing a written objection with the court and mailing a copy of it directly to the IRS. When the IRS did not respond, the bankruptcy court sustained the objection.

About a year after the bankruptcy case ended, the IRS asked the bankruptcy court to vacate its earlier order. The government claimed the debtor failed to strictly comply with a particular bankruptcy rule–known as Rule 7004–which states that when a party serves notice in a federal bankruptcy case, they must do so by mailing the “summons and complaint” directly to the U.S. Attorney General and the U.S. attorney for the relevant district. Since the debtor directly notified the IRS, the government said he never properly brought the agency “within the bankruptcy court’s jurisdiction.”

Although the bankruptcy court agreed with the government’s reading of the rules and granted the motion to vacate, the Eighth Circuit reversed. The appeals court explained that prior to 2017, when the debtor brought his petition, Rule 7004 did not apply to this situation. Basically, the pre-2017 rule was that service on the U.S. attorney general and local U.S. attorney was only required for “motions” in a contested bankruptcy matter. But an objection to a proof of claim was not a “motion,” the Eighth Circuit said. So the debtor acted properly when he mailed his objection directly to the IRS.

Speak with a Southeast Iowa Bankruptcy Lawyer Today

It should be noted that under current bankruptcy rules, “objections” must now be served on the Attorney General and U.S. attorney. This is just one of many examples demonstrating the complexity of bankruptcy rules–and how easy it can be for debtors to get trapped by them. An experienced Southeast Iowa bankruptcy attorney can guide you through this process. Contact the Noyes Law Office today if you need representation in connection with any Chapter 7 or Chapter 13 bankruptcy case.

Source:

scholar.google.com/scholar_case?case=10539924706065850936

https://www.noyeslawoffice.com/what-is-bankruptcy-fraud-and-how-can-i-avoid-it/

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