At the end of a Chapter 13, you may still owe some interest on taxes included in bankruptcy.
But not nearly as often as the IRS would have you think.
It’s a huge let down to think after all the payments in a Chapter 13, not everything went away. But in a narrow slice of situations, it happens.
Here’s the deal: if the tax is one that’s dischargeable in Chapter 13 according to the Bankruptcy Code, then no interest is due at discharge.
If, however, the tax was a non dischargeable tax which was paid in full through the plan, then the IRS is entitled to interest.
That interest covers the period after the filing of the bankruptcy case. Any interest on the tax that accrued before filing is part of the tax claim in the case.
To figure out whether you really owe the interest on tax the IRS now claims, you need to know not just what taxes you paid in the case, but which ones were dischargeable.
Taxes not discharged in Chapter 13
Section 1328 of the Bankruptcy Code tells us what debts can be discharged in Chapter 13. Like a lot of law, it does so by referencing other parts of the Code.
Which makes for clarity but not for easy reading. Not discharged are debts
of the kind specified in section 507(a)(8)(C) or in paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of section 523(a)
Here, translated, are the exceptions to discharge of taxes, and therefore, the taxes on which interest continues:
- Trust fund taxes – taxes which the debtor collects from others either as an employer or retailer § 507(a)(8)(C)
- Taxes for which no return was filed, or the return was filed less than two years before the bankruptcy case was filed. § 523(a)(1)(B).
- Taxes which were the subject of a fraudulent return or an effort to evade the tax. § 523(a)(1)(C).
Chapter 13 treatment of taxes
A Chapter 13 plan, in order to be confirmed, must provide for payment in full of priority taxes. § 1322(a)(2).
But plans may not provide for the payment of interest arising after the case is filed, unless the claim is secured by a lien. §1322(b)(10).
So, there is a slice of taxes that may be paid in full because they are a priority tax, but are not dischargeable under law. Those are the taxes that properly continue to accrue interest. That interest can legally be collected after the Chapter 13 case is over.
IRS makes mistakes
The IRS is currently underfunded and understaffed. In my experience, they make more mistakes these days than they did earlier in my career.
If you get a notice of tax due after you get your Chapter 13 discharge, write back with a copy of your discharge and your statement that the tax that generated the interest was dischargeable.
If that doesn’t work, you have a violation of the discharge and a right to sanctions against the Service, including payment of your attorney’s fees.
Remember that if your case is a Chapter 20, you don’t get a discharge in the Chapter 13. So, interest on all the taxes paid through the plan continues to run until paid.
