Copley v. United States involved a question at the intersection of tax law and bankruptcy law: can a debtor invoke bankruptcy exemption rules to shield an anticipated income tax refund from offset by the Internal Revenue Service? When the Fourth Circuit Court of Appeals was presented with this question of first impression — a question that has divided bankruptcy courts in recent years — it held that the IRS right of offset prevails over the debtors’ right of exemption.
To date, Copley is the only circuit court opinion that rebuffs the so-called “majority view” on this question while also explicitly finding the income tax refund to be part of the bankruptcy estate. The stakes are significant for the IRS as a creditor, and this outcome underscores the primacy of tax offsets as a collection tool for the agency. As this essay describes, bankruptcy lawyers and tax lawyers alike need to be aware of this decision and the practical implications thereof so that they can advise debtors accordingly.
This is an excellent article summarizing the Copley case regarding tax refunds and IRS offsets. Particularly useful is the suggestion that Debtors due a tax refund could request an offset bypass refund (OBR), see IRM 126.96.36.199.11.1(1) (Nov. 8, 2017), which if granted means the IRS would release part or all of the refund despite the outstanding tax debt. A Debtor must show an economic hardship within the meaning of IRC § 6343 and provide documentation, and will only receive an OBR to the extent of that documented dollar amount. The IRS instructions on how to seek an OBR are to contact the Taxpayer Advocate Service (TAS) and request the OBR before the return is filed because the OBR must be approved before the refund is offset.
The final footnote, #115, is not completely accurate when it states that pursuant to IRM 188.8.131.52.1(1) a tax payer cannot pursue an Offer in Compromise during a bankruptcy. While that is certainly the position of the IRS, bankruptcy courts in West Virginia , see Mills v. United States (In re Mills), 240 B.R. 689 (Bankr. S.D. W. Va. 1999) and Macher v. United States, 2003 WL 23169807 (Bankr. W.D. Va. May 29, 2003) aff’d sub nom. United States v. Macher (In re Macher), 303 B.R. 798 (W.D. Va. 2003), Georgia, Holmes v. United States (In re Holmes), 298 B.R. 477 (Bankr. M.D. Ga. 2003), and North Carolina, see In re Mead, have held that exclusion of offers in compromise by bankrupt debtors violates the anti-discrimination protections of 11 U.S.C. § 525(a).
For a copy of this article, please click here:
For a copy of the underlying decision, please click here: