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Do I have a case if my bankruptcy lawyer gave me bad advice leading to old tax debt being owed

Covington, GA |

I went to an attorney last year because I had some old state tax debt. I was advised by the attorney that the tax debt could be placed in a Chapter 7 and discharged. I didn't have any other real debt and the taxes were the only reason I even considered the bankruptcy. In fact the $1,500 fee I paid him was more than all the other debt I had. My home and car were current therefore, I was in no danger of losing either. I was advised the tax debt could be discharged an I moved forward with the bankruptcy. Yesterday the state contacted me stating I not only still owe the debt, but I owe an additional $5K in interest because tax debt due to audit can not be put in a bankruptcy. I contact my attorney's office and they said they didn't know they only understand bankruptcy law.

In my initial call to my attorney's office after receiving the letter from the state. I was told to just show them my discharge papers. After speaking with the state and being informed that tax debt due to an audit couldn't be placed in a bankruptcy I called the attorney's office back and that's when I was told they only understand bankruptcy law. I have left messages for someone to call me back, but I haven't heard from anyone since that last nonsensical conversation. I trusted them to give me proper advice. I made a decision based on the fact that the debt was over three years old that it could be included. If I had known the truth I would not have filed bankruptcy. Now my credit is damaged for the next 10 years, I owe the tax debt which I cannot afford and now my home is in danger of being taken by the state to pay the tax debt. I need help.

Attorney Answers 5


  1. Best answer

    Its not so much the "audit" source, but the type of tax.

    Every state tax has its own character. If the tax is a fiduciary tax like employer trust fund (and in some states like Washington State-- sales taxes are fiduciary; but in California they are not).

    Further, there are age limits on taxes that most bankruptcy attorneys know, namely the 3 year, 2 year and 240 day age limits (without tolling) that have to be met. If you do bankruptcy and the taxes are not dischargeable because of time limits or the "fiduciary" nature of the tax, then you are stuck with the debt for 8 years until its time to file a chapter 7 again.

    A lot of bankruptcy attorneys eyes glaze over when you talk about tax. I'm unusual since I am a patent attorney (GA Tech grad) and tax attorney and know that bankruptcy is the 5th leg of tax.

    Now, that having been said, if you have ANY substantive defense to the tax, you may be able to re-open your bankruptcy case and proceed under 11 U.S.C. sec 505 and actually have a trial about whether or not you owe the tax. There was a Southern California case where the bankrupt jumped the gun and filed too learly and the section 505 case was the only way to fight the tax.

    Don't expect your bankruptcy attorneys to do a full tax based adversary proceeding in your section 505 proceeding. You should contact tax counsel as they will be able to tell you if you were improperly assessed, and whether the tax was a fiduciary tax.

    There are more than a few tax attorneys in Georgia, but you may have to travel to Atlanta. The vast majority of bankruptcy attorneys know very little about tax.

    Curt Harrington Patent & Tax Law Attorney Certified Tax Specialist by the California Board of Legal Specialization PATENTAX.COM This communication is general information and not legal advice, and does not create an attorney-client relationship. This communication should not be relied upon as any type of legal advice. Please note that no attorney-client relationship exists between the sender and the recipient of this message in the absence of either (1) a signed fee contract and (2) remission of an agreed-upon retainer. Absent such an agreement and retainer, I am not engaged by you as an attorney, nor is any other member of my law firm.


  2. You need the advice of a tax lawyer who also knows bankruptcy law. The rules for when taxes can be discharged are very complex, so I'm not even sure that your bankruptcy attorney committed malpractice -- that would entail a departure from the standard of care that average bankruptcy lawyers in your area exercise in dealing with tax questions. I tend to think that "tax debt due to audit" is not, for that reason alone, non-dischargeable. But the audit may have resulted in the assessment of new taxes. If the assessment happened within 240 days of your bankruptcy, it would render the additional tax non-dischargeable. There are other factors that a tax lawyer would consider, which is why it's so important for you to see one.


  3. I wouldn't be so sure that the folks at the government are giving you correct advice. Most state tax people I know are not attorneys & have little or no understanding of bankruptcy law. I have had IRS people tell my clients that their taxes were not discharged, but when the matter was brought to the attention of the IRS attorneys that actually worked with bankruptcy cases, the result was that they agreed that the debt was in fact discharged.

    Hope this perspective helps!


  4. Don't panic. As Ms. Bunce alluded to, it sounds as though your bankruptcy attorney may have been correct and that the folks at the government do not know what they are talking about. Perhaps it will help if you go and consult with another bankruptcy attorney and get a second opinion on this. Then hopefully you will know if your beef is with your bankruptcy attorney or with the government.


  5. First of all your lawyer may have been correct and the state tax people may be wrong, so you need to research that first.

    Second, depending on whether you gave the lawyer full disclosure as to the audit, he may have relied on incomplete details from you.

    Third, even if he erred malpractice involves deviation from the normal standard of care for lawyers, so depending on the details, even a mistake may not be malpractice.

    And since you can't sue for his failure to discharge a debt that never was dischargeable, your monentary damages likely are too small for a malpractice lawyer to take the case.

    Before doing anything, see a tax lawyer to determine if the state is even correct, and then discuss with him whether you have a case.

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