Tax advice in BAPCPA - A Taxing Experience
If a debtor makes more than the median income and, therefore, The Means Test
applies, the amount of priority tax debt has to be evaluated to 1) determine
how much to claim as an average monthly priority debt payment, and 2)
resolve whether disposable income will provide for payment of the lesser of
$10,000 or 25% to unsecured creditors over 60 months. In the past, an
attorney may have recommended to a client to diminish cash assets by paying
down priority tax debts. The trustee would have been unlikely to bring a
preference action against the IRS as the IRS would have been paid first out
of the proceeds of the preference action. So, rather than letting the cash
asset be liquidated, better to use that asset to pay down non-dischargeable
tax debt.
Under the BAPCPA, an attorney may have to tread a bit more lightly. If the
client pays off priority IRS debt, it will serve to 1) reduce the average
monthly priority debt payment and 2) reduce the total amount of unsecured
debt. In the post Bankruptcy Reform Act world, you may want to think twice
about advising your client to pay down the priority tax debt as you may need
the additional priority debt payment to reduce disposable income and to keep
unsecured debt at a high level so that disposable income will not afford the
ability to pay $10,000 or 25% to unsecured creditors.
