5.6.a Exhaustion Of Administrative Remedies

• Jurisdiction: United States

a. Generally

It is not uncommon for the taxing entity to file a proof of claim that is incorrect, or for the debtor to dispute the amount or nature of a claim asserted by the taxing entity.

For example, the IRS routinely files all claims as secured, even though in reality it may be completely unsecured, or only partially secured. Or, the taxing entity may file a claim based solely on its estimate of the liability due to the debtor's failure to file a tax return. Furthermore, a claim based on unpaid withholding taxes may result in the assertion of a claim of 100 percent penalty against your client, including the sum claimed for the employer's matching funds, delinquency penalties, and interest owing on employment tax deficiencies. However, the IRC only asserts a 100 percent penalty on the corporate officer for the amount of tax required to be withheld and not paid (the payroll tax and social security taxes), and not these other charges. See IRC § 6672(a). Accordingly, any proof of claim asserting those charges should be objected to.

The majority rule is that the debtor in Chapter 7 does not have standing object to a creditor's claim. Courts have recognized exceptions, however, where the debtor may be entitled to a surplus in the estate, or where it may be shown that a lower claim by one creditor could result in more...