Most people think of bankruptcy as a way to wipe out debt. Section 505 of the Bankruptcy Code does something different. It lets a bankruptcy judge decide whether the IRS's number is right in the first place.
That matters more often than you might think. The IRS assesses tax on estimated income, on returns it prepared itself, and on audits that went by default because nobody answered the mail. Those numbers can be badly wrong. If you are in bankruptcy, you may have a forum to fix them.
What section 505 actually says
Under 11 U.S.C. § 505(a)(1), the bankruptcy court "may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax." It can do so whether or not the tax was previously assessed, whether or not it was paid, and whether or not it was contested before. You can read the full text at Cornell's Legal Information Institute.
That is broad language. It covers income tax, payroll tax, the Trust Fund Recovery Penalty, accuracy penalties, failure-to-file and failure-to-pay additions, and state taxes too. The IRS manual describes the rule the same way: the bankruptcy court can determine the amount or legality of any tax, addition to tax, or tax penalty, whether or not previously assessed, paid, or contested (IRM 5.9.4.8).
The limits
Section 505(a)(2) takes three things off the table:
- Taxes already litigated. If the amount or legality was contested before and adjudicated by a court or administrative tribunal of competent jurisdiction before your bankruptcy case began, the bankruptcy court cannot redo it. If the Tax Court already ruled on your year, that ruling stands.
- Refunds, until the agency gets a turn. The court cannot decide the estate's right to a refund until 120 days after the trustee properly requests it from the taxing authority, or until the authority decides the request, whichever comes first.
- Stale property tax disputes. The court cannot redetermine an ad valorem tax on real or personal property of the estate if the time to contest it under nonbankruptcy law has run.
Notice what is not on that list. A tax you never contested, or one where you let the deadline pass, is still fair game. That is the opening.
The missed Tax Court deadline problem
Normally, when the IRS proposes a deficiency, you get 90 days to petition the Tax Court. Miss it and the IRS assesses, and your remaining options get more expensive: pay and sue for a refund, or try audit reconsideration and hope.
Section 505 sidesteps that. Because the bankruptcy court can determine a tax "whether or not previously assessed," a default assessment from a notice you never answered is not the end of the road if you are in a bankruptcy case.
The bankruptcy filing also changes the Tax Court picture. Under 11 U.S.C. § 362(a)(8), the automatic stay stops the commencement or continuation of a Tax Court proceeding about an individual debtor's tax liability for periods ending before the order for relief. And under IRC § 6213(f)(1), the time to file a Tax Court petition is suspended while the stay bars it, plus 60 days. So you may end up with a choice of forums, and the choice deserves real thought.
Why this matters for SFR and audit assessments
When the IRS files a substitute for return, it usually counts every dollar of reported income and none of your deductions, credits, or basis. When an audit closes by default, the same thing tends to happen. Those numbers are often too high.
A 505 determination does not change whether a tax year is dischargeable. That question runs through 11 U.S.C. § 523(a)(1) and the timing rules. But it can shrink the amount that survives. If a year is nondischargeable because of a late or missing return, cutting the assessment down to the correct number may be the single most valuable thing the case accomplishes. It also fits naturally with amended return and audit assessment issues.
How the issue gets in front of the judge
The most common path is an objection to the IRS's proof of claim. Under 11 U.S.C. § 502(b), when someone objects, the court determines the amount of the claim. A properly filed proof of claim is prima facie evidence of its validity and amount under Federal Rule of Bankruptcy Procedure 3001(f), so the objection has to come with real evidence. See reading and objecting to an IRS proof of claim for the mechanics.
A debtor can also bring a motion or an adversary proceeding asking the court to determine the tax under § 505 directly, which is sometimes the better route when the IRS has not filed a claim or the dispute is about a year that matters after the case.
Burden of proof does not move
Filing bankruptcy does not shift the burden onto the IRS. In Raleigh v. Illinois Department of Revenue, 530 U.S. 15 (2000), the Supreme Court held that the burden of proof on a tax claim in bankruptcy stays where the substantive tax law puts it. For most federal tax issues, that is on the taxpayer.
Translation: you need records. Bank statements, receipts, mileage logs, closing statements, whatever proves the deductions and basis the IRS ignored. If you could not prove it to an auditor, the bankruptcy judge will not take your word for it either. Judges are polite that way, but they are not gullible.
The court does not have to say yes
The statute says the court "may" determine the tax. That is discretionary. Courts weigh things like whether deciding the tax actually serves the bankruptcy case, the complexity of the issues, the burden on the court's docket, and whether the request looks like forum shopping. A no-asset Chapter 7 where the only beneficiary is the debtor can get a cooler reception than a Chapter 13 or Chapter 11 where the tax amount drives what creditors receive.
That does not mean individuals never succeed. It means you should be ready to explain why the bankruptcy court is the right place to resolve the dispute and why now.
What happens after the court rules
Under § 505(c), once the court determines a tax, the taxing authority may assess it against the estate, the debtor, or a successor, notwithstanding the automatic stay. The IRS manual notes that once the tax is determined by the court, generally no bar to assessment exists (IRM 5.9.4.9.2). The good news is that the number is now the court's number, not the IRS's estimate.
Section 505(b): taxes of the estate itself
Section 505(b) is a different tool for a different player. It lets the trustee submit a return for taxes incurred during the administration of the case and ask for a prompt determination. If the government does not select the return for examination within 60 days, or does not finish within 180 days, the estate, the trustee, and the debtor are discharged from further liability for that tax upon paying what the return shows, unless the return was fraudulent or materially misrepresented. The IRS's procedures for these requests appear in IRM 5.9.4.9.
For most individual debtors, this is the trustee's concern, not yours. It is worth knowing it exists so you do not confuse it with the § 505(a) determination that can help you directly.
Is 505 worth it in your case?
Ask three questions. Is the disputed year one that will survive bankruptcy? Is the difference between the IRS's number and the right number large enough to justify litigation? And do you have the documents to prove it? If the answer to all three is yes, 505 deserves a serious look. If the year is dischargeable anyway, fighting over its amount may be wasted motion. Check your years in the discharge calculator first. For a broader view of how bankruptcy fits tax problems, read this guide to bankruptcy for tax problems.
If you think the IRS's number is wrong and bankruptcy is on the table, call my office at (813) 229-7100. Every case turns on its own transcripts and dates; this page is general information, not legal advice for your situation. The IRS gets to make the first guess. It does not always get the last word.