Bankruptcy, Taxes, and the Primacy of IRS Refund Offsets: Copley v. United States

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.