Expert: Terry Leeders - 4/29/2009

Question
My Chapter 13 Bankruptcy plan approved by the court gave the IRS a priority creditor status and included a provision to apply future tax refunds toward a past tax debt.  

A few days after the plan was approved, the trustee sent a "rubber stamp" court order to the IRS requesting the surrender of my tax refunds.  The IRS surrendered the refunds without question or legal recourse even though the amount of the refunds would have paid my IRS balance due in full.

Upon receiving the refunds, the trustee applied the proceeds to other secured creditor debts and didn't pay anything to off-set the IRS debt.

Due to additional financial problems, I had to convert my Chapter 13 to a Chapter 7 due before completing the plan.

As a result, the IRS tax debt was not paid as originally prescribed during the Chapter 13 plan and was not discharged during the Chapter 7 conversion.

Was the Chapter 13 trustee required to pay the IRS with the refunds as ordered by the plan, or is he allowed to use the refunds how ever he wants despite the court approved plan?

Answer
Normally, I've seen plans that say that tax refunds are to be turned over to the trustee.  The trustee has a certain payment schedule order to pay off categories of debts.  Absent a specific plan statement that says tax refunds are to go to a certain creditor (secured creditors might object to this) the trustee sounds like they paid out the claims as the code requires.  Now, if there was such a provision in your bankruptcy plan, you will need to file a motion in bankruptcy court to have the trustee get the funds back from the parties they were disbursed to, then reallocated as the plan directs.  
My hunch is, unfortunately, that you misread or misunderstood the tax refund language in the plan.  But if you are correct, the court can sort this out, so that the right parties get the right amounts.