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Chapter 7 Cases

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Part 25. Special Topics

Chapter 17. Bankruptcy

 

 

Section 7. Bankruptcy Processing of Chapter 7 Cases


25.17.7  Bankruptcy Processing of Chapter 7 Cases

25.17.7.1  (09-01-2004)
Introduction

1.       Chapter 7 Liquidation. Liquidation under Chapter 7 of the Bankruptcy Code is the most common form of relief sought by debtors. Chapter 7 is used primarily by individuals to free themselves of debt simply and inexpensively. Businesses wanting to liquidate and terminate their business also file Chapter 7.

A.      Chapter 7 provides relief to the debtor regardless of the amount of the debts owed or whether the debtor is solvent or insolvent.

B.      The debtor's assets are converted into cash for distribution among creditors. Individual debtors receive a discharge of all prepetition debts other than certain debts which are non-dischargeable under the Bankruptcy Code. (An individual's right to a discharge through the filing of a Chapter 7 petition is not absolute.)

C.      While corporations and partnerships do not receive a discharge, few, if any, assets remain from which to collect tax liabilities not paid by the bankruptcy estate.

D.      A bankruptcy discharge does not extinguish a tax lien on property.

2.       Parties. A Chapter 7 bankruptcy involves three major parties:

A.      the debtor,

B.      the trustee, and

C.      the creditors

3.       Voluntary/Involuntary. A case under Chapter 7 begins either by the filing of a voluntary petition by the debtor or by the filing of an involuntary petition by the creditors. See IRM 25.17.1.6, Glossary – Bankruptcy Terms.

25.17.7.1.1  (09-01-2004)
Notice and Filings

1.       Notice to IRS . Notice of a Chapter 7 bankruptcy filing must be given to the Service when the IRS is listed as a creditor in the debtor's schedules. Bankruptcy Rule 2002(f).

2.       Documents Filed. Bankruptcy Rule 1007 requires the Chapter 7 debtor to file supporting documents within a fixed time after filing the petition. Such filings include a mailing matrix, schedules, and a statement of financial affairs.

25.17.7.1.2  (09-01-2004)
The Trustee

1.       Trustee's Role. In general, a Chapter 7 liquidation is administered by a trustee who collects all of the debtor's assets, reduces the assets to cash, and distributes the funds to creditors in the priority set forth in 11 U.S.C. § 726. The Chapter 7 trustee is a private party who manages the bankruptcy estate on behalf of creditors. The trustee is accountable to the court for all actions taken on the case.

2.       Trustee's Selection. The trustee is appointed by the United States Trustee’s Office, an officer of the United States Department of Justice. A Chapter 7 trustee can also be elected by creditors.

3.       Trustee Responsibilities. The responsibility of collecting assets of the estate, which may include converting property to cash, avoiding improper liens, and setting aside preferential, fraudulent, and/or unauthorized postpetition transfers falls to the trustee. If the business of the debtor is authorized to continue operating under 11 U.S.C. § 721, the trustee may, without notice or hearing, sell or lease property of the estate in the ordinary course of business.

A.      The trustee examines claims of creditors and objects to those claims when appropriate.

B.      The trustee is charged with investigating the finances of the debtor.

C.      The trustee files tax returns for the estate when required and pays taxes if due.

D.      If the debtor is uncooperative, found hiding assets, or is otherwise interfering with the effective administration of the case, the trustee may object to the debtor's receiving a discharge.

E.      At the conclusion of the case, the trustee must file a final report with the court and the United States Trustee. Any creditor, including the IRS , may object to this report.

25.17.7.2  (09-01-2004)
Eligible Entities

1.       Petitioners. Any entity, with the exception of governmental units, railroads, insurance companies, banks and other financial institutions, can file a Chapter 7 petition. Eligible entities include:

·         individuals

·         corporations

·         partnerships

Reminder:

Only individuals may receive a discharge.

2.       Joint Petitioners. When a married couple files a Chapter 7 bankruptcy, a joint petition may be filed by an individual and spouse and can be administered by the same trustee.

25.17.7.3  (09-01-2004)
First Meeting of Creditors

1.       First Meeting of Creditors. After the filing of a Chapter 7 bankruptcy, a first meeting of the creditors (also known as the 341 Meeting, 341 Hearing, or Section 341 Meeting) is usually held within 20 – 40 days. The debtor must attend and can be questioned by creditors, including the IRS , concerning financial affairs, debts, and property issues. The trustee attends and also questions the debtor. The Service can obtain pertinent information at the 341 Meeting on such matters as trust fund taxes (including names, duties, and responsibilities of officers), assets, unfiled tax returns, and employment tax obligations.

25.17.7.4  (09-01-2004)
Referrals to Insolvency

1.       Referrals to Insolvency. Compliance employees must send an inquiry referral on Chapter 7 cases to Insolvency as soon as they learn a bankruptcy has been filed (same day notification, if possible). The referral to Insolvency may be made by telephone or facsimile; or a written inquiry referral can be sent, marked "expedite."

25.17.7.4.1  (09-01-2004)
Contact Points

1.       Contact Points. A listing of contact points for local Insolvency offices is available on the IRS Intranet through SERP for prompt resolution of bankruptcy-related issues. Local Insolvency offices must ensure changes in their phone or fax numbers are reflected on the SERP directory. Insolvency employees should also keep a list of contacts for other IRS functions with which they deal on a regular basis.

25.17.7.5  (09-01-2004)
Automatic Stay

1.       The Automatic Stay. The filing of a bankruptcy petition effects the automatic stay. 11 U.S.C. § 362(a).

A.      The automatic stay generally prohibits any act to obtain possession of property of the bankruptcy estate or to collect or recover a claim against the debtor (taxpayer) that arose before the commencement of the case.

B.      The stay arises by operation of law as soon as the bankruptcy petition, whether voluntary or involuntary, is filed and requires no judicial action. It stays most actions against the debtor or the debtor's property. 11 U.S.C. § 362.

2.       Duration of Stay. The stay in a Chapter 7 case is in effect until the earliest of the time the case is closed by the court or dismissed, or, in an individual case, until the time a discharge is granted or denied. The stay is lifted at discharge against all property – including exempt or abandoned property. However, the stay against specific property of the estate continues until such property is no longer property of the estate (i.e., the property is being administered by the trustee). See IRM 25.17.2.9, The Effect of Bankruptcy on Collection,including (2), TableShowing How Bankruptcy Can Affect Collection.

3.       Limited Bankruptcy Timeframes. In the majority of Chapter 7 individual cases, the court grants a discharge shortly after the meeting of creditors has been held and the period of time has expired for creditors to file complaints objecting to the debtor’s discharge. The period of time from petition to discharge is usually 90 to 120 days . Thus, the stay period and the statute extension on any non-discharged tax are generally short in Chapter 7 bankruptcy cases.

4.       Preventing Violations of the Automatic Stay. An account in bankruptcy must remain under freeze codes (TC 520s), and the Service must take all actions possible to conform with the provisions of the Bankruptcy Code to avoid violating the automatic stay.

25.17.7.5.1  (09-01-2004)
Payments from Debtors on Dischargeable Taxes

1.       Payments Received on Dischargeable Tax. When a payment is received from a debtor for a dischargeable tax liability, the payment cannot be retained by the Service. Corrective actions must be initiated within two workdays of identification.

A.      If a payment has already been received, deposited, and applied to a dischargeable tax period by the Service, the payment must be refunded expeditiously.

B.      To refund a payment, Insolvency completes and expedites a Form 5792, using established manual refund procedures. See IRM 25.17.4.3.1, Manual Refunds – Form 5792.

2.       Violations of the Bankruptcy Code. A violation of the Bankruptcy Code must be handled expeditiously to protect the debtor's rights. The Service may be liable for damages when a stay violation is not addressed timely.

Note:

If Insolvency is unsure if the refund should be sent to the trustee or to the debtor, guidance from Counsel should be sought.

25.17.7.5.2  (09-01-2004)
Voluntary Payments on Non-Dischargeable Taxes — Prior Installment Agreement

1.       Non-Dischargeable Taxes. When a debtor continues to make voluntary payments from postpetition earnings for non-dischargeable taxes pursuant to a pre-existing installment agreement after filing a Chapter 7 bankruptcy petition:

A.      the Service can usually accept such payments, including automatic debit payments, without violating the automatic stay;

B.      Insolvency should document the AIS history screen with all pertinent information relating to such payments, including any contacts made with the debtor on this matter; and

C.      should legal advice be required in this type of situation, Insolvency must confer promptly with Counsel.

25.17.7.6  (09-01-2004)
Opening the Chapter 7 Case

1.       Asset/No Asset. Upon receipt of a Chapter 7 case by Insolvency, each case is categorized as either an asset or a no asset case. Some bankruptcy courts simplify the asset/no asset determination considering all Chapter 7 petitions as "no asset" until the court issues a notice of possible dividend and sets a bar date. Other courts issue separate notices identifying the cases as either "asset" or "no asset. "

Reminder:

All new cases must be loaded on AIS as soon as possible. Initial processing of new cases must be completed within five workdays of receipt, including the input of freeze codes (TC 520s), in combination with appropriate closing codes. See IRM 25.17.5.5, Insolvency Interface Program (IIP), and IRM 25.17.5.5.1, Timeframes – Initial Case Processing Actions.

2.       No Asset Case. A no asset case is defined, for IRS purposes, as any of the following:

·         a case in which the trustee determines " no dividend" will be paid

·         a case in which assets of the debtor are less than the allowed exemptions and costs of administration

·         a case involving a partnership or corporation where the costs of administration exceed the value of the assets

3.       Limited Follow–Up. In general, no asset cases require limited follow-up. TC 520 with the applicable closing code is input on all cases in which the IRS is listed as a creditor to ensure the automatic stay is not violated.

4.       Claim Not Filed. The Service does not file a proof of claim in a no asset case. If the case converts to an asset case at a later date, a claim may be filed.

5.       No Payments. The IRS and other creditors do not receive any payments (or dividends) from the bankruptcy estate in a no asset case.

6.       Asset Cases. When the debtor has non-exempt assets, those assets can be available for use in satisfying the claims of creditors.

A.      Complete Processing. Asset cases require complete processing, and in-depth research must be conducted by Insolvency. See IRM 25.17.5, Opening a Bankruptcy Case.

B.      File Claim. The Service should file a proof of claim, if appropriate. See IRM 25.17.7.7, Proof of Claim – Asset Cases.

7.       Unfiled Returns. The Law Enforcement Manual (LEM) 5.5.3 and IRM 25.17.4.13 outline criteria concerning unfiled returns.

Reminder:

Resources should not be expended to file a claim if circumstances of the case do not merit a claim.

25.17.7.7  (09-01-2004)
Proof of Claim — Asset Cases

1.       Filing of Claim. A creditor, including the IRS , must file a proof of claim in an asset Chapter 7 case to share in the distribution of the estate.

2.       Procedures. The procedures for filing claims in Chapter 7 are set forth in Bankruptcy Rules 3001 and 3002. See IRM 25.17.6, Proof of Claim.

3.       Notice Given if Dividends Likely. The court may initially conclude no assets exist in the case but later determine a dividend payment is possible. At that time, the court will issue a notice for the filing of claims.

4.       Unassessed Claim. To protect the government's interests, the IRS can file an unassessed (estimated) claim when the exact amount of a debtor's liability is unknown (e.g., unfiled returns, TFRP under investigation, pending audit). However, the claim must have a factual basis. The government should be in a position to show the court the liability is reasonable. See IRM 25.17.6.8, Unassessed Claims.

5.       Monitoring. If Insolvency files an unassessed claim based on a pending assessment, it must monitor (follow-up) for the receipt of more information from either the debtor or the IRS function proposing the assessment. After all pending actions are completed, Insolvency may amend or withdraw the claim, if appropriate. Note IRM 25.17.6.8(8), Withdrawal of Unassessed Claim, and (9), Unfiled Returns.

6.       Claim Filed on Behalf of Creditor. If a creditor ( IRS ) does not file a proof of claim, the debtor or the trustee may file a claim on behalf of the creditor. The Service generally then files a corrected claim, or an amendment, with the court, showing accurate tax figures based on the IRS tax database.

7.       Objections to Claims. The duty to object to any duplicative, overstated, previously paid, or otherwise questionable proofs of claim falls to the trustee. Objections to a claim may also be made by other parties, including, for example, the debtor.

25.17.7.7.1  (09-01-2004)
Bar Date

1.       Timeframe. To be considered timely, a Chapter 7 proof of claim must be filed with the bankruptcy court:

A.      in the first 180 days of the bankruptcy (i.e., before the 180-day period has run after the order for relief, generally meaning the petition date); or

B.      sometime within the 90-day time period after the 341 Hearing.

2.       Late Claim Allowed if Filed Pre-Distribution. In a Chapter 7 case, if a claim is untimely filed, the IRS can still receive full payment of priority tax claims as long as the claim is filed before the trustee begins distribution.

3.       Extension of Bar Date. The IRS may request the bankruptcy court permit an extension of the time to file a claim prior to the expiration of the 90-day period after the first date set for the meeting of creditors, or the 180-day period after the order for relief. Insolvency should consult with Counsel, if necessary, to determine if an extension is merited. See IRM 25.17.6.7.1.1, Bar Date Extension.

25.17.7.8  (09-01-2004)
Chapter 7 No Asset Process

1.       The Typical Chapter 7 No Asset Process:

a.       The petition is filed.

b.       The 341 Meeting of Creditors is held.

c.       The trustee checks for assets.

d.       The trustee approves and files no asset report.

e.       The court enters discharge (normally 90 to 120 days after the filing of the petition), or enters denial of the discharge (for individuals).

f.         The court approves no asset report; the court excuses the trustee; and the case is closed.

25.17.7.9  (09-01-2004)
Chapter 7 Asset Process

1.       The Typical Chapter 7 Asset Process:

a.       The petition is filed.

b.       The 341 Meeting of Creditors is held.

c.       The trustee files an interim report of assets.

d.       The trustee checks for any additional assets.

e.       A proof of claim is filed.

f.         The court enters discharge (for individuals).

g.       The trustee administers case, including 1) liquidating all assets that create a benefit for the estate; 2) objecting to questionable proofs of claim; 3) determining the distribution of proceeds; and 4) filing a final report.

25.17.7.10  (09-01-2004)
Subordination of Federal Tax Lien

1.       Subordination. 11 U.S.C. § 724(b) provides for the distribution of the proceeds of property encumbered by a valid prepetition tax lien. Specifically, it provides that holders of unsecured priority claims under 11 U.S.C. § 507(a)(1) through § 507(a)(7) are paid before the holder of the tax lien is paid. This is referred to as a subordination of the tax lien (taking a lower position). See IRM 25.17.7.17, Distribution, and IRM 25.17.4.4.1(4), Certificate of Discharge.

2.       Administrative Expenses. The Service's claim for administrative expenses that accrue during the bankruptcy proceeding is entitled to priority classification under 11 U.S.C. § 507(a)(1). Accordingly, the Service's secured tax claim will be subordinated to the payment of the Service's administrative tax claim, if any.

Note:

In addition to the federal secured tax claim, state and local secured tax claims are also subordinated.

25.17.7.11  (09-01-2004)
Sale of Property by the Trustee

1.       Lien Interest. When the trustee disposes of the debtor's assets by selling property, and the IRS has a valid prepetition federal tax lien on file, the Service's lien interest in such property is unknown until all priority claims, including administrative expenses, are determined. Thus Insolvency should not interfere with, or object to, any sale of property by the trustee without specific cause.

2.       Certificate of Discharge. A need to issue a Certificate of Discharge may arise, if requested, to clear title concerns after the completion of a sale. If appropriate, a no interest lien discharge may be considered. See IRM 25.17.4.4.1, Sale of Property Considerations, and IRM 25.17.4.4.1(4), Certificate of Discharge.

3.       Post-Discharge Liens. Tax liens filed against the individual debtor after a discharge from bankruptcy is granted may interfere with the sale of estate property. The IRS holds the position that, because the bankruptcy estate is a separate entity, such post-discharge liens do not attach to estate property. Therefore, a no interest lien discharge may be provided.

4.       Tax Consequences. The U.S. Trustee encourages trustees to evaluate the tax aspects of any sale and discourages them from administering any property with significant tax consequences.

5.       Objections to Sale . Insolvency employees should review sale motions with the tax consequences in mind and object to sales when appropriate, as provided in IRM 25.17.4.4.1(6), Tax Consequences.

Note:

If any estate property is subsequently abandoned to the debtor, the federal tax lien attaches to the property upon abandonment.

25.17.7.12  (09-01-2004)
Trust Fund Recovery Penalty

1.       Corporation and Responsible Officers in Bankruptcy. Assessment of the Trust Fund Recovery Penalty (TFRP) under I.R.C. § 6672 becomes an issue when a corporation, having unpaid trust fund liabilities, files a Chapter 7 petition. In addition, the potentially responsible persons of the corporation may have filed their own bankruptcy petitions.

2.       Objections Filed by Responsible Persons. The responsible persons frequently object to the TFRP investigation the IRS conducts against them, claiming the trust fund taxes will be paid through the corporate bankruptcy proceeding.

3.       Field Compliance Assignment. If research on corporate asset Chapter 7 cases shows balance due accounts or return delinquency periods assigned to field Compliance, Insolvency should contact with the revenue officer (RO) group to determine what information is available on the case.

4.       Other Investigations (OIs). If an OI for investigation of the TFRP is warranted, it will be based on TFRP criteria concerning dollar amounts and collectibility factors.

5.       TFRP Assessments Against Responsible Persons. IRM 25.17.3.9(14) provides the TFRP should generally be assessed against the responsible persons of a corporate Chapter 7 debtor case unless compelling evidence exists that the assets of the estate are sufficient to satisfy all of the liabilities of the debtor (which is rare).

A.      Generally, Insolvency will recommend immediate assertion of the TFRP.

B.      If the decision is made not to assess, Insolvency must indicate the reasons for non-assertion in the case history. The decision on withholding the TFRP assessment should be reviewed with the manager in accordance with local procedures.

Caution:

Should any of the circumstances/factors change at a later date that allowed Insolvency to originally delay the TFRP assessment (e.g., a current review indicates non-compliance, plan deficiencies, etc.), reconsideration should be given to making the TFRP assessment.

6.       Field Assignment of Accounts. If a revenue officer group wants an account to remain open to field Compliance, TC520 with closing code 84 will not suspend a balance due account for the module to which it is input.

Caution:

Although CC 84 is available for use in circumstances that require extensive field work and involve little risk in committing a violation of the Bankruptcy Code, caution must still be employed. The Service can be liable for damages if a violation of the Bankruptcy Code occurs.

25.17.7.13  (09-01-2004)
Bankruptcy Estate Income Taxes – I.R.C. § 1398

1.       Individual Chapter 7 – Separate Taxable Entity. The bankruptcy estate in an individual Chapter 7 bankruptcy is a separate taxable entity required to file its own Form 1041.

A.      I.R.C. § 1398 contains special provisions for an individual under Chapter 7.

B.      Individual debtors have the right to terminate their tax years when the petition is filed.

C.      The Chapter 7 trustee has a duty to file the estate's tax return.

D.      The return filing requirements are generally the same as for individual Chapter 11 cases, as discussed in IRM 25.17.11.4, Internal Revenue Code § 1398 Issues.

2.       Corporations and Partnerships – No Separate Taxable Entity. In corporate and partnership Chapter 7 cases, as well as in Chapter 11 cases, no separate taxable entity is created. I.R.C. § 1399.

A.      The trustee is responsible for filing any required returns.

B.      A trustee can apply to be relieved of the filing requirements in corporate cases when the corporation has neither assets nor income. The procedures are found in Revenue Procedure 84–59. They require the trustee to make a written request giving the reasons and must be signed under penalties of perjury.

C.      Insolvency will make the determination to grant or deny the request within 90 days of receipt of the request.

25.17.7.14  (09-01-2004)
Postpetition Liabilities— Individuals

1.       Rule for Individuals – Chapter 7 Postpetition Debts. In a Chapter 7 proceeding, the individual debtor is considered to be a separate taxable entity from the estate. Taxes on the individual debtor's postpetition wages are incurred by the individual debtor, while taxes on income arising from assets which are property of the estate are incurred by the estate. Therefore, a postpetition liability incurred by an individual debtor (rather than the estate) in a Chapter 7 proceeding cannot be claimed in the bankruptcy case.

25.17.7.15  (09-01-2004)
Conversion

1.       Voluntary. Chapter 7 debtors may voluntarily convert their cases to proceedings under Chapters 11, 12, or 13 at any time, as long as the Chapter 7 case was not originally converted from a Chapter 11, 12, or 13 proceeding.

2.       Involuntary. Involuntary conversions to Chapter 11 sought by creditors or the trustee can also occur.

25.17.7.16  (09-01-2004)
Dismissal

1.       Notice and Hearing. A Chapter 7 case may be dismissed "for cause " only after notice and a hearing. 11 U.S.C. § 707(a).

2.       Causes for Dismissal. Reasons ( "causes" ) a debtor's bankruptcy may be dismissed include:

·         unreasonable delay by the debtor that is prejudicial to creditors

·         non-payment of any fees or charges

·         failure of the debtor in a voluntary case to file schedules as required by 11 U.S.C. § 521, but only on motion of the U.S. Trustee

3.       Abuse of Bankruptcy Process. The court, on its own motion or on a motion by the United States Trustee, may dismiss the case on other grounds if granting relief would be a substantial abuse of the bankruptcy process. Grounds for dismissal could include:

·         bad faith in filing the petition

·         debts consisting of primarily consumer debts

25.17.7.17  (09-01-2004)
Distribution

1.       Order of Distribution. The order of distribution in a Chapter 7 case for estate property not subject to liens is established in 11 U.S.C. § 726 and is as follows:

a.       11 U.S.C. § 507 priority claims (includes administrative expenses, postpetition taxes incurred by the estate, including interest on these taxes, and priority tax claims) which are timely filed, or which are untimely filed before the trustee begins distribution;

b.       general unsecured claims which are timely filed, or filed late due to lack of notice;

c.       late claims (other than those in items (1) and (2));

d.       non-pecuniary loss penalties (punitive in nature, for example, failure to pay) and fines;

e.       postpetition interest; and lastly,

f.         the debtor receives the remainder of any distribution.

2.       Rights of a Private Secured Party. The distribution does not affect the rights of a private secured party. If property in which a secured party has a lien is sold by the trustee, that creditor will be paid first from the sale proceeds after the expenses of the sale.

3.       Treatment of IRS Tax Lien. The IRS , as a secured creditor, does not have the same rights as private secured creditors in a Chapter 7 case. This is because the tax lien is subordinated to priority claims, including administrative expenses of the estate, pursuant to 11 U.S.C. § 724. Other priority claims will be paid before the tax lien is paid. See IRM 25.17.7.10, Subordination of Federal Tax Lien, and IRM 25.17.7.11, Sale of Property by the Trustee.

25.17.7.18  (09-01-2004)
The Discharge Injunction

1.       Discharge Injunction. Under 11 U.S.C. § 524, Effect of Discharge, a discharge operates as an injunction against the continuation or commencement of any act to collect the discharged debt.

2.       Service Prohibition. The Service can be liable for damages if the discharge injunction is violated. See I.R.C. § 7433(e). Insolvency must take timely and precautionary measures when adjusting accounts having discharged liabilities to prevent violations of the discharge injunction under 11 U.S.C. § 524.

3.       Collection Caution. The Service, therefore, is prohibited from taking any actions to collect, recover, or offset against postpetition refunds any discharged debt against the debtor. General collection actions that must not be taken include sending balance due notices, serving wage levies, and making offsets of postpetition refunds to discharged liabilities. See IRM 25.17.7.21, Collection from Exempt or Abandoned Property, and IRM 25.17.14.8, Discharge Injunction.

Caution:

As the majority of discharge injunction violations occur in Chapter 7 cases, Insolvency employees assigned Chapter 7 casework must be diligent while working on discharge processing procedures.

25.17.7.19  (09-01-2004)
Discharge

1.       Effect of Discharge. Generally, a Chapter 7 discharge relieves an individual debtor from liability for most prepetition debts. It operates as an injunction against any collection action to recover discharged debts from the debtor. In effect, the discharge extinguishes the debtor's personal obligations on debts. Creditors, including the IRS , must not take any action in violation of 11 U.S.C. § 524

2.       Discharge Law Complex. The bankruptcy law regarding the scope of a Chapter 7 discharge is complex. Counsel should be consulted for legal guidance, as necessary.

3.       Tax Discharge Determination. When an individual debtor receives a discharge in Chapter 7, Insolvency must do a quality, timely review of the debtor's accounts to determine which taxes are excepted from the discharge.

4.       Valid Tax Lien/Exempt or Abandoned Property. Attention must be given to a valid Notice of Federal Tax Lien filed prior to the bankruptcy filing date. The lien may attach to exempt or abandoned assets with collection potential. See IRM 25.17.7.21, Collection from Exempt or Abandoned Property.

5.       Early Discharge in Chapter 7s. In most cases, unless a complaint has been filed objecting to the discharge, the discharge will be granted to an individual Chapter 7 debtor relatively early in the case. This generally happens 60 – 90 days after the date first set for the meeting of the creditors.

Reminder:

Chapter 7 Discharge Available Only to Individuals. Partnerships and corporations cannot receive a Chapter 7 discharge – only individuals. However, since Chapter 7 is a liquidation proceeding, usually no assets remain from which to collect any tax liabilities not paid by the bankruptcy estate.

6.       Quality Documentation. All closing actions taken on Chapter 7 cases, including justifications for discharge determinations, must be properly and timely documented on AIS. Not only is this information important to Insolvency, but other Service employees (e.g., Counsel, Examination) can benefit from detailed and concise dischargeability documentation if they use the AIS history screen "read only " option.

25.17.7.19.1  (09-01-2004)
Discharge Timeframes

1.       Timeframe Requirement – Discharge Processing. Insolvency is required to initiate all of the required closing actions necessary for discharge processing within 30 calendar days of the receipt of the discharge notice. Discharge determinations must be made, Other Investigations (OIs) sent to field Compliance under appropriate situations, and adjusting actions started within the 30 day timeframe.

Note:

Sometimes a delay in closing a case on AIS is unavoidable, such as when awaiting results from an OI investigation. If additional time is needed, the Insolvency employee working the discharge should obtain managerial concurrence. However, the OI investigation should be concluded as promptly as possible.

2.       Freeze Code Release Caution. Insolvency must ensure the bankruptcy freeze codes remain in force until all bankruptcy discharge procedures have been completed.

25.17.7.20  (09-01-2004)
Non-Dischargeable Taxes

1.       Non-Dischargeable Taxes. According to 11 U.S.C. § 523(a), certain tax debts are not dischargeable, including:

A.      priority taxes (see table in IRM 25.17.6.5.2);

B.      trust fund taxes;

C.      taxes for which a late return was filed within two years of the bankruptcy filing;

D.      taxes for which a return was not filed; or

E.      taxes resulting from a fraudulent return or from willful attempts to evade or defeat the tax.

2.       Willful Evasion. Insolvency must not take collection action or remove bankruptcy freeze codes from discharged tax years on the ground that the willful evasion exception applies without first consulting Counsel.Compliance employees must receive all necessary written approvals through Counsel for assertion of this exception to discharge.

3.       Collection Activity. While a Chapter 7 individual debtor may be granted a general discharge, actions may be taken to collect 11 U.S.C. § 523 non-dischargeable liabilities once the automatic stay is terminated. The IRS can collect non-dischargeable liabilities from exempt, abandoned, non-administered, and after-acquired assets of an individual debtor. Postpetition interest on non-dischargeable taxes is also non-dischargeable. See IRM 25.17.2.9.1, Bankruptcy Discharges – Impact on the Overall Collection Process, and IRM 25.17.14.7, Discharge and Exceptions to Discharge.

25.17.7.21  (09-01-2004)
Collection from Exempt or Abandoned Property

1.       Dischargeable Taxes and Lien Rights. Discharged taxes may be collectible from exempt property or property that has been abandoned, or otherwise not administered by the trustee, if a valid prepetition Notice of Federal Tax Lien is on file against an individual Chapter 7 debtor. See IRM 25.17.2.9.1.1, Collection from Exempt Property After Discharge.

Note:

Exempt property can also include pension plan assets.

2.       Inclusion of Non-Dischargeable Taxes. While collection efforts may be ongoing from Insolvency at the closing of a bankruptcy for dischargeable taxes, the Service is not prohibited from including any non-dischargeable taxes the debtor may owe.

Reminder:

Non-Dischargeable Taxes/Individuals. The IRS has the right to collect non-dischargeable liabilities from exempt, abandoned, non-administered, and after-acquired assets of an individual debtor. See IRM 25.17.7.20(3), Collection Activity.

3.       ERISA. Included among the assets the federal tax lien can attach are Employee Retirement Income Security Act (ERISA)-qualified pension plans which are generally not included in the bankruptcy estate — pursuant to Patterson v. Shumate,504 U.S. 753 (1992) . See IRM 25.17.2.9.1.1(3), Pension Plans.

4.       Timeframe for Adjusting Accounts. Insolvency is required to initiate all necessary discharge closing actions within 30 calendar days of the receipt of the discharge order, including the initiation of an OI for an exempt/abandoned asset investigation. If an OI is sent, the investigation should be concluded as soon as possible. Any issues or concerns should be brought to the attention of the debtor or debtor's attorney for a prompt resolution.

5.       Preventing Violations of the Discharge Injunction. To prevent violations of the discharge injunction, the account(s) must be kept under TC 520 (freeze code) control to prevent notices from being generated and offsets made to dischargeable periods, pending a determination of the exempt or abandoned property issues. See IRM 25.17.7.18, The Discharge Injunction, and IRM 25.17.14.8, Discharge Injunction.

6.       When to Make Adjustments. In most instances, when an OI is outstanding, adjustments should not be made on the tax accounts, nor lien(s) released on dischargeable tax liabilities secured by a valid NFTL, until the collection potential of such property has been determined.

Caution:

Insolvency must exercise caution as any undue delay in releasing the bankruptcy freeze may increase the risk of a refund violation.

7.       Related IRM Citations. IRM 25.17.2.9.1.1, Collection From Exempt Property After Discharge; IRM 25.17.4.1, Property of the Estate; IRM 25.17.4.1.2,Exempt and Abandoned Property; and IRM 25.17.14.4, "OIs" and Exempt or Abandoned Property, give additional information on potential collection from specific property at the closing of a bankruptcy.

25.17.7.22  (09-01-2004)
Grounds for Denial of Discharge

1.       Bankruptcy Code Rules. 11 U.S.C. § 727 details the ground rules for determining whether or not to grant a Chapter 7 individual debtor a discharge of prepetition debts. If a discharge is denied under this section, none of the debtor's debts will be discharged.

2.       Reasons for Denial of Discharge. A bankruptcy court may deny a discharge when a Chapter 7 individual debtor:

A.      attempts to, or does defraud the estate by described affirmative acts or by withholding information from estate officers;

B.      cannot explain loss or deficiency of assets;

C.      commits an act outlined in above-listed items within one year before or during the case and in connection with another case concerning an insider;

D.      fails to keep books and records from which to ascertain the debtor's financial condition;

E.      fails to obey any court order;

F.      received a discharge in a Chapter 7 or a Chapter 11 case commenced within six years of the filing of the current bankruptcy; or

G.     received a Chapter 12 or Chapter 13 discharge in a case commenced within six years of the filing date of the current bankruptcy, but failed to perform certain required acts in connection with the prior bankruptcy; or

H.      transfers, conceals, or destroys property, with intent to defraud, within one year before the bankruptcy petition or takes the same actions toward estate property after the petition filing.

3.       Counsel Consult. If it appears the debtor may have committed an act justifying a denial of discharge, Counsel should promptly be contacted for consideration of the government's objecting to the discharge.

25.17.7.23  (09-01-2004)
Revocation of a Discharge

1.       Revocation Criteria. A discharge may be revoked by the court upon the request of the trustee, a creditor, or the United States Trustee, if:

A.      the discharge was obtained through fraud which the requesting party did not know of until after the discharge was granted and the request was made within one year after the discharge was granted;

B.      the debtor acquired property of the estate and knowingly and fraudulently failed to report the acquisition of or entitlement to property of the estate, or failed to surrender same to the trustee; or

C.      the debtor refused to obey a lawful order of the court, or to respond to a material question approved by the court, or to testify (other than on the ground of privilege against self-incrimination).

Timeframe for Request. A revocation request pursuant to (b) or (c) above must be made before the later of one year after the granting of the discharge or the date the case is closed under certain conditions. 11 U.S.C. §§ 72 7(e)(1), 727(e)(2)(A), 727(e)(2)(B).

 

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