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Common Issues |
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Common Issues |
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Part 25. Special
Topics
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Chapter 17. Bankruptcy
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Section 4. Common
Bankruptcy Issues
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25.17.4 Common Bankruptcy Issues
- 25.17.4.1
Property
of the Estate
- 25.17.4.2
ASED/CSED
- 25.17.4.3
Credits,
Refunds, and Offsets
- 25.17.4.4
Sale
of Property
- 25.17.4.5
Preferences
- 25.17.4.6
Bankruptcy
Court Tax Determinations — 11 U.S.C. § 505
- 25.17.4.7
Offers
in Compromise and Bankruptcy
- 25.17.4.8
Bankruptcy
Fraud
- 25.17.4.9
Unpostables
- 25.17.4.10
Failure
to Pay Tax Penalty and Failure to Pay Estimated
Income Tax Penalty
- 25.17.4.11
Referrals
– Representing IRS in Bankruptcy Court
- 25.17.4.12
Litigation
Accounts Management System (LAMS) and Litigation
Transcript System (LTS)
- 25.17.4.13
Unfiled
Returns
- 25.17.4.14
Innocent
Spouse Claims and Bankruptcy
- 25.17.4.15
Installment
Agreements and Bankruptcy
25.17.4.1 (09-01-2004)
Property of the Estate
1.
The Bankruptcy Estate. The
filing of the bankruptcy petition creates the
bankruptcy estate. The estate consists of all of the
debtor’s interests in any property at the time the
case is filed. 11 U.S.C. § 541(a)(1). It also
encompasses the interest of the debtor and the
debtor's spouse (the non-debtor or non-petitioning
spouse) in community property states. 11 U.S.C. §
541(a)(2). See
2.
After-Acquired Property. In
a Chapter 12 or 13 bankruptcy, after-acquired
property, including wages
and income, becomes property of the
estate, as does after-acquired community property.
11 U.S.C. §§ 1207 and 1306. In general, some
property, especially wages or other income used to
fund the plan, may continue to be property of the
estate after confirmation.
3.
Counsel Guidance. Complex
issues surround what constitutes the property of a
bankruptcy estate. Counsel should be contacted for
guidance when case-specific issues initially arise.
25.17.4.1.1 (09-01-2004)
Levies and Bankruptcy
1.
Introduction. A levy served prepetition on a taxpayer who
subsequently files for bankruptcy protection may
lead to a hearing in bankruptcy court. Indeed, an
2.
Levies and Insolvency. Pursuant
to United States v. Whiting
Pools, Inc., 462 U.S. 198 (1983), property,
whether tangible or intangible, levied
upon prepetition but not
transferred to the
A.
Levy Funds Not Received By Petition Date. Accordingly,
if an
B.
Prepetition Seizure. Any
tangible
property seized prepetition, but not sold
prepetition, is property of the bankruptcy estate
subject to turnover. The
C.
Levy Funds Received Prepetition. When
the
Note:
However, such a payment may be subject
to recovery by the estate as a preference.
See
3.
Right to Adequate Protection. The courts generally recognize the Service's
right to adequate
protection when
a levy is issued prepetition. The levy provides the
4.
Prepetition Levy/Postpetition Levy Payment. Payment(s)
received after a bankruptcy has been filed (postpetition),
based on a prepetition
levy, should be returned, unless the
5.
Timeframe for Corrective Actions. Corrective
actions must be initiated within two
workdays of
the date the Service becomes aware of the payment.
Return of the payment will be expedited per local
guidelines, to either the trustee or the debtor,
using Form 5792 (manual refund) procedures. See
6.
Third Party Contact — Levy Release. Whenever
Insolvency handles a release of levy, Form 12175
must be completed. A
release of a levy is considered to be a third party
contact. Form
12175 is the source of the third party contact list
provided to the taxpayer/debtor.
7.
Form 12175 Completion. On
the date Insolvency completes Form 12175
(instructions are on the reverse of form), the form
should be sent to the Third Party Contact
Coordinator. A copy of the form must be retained in
Insolvency, and the case history must be properly
documented to show action(s) taken.
8.
Chapter 13
– Postpetition Levy Action. In
a Chapter 13 case, if the plan does not provide for
a postpetition tax liability, generally the
postpetition liabilities can be collected (including
by use of levy action) from any asset not dedicated
to the plan. In re
Lambright, 125
B.R. 733 (Bk. Ct. N.D. Tex. 1991). However,
Insolvency must follow local rules/agreements or
standing orders impacting this position.
A.
Levy Language for Postpetition Tax Liabilities. If
wages and future earnings of the debtor are
designated to fund the plan, and the
B.
Pre-Levy Notice.
Caution:
The
automatic stay may prohibit collection of
postpetition tax liabilities after confirmation of
the Chapter 13 plan. Counsel should be consulted for
legal advice because judicial districts differ as to
which assets (if any) are protected property of the
estate after confirmation.
9.
Documentation. All actions taken on a federal levy matter,
while the debtor is under the protections afforded
by the Bankruptcy Code, must be timely and
accurately documented. Insolvency's documentation on
a case may be used in bankruptcy court.
Note:
Although a new bankruptcy case filing
may not be loaded on AIS at the time a levy issue is
handled by Insolvency, all documentation on the
matter should be transferred to the AIS history
screen at the earliest possible date.
10.
Counsel Assistance. Insolvency
should contact Counsel for assistance on problematic
levy issues arising during the pendency of a
bankruptcy. Levy concerns must be addressed under
strict timeframes so the debtor's rights are
protected. The Service may be held liable for
damages if violations of the Bankruptcy Code (11
U.S.C.) occur.
25.17.4.1.2 (09-01-2004)
Exempt and Abandoned Property
1.
Exempt Property. "Exempt
property" is excluded by state or federal law
from the estate and cannot be liquidated by the
trustee. Exempt property is not liable for any debts
of the debtor except alimony, security interests, non-dischargeable
tax debts, and dischargeable taxes secured by a
Notice of Federal Tax Lien.See 11 U.S.C.
§ 522.
2.
Individuals and Exempt Property. Only
individuals may claim exempt property. Debtors must
select either federal or state exemptions; selection
from both is not permitted.
A.
Federal or State Exemptions. The
election between federal and state exemptions is
permitted unless the state in which the debtor
lives, by law, specifically prohibits election. In
those states, the debtor is allowed only those
exemptions provided by state law.
B.
Spouses.
In the case of a husband and wife whose estates are jointly administered,
the debtors are not permitted to elect different
exemption options.
C.
Federal Exemptions . 11 U.S.C. § 522(d) lists the federal
exemptions available to the debtor.
3.
Abandoned Property. "Abandonment"
severs a bankruptcy estate's interest in property.
Under the Bankruptcy Code, the bankruptcy court may
permit the trustee to abandon any property of the
estate that is burdensome or of inconsequential
value to the estate.
A.
Affirmative Abandonment. The
trustee may actively abandon property, or a party in
interest may request abandonment. The trustee may
abandon the property to the debtor or to a party
with a possessory interest. Notice of hearing is
required.
B.
Administrative Abandonment. If
the property is listed in the schedule of assets,
but is not administered by the trustee, then it is
abandoned to the debtor upon closing of the estate.
4.
Lien Rights.
Discharged taxes may be collectible from exempt or abandoned property if a
prepetition NFTL has been properly filed and
recorded. 11 U.S.C. § 522(c)(2)(B). Collection from
such property will be made only after Insolvency has
made a determination the property is available for
collection and collection actions are appropriate.
Caution:
Collection
from exempt property is prohibited as long as the
automatic stay is in effect.
5.
Pension Plans. See
25.17.4.2 (09-01-2004)
ASED/CSED
1.
Automatic Statute Computations. Master
File computes appropriate statute extensions for
assessment and collection in most instances when the
TC 521 posts (reversing the TC 520 bankruptcy freeze
code).
Note:
The statutory period for assessment
is not affected by bankruptcy for cases filed after
2.
Suspension Timeframes.
A.
Assessment Statute Expiration Date (ASED). On
bankruptcy cases with a petition date before the
enactment of BRA 94, the running of the statutory
period for assessment (ASED) is suspended during
the period the assessment is prohibited (while the
automatic stay is in effect) and for 60 days
thereafter. I.R.C. § 6503.
B.
Computation of a New ASED. To
compute a new ASED, 60 days are added to the
unexpired time (number of days) remaining on the
original statute as of the petition date. Then that
amount of time is added to the date of discharge or
dismissal (or the date the stay was lifted) to
establish the new ASED. (For ASEDs on examination
cases, Compliance examination should be consulted.)
C.
Collection Statute Expiration Date (CSED).
The running of the statutory period for collection (CSED)
is suspended for the period
collection is prohibited (while the automatic stay
is in effect) plus six months. I.R.C. §
6503.
D.
Computation of a New CSED. Computation of a new CSED is similar to an
ASED computation. Six months are added to the
unexpired time (number of days) remaining on the
original statute as of the petition date and that
total is added to the discharge or dismissal date
(or the date the stay was lifted) to establish the
new CSED.
Note:
The
3.
CSED Recomputation – Manual Input of TC 550.
A.
For
Non–Master File (NMF) accounts, a manual input of
TC 550 is necessary.
B.
The input
of a TC 550 must be timely input (for example, when
the court grants a discharge or dismisses a case).
C.
The
presence of a TC 520 in the module will not prevent
TC 550 from posting.
D.
If a TC 550
is input to a module with an unreversed TC 520 with
a bankruptcy closing code, automatic computation of
the CSED when the TC 521 posts will not occur.
Generally, no TC 550 is necessary to update the CSED
on modules to which a TC 520 was input after July
1986 and a TC 521 was input after January 1987.
4.
CSED — Individual Master File (IMF)
A.
Posting of CSED. The CSED for a tax module is displayed on IDRS.
This information is invaluable to Compliance
employees in determining the time remaining on a
collection statute (i.e., if collection actions may
be taken on a delinquent account).
B.
CSED and Joint Assessments — Both Spouses in Bankruptcy. With
the filing of a bankruptcy petition and the
subsequent input of a TC 520, the CSED is extended.
However, if the tax module is for an IMF joint
assessment, the statute is extended against both the
husband and the wife, only
if both have
filed bankruptcy.
C.
CSED and Joint Assessment — Only One Spouse in Bankruptcy. If
only one spouse files bankruptcy, and the joint (prepetition)
tax return was filed under the non-petitioning
spouse's Social Security Number (
D.
CSED Indicator Codes. The
CSED
Note:
The
TC 520, with the appropriate closing code and the
CSED
5.
CSED Protection — OI For Non-Petitioning (Non-Debtor) Spouse. When
considering collection from a non-petitioning
spouse, an Other
Investigation (OI) may be appropriate.
However, as long as plan payments are sufficient to
satisfy the claim, collection activity outside of
bankruptcy and against the non-petitioner's spouse
may not be warranted. To protect the collection
statute, Insolvency must be aware of CSED problems
that may develop on the non-debtor spouse. See
Caution:
In
community property states, local Counsel advice
should be sought before taking collection action
against a non-debtor spouse.
6.
OI Potential. If, at the time a bankruptcy petition is
filed, a case is assigned to an RO, an OI may be
initiated to ensure continuity of case actions and
to protect statute expirations.
A.
Chapter 11 — Individuals. As individual Chapter 11 cases typically
involve large dollar accounts and are less likely to
have a confirmed plan, an OI for collection against
a non-petitioning spouse is generally appropriate.
B.
Chapter 7.
OIs are particularly useful in Chapter 7 cases (for example, investigating
exempt and abandoned property and lien equities).
C.
Queue CSED Expirations. Protection
of the CSED on a non-petitioning spouse is
unnecessary if the case will, absent the bankruptcy,
expire in the queue (where IDRS accounts are
maintained in a "Hold" file and assigned a
lower priority status than current accounts).
Likewise an account with an unreversed
currently-not-collectable (
25.17.4.2.1 (09-01-2004)
BRA 94 and Its Effect on Assessments
1.
BRA 94.
The Bankruptcy Reform Act (BRA 94) brought about significant changes
affecting the
A.
Sovereign Immunity. BRA
94 waived the government's sovereign
immunity against judgments in connection
with enumerated provisions (preferences, violations
of stay, etc.). However, sovereign immunity remains
in effect on the awarding of punitive damages, and
attorney fees are capped.
B.
Assessments Allowed. Before
BRA 94, the Bankruptcy Code prohibited assessment of
a tax liability unless the court granted relief from
the automatic stay. After
Note:
Deficiencies in which the statutory
period for petitioning the tax court has expired prior
to the bankruptcy petition can also be
assessed.
2.
Impact on ASEDs. BRA
94 has had an impact on ASED computations. In most
cases, the stay of assessment and suspensions of the
Assessment Statute Expiration Date no longer
applies, beginning on or after the effective date of
BRA 94. The Service must now take timely action to
protect the ASED whenever this is applicable. See
(b) below and also (3) and (4).
A.
Most Taxes Can Now Be Assessed. For
debtors who filed bankruptcy on or after
B.
Unagreed Audit Deficiencies. On
unagreed audit
deficiencies, the ASED is computed from the date of
issuance of a statutory notice until the date a TC
521 is input at the close of the bankruptcy.
Examination is responsible for the input of the
transaction code to suspend the ASED.
Note:
Computation of the ASED for audit cases
is made by the examination function.
3.
Tax Court and ASEDs. For
taxpayers who filed bankruptcy on or after
4.
Consent to Extend ASED. Under BRA 94, the Service may obtain a valid
consent to extend the statute of limitations on
assessment from entities in bankruptcy. A TC 560,
input by examination, indicates an extension of the
ASED.
25.17.4.2.2 (09-01-2004)
Examination and Insolvency
1.
Insolvency Notification System. Using
the Insolvency Notification System (
2.
EXAM (
3.
Examination Contacts to Insolvency. If
an examination is open, a Compliance examination
employee will:
A.
contact the
responsible Insolvency employee; but
B.
continue
with established examination bankruptcy procedures;
and
C.
advise
Insolvency of any proposed exam-initiated
deficiencies or adjustments that might result in a
refund or a credit to the taxpayer. This should be
done at the earliest
possible time before the bar dateby
sending Insolvency a memorandum, or a locally
developed form (along with a copy of the transmittal
letter to the examination report), or a copy of the
Revenue Agent Report (RAR).
Note:
Insolvency will not perform a periodic
follow-up with the examination function.
Responsibility to notify Insolvency rests entirely
with the examination function.
4.
Exam's " HOLD" File. The
examination function establishes a "HOLD"
file of cases for which a statutory notice has been
issued, and assessment is stayed because a Tax Court
petition cannot be filed under 11 U.S.C. §
362(a)(8). Periodically, Examination transmits a
list of these cases to Insolvency.
A.
Timeframe for Insolvency to Contact Exam. Within
five workdays of
receipt of the exam list, Insolvency will advise the
examination function which assessments (if any) can
be made. Insolvency's response will show the date
the stay was lifted, if applicable.
B.
Determining the —L Freeze.
C.
Alternatively,
or, in addition, access to the Automated Insolvency
System (AIS) (read only capabilities) can be granted
to the examination function.
5.
Insolvency Follow–Up/Monitoring. Because confirmations take place quickly in some bankruptcies (especially in
Chapter 13), monitoring methods must be established
by Insolvency for cases involving examination
issues. If research indicates one or more tax
periods are being examined, and the assigned exam
function has not contacted the Insolvency group,
Insolvency should contact the exam unit to gather
current information on the status of the audit.
6.
Reminders — Changes Due to BRA 94 — Assessment of Taxes.
·
the Service
is free to make most assessments, notwithstanding
the automatic stay
·
the Service
may assess an agreed tax
deficiency — see 26 U.S.C. § 6213(d)
·
the Service
may assess a tax shown on a return filed by the
taxpayer — see 26 U.S.C. § 6201(a)(1)
·
the Service
may assess taxes which are not subject to the
deficiency procedures (e.g., the Trust Fund Recovery
Penalty, whether the taxpayer agrees or not) — see
26 U.S.C. § 6671
Note:
Unless the period for petitioning the
Tax Court is suspended, the automatic stay no longer
provides an extension of the ASED; therefore, the
Service must take timely action to protect the
statute.
7.
Documentation. All contacts made by Insolvency with the
Compliance examination functions should be
documented promptly and accurately by Insolvency.
25.17.4.3 (09-01-2004)
Credits, Refunds, and Offsets
1.
Authority of Right to Offset. The
2.
Mutuality of Debts. Although
11 U.S.C. § 553 expressly preserves only the right
to setoff when both the credit and the debt occur
prepetition, nothing in the Bankruptcy Code
abrogates the Service's non-bankruptcy rights to
setoff. Thus, setoff may also be available when the
credit or the debt occurs postpetition as
long as the debts are mutual. See
Caution:
Automatic
Stay Prohibition. Although
the Service has a right to setoff, the automatic
stay bars an offset of prepetition credits against
prepetition taxes. Counsel can advise Insolvency of
the applicability of the automatic stay to any
setoffs for a specific court jurisdiction.
3.
Violations of the Automatic Stay. After
a bankruptcy is filed, accounts should be examined
and research completed promptly to determine if
credits are present that need to be resolved, if
refunds should be retained or turned over to the
debtor or trustee, and if any illegal offsets have
occurred. This is usually done during the
preliminary cursory review of accounts in
Insolvency. See
A.
Timeframe to Correct. If
a violation of the Bankruptcy Code has inadvertently
occurred, corrective actions must be initiated
within two workdays
.
B.
Erroneous No Liability Case. An
offset may be discovered in an apparent " No
Liability" case where a tax refund was applied
to full pay an existing balance due tax account after
a bankruptcy petition was filed. However, if the
bankruptcy freeze code was not input timely, the
account could erroneously appear to be one of
"No Liability " when it is reviewed later
in Insolvency. An offset action of this type will
most likely result in a violation of the automatic
stay.
Note:
Whenever such an offset is discovered,
immediate steps to correct the violation must be
taken by the Service, including expedited refund
issuance and filing or amending a claim, if
appropriate.
4.
Refunds Not Offset But Retained by the Service. The
Service may retain refunds to protect its right of
setoff. These refunds may be retained whether they
arise prepetition or postpetition. Service policy
emphasizes making prompt determinations.
5.
Timeframe.
When Insolvency discovers refunds are being retained, Insolvency will begin
the refund resolution process within 30
calendar days.
6.
Refund Determination. Insolvency
must make a refund
determination
within 30 calendar days, to either:
a.
Issue Refund. Issue
the refund to the trustee or debtor, as required by
local rules/agreement, order, plan or practice; or
b.
Refer to Counsel. An expedited referral should be made to Counsel (if necessary) to file a
motion to lift the automatic stay to effectuate a
refund offset; or
c.
Retain Refund. Retain
the refund to protect the Service's right of offset,
but only with concurrence
of Counsel.
7.
Guidelines for Refund Determination. Local
guidelines for a possible tolerance/dollar criteria
might preclude a referral to Counsel in this type of
situation. If a referral is not locally appropriate,
Insolvency should follow the guidelines set forth in
the Table under
.
Stay Lifted to Allow Refund Offset. It
is Service policy not to offset the refund unless
the automatic stay has been lifted for periods
protected by the automatic stay.
A.
Secured Status .
Generally, the refund will entitle the Service to a
secured status on the proof of claim – to the
extent of the outstanding tax liabilities. Any
refund excess will be refunded to the debtor or
trustee, per local guidelines or Counsel advice.
B.
Clarify Claim Status. Also, Insolvency must amend or withdraw a claim, as appropriate, after the
offset is completed to clarify the Service's claim
for the court.
8.
Chapter 13. After a Chapter 13 confirmation, Insolvency
should promptly determine if a refund should be
retained, given to the debtor or trustee, or offset
against other postpetition liabilities.
9.
Contacts to Insolvency. If
an
10.
Refund Considerations/Problems: Insolvency
must consider issues surrounding potential refunds
for accounts under bankruptcy protections such as:
·
a
·
inability
to generate a systemic refund (manual refund
issuance — process takes longer)
·
court order
or plan dictates how refund disposition is to be
handled
·
a potential
– or actual – violation of the automatic stay
·
potential
for duplicate refunds
·
a change of
venue (i.e., case relocated to another court after
bankruptcy petition filed)
·
address
problems
·
mandated
redirection of the refund to an entity other than
the debtor
·
debtor and
non-debtor spousal issues on a joint return/joint
refund situation
25.17.4.3.1 (09-01-2004)
Manual Refunds — Form 5792
1.
Manual Refund Requests. When
refunds are prepared manually in Insolvency, Form
5792, Request for IDRS
Generated Refund, must be completed per
local guidelines. AIS prepares a template of this
form for the manual refund request. Form 3210, Document
Transmittal, can also be generated from
AIS to transmit Forms 5792 for processing. All
5792s must be marked "expedite."
2.
Documentation. Matters concerning refunds and credits should
be handled expeditiously by the Service and
pertinent information promptly documented on AIS.
This includes information on expedited Form 5792
refund requests. AIS history items may be used in
court should litigation develop.
Note:
When a manual refund is requested, the
initiator must
control and monitor the case until the TC
840 posts to the master file.
25.17.4.3.2 (09-01-2004)
Table — Credits, Refunds, Offsets
1.
Prepetition Credits. A
"prepetition credit" is a credit available
on a tax module when the taxable period ends prior
to the petition date. Although the prepetition
credit may be available and is valid as a credit to
the debtor's account (e.g., tax refund), the act of
transferring the funds to effect a setoff may be a
violation of the automatic stay (unless allowed by
local standing orders or local rules).
2.
TABLE — Credits, Refunds, Offsets. Unless
any standing orders, local rules, or agreements
allow for different treatment,
credits/refund/offsets may be resolved using the
following Table:
|
If
|
Then
|
|
The automatic stay has been lifted...
|
(1) Credit must first be applied to dischargeable tax, penalty,
and interest due as of the date of petition. |
|
A Chapter 7 trustee requests the credit for the
estate... |
(1) If no prepetition tax liability exists, a manual refund must
be prepared to go to the trustee. |
|
A claim is required…
|
Reminder:
In
general, prior to a Ch 11 or 13 confirmation,
a refund may be retained to preserve the |
|
Chapter 12 and Chapter 13 plans have been
confirmed... |
Caution:
Service policy provides for a prompt determination whether to
issue a refund or retain refund and/or request
a motion to allow the Service to make a refund
offset.
Exception:
In
jurisdictions where standing orders or local
rules permit a setoff. |
|
No tax debt is showing currently on IDRS —
but an offset has occurred in violation of the
automatic stay...
|
(1) Note:
Also
see |
3.
Language for Claiming Setoff Amounts.
25.17.4.3.3 (09-01-2004)
Postpetition Payments and Credits
1.
Postpetition Credits and Postpetition Debts. Generally,
postpetition credits (e.g., tax refunds) owed to the
taxpayer can be offset directly against postpetition
tax periods for taxes owed by the taxpayer.
2.
Postpetition Credits and Prepetition Debts. Since
11 U.S.C. § 553 does not create an independent
right to setoff but rather preserves the Service's
non-bankruptcy rights, the Service holds it can set
off postpetition credits against prepetition debts
and vice versa as long as the debts are mutual
(i.e., both the credit and the debt are owed to/by
the taxpayer). However, some
courts have held the Service does not have a right
to set off postpetition credits against prepetition
liabilities.
Caution:
Insolvency should consult Counsel to
determine the action to be taken, especially in
Chapter 13 cases. Some standing orders and local
rules/agreements allow offsets while the taxpayer is
in bankruptcy.
3.
Non-Mutual Debts — Chapters 7 and 11 Individuals. In
a Chapter 7 or 11 individual case, the estate is a
separate taxable entity. A credit owed to a debtor
in these chapters cannot be set off against a tax
owed by the estate due to the lack of mutuality.
4.
Chapter 7 Discharge/Payments/Offsets. If payments are received from taxpayers for taxes that have been discharged
under Chapter 7, or refunds have been offset to
dischargeable periods, corrective actions must be
initiated within two
workdays of
the date the Service becomes aware of the violation
of the Bankruptcy Code. See
Note:
The Service is prohibited by the
discharge injunction imposed by 11 U.S.C. § 524
from applying payments on taxes that have been
discharged. Sanctions can be imposed against the
Service as a result.
5.
Voluntary Payments – Guidelines. At
times an individual debtor may make a voluntary
postpetition payment. Acceptance of such
payments does not violate the automatic stay as long
as the payments are truly voluntary. Voluntary
payments by an individual Chapter 7 debtor can be
accepted and applied to non-dischargeable periods. However,
the payments cannot be made from property of the
estate. See
6.
Table — Postpetition Payments and Credits. The
Table below provides additional information on
postpetition payments and credits.
|
If
|
Then
|
|
The automatic stay is in effect...
|
|
|
The automatic stay is not
in effect...
|
(1) The credit should be applied to non-dischargeable prepetition
tax, penalty, and interest. |
|
The Chapter 7 trustee of an individual debtor
requests the credit and no postpetition tax
liability exists...
|
(1) Letter 1467 should be issued through AIS advising the trustee
the credit is postpetition and not property of
the estate. |
|
If the credit module begins prepetition and
ends postpetition...
(for
example, tax period 30/200112 has a credit of
$500 and debtor filed bankruptcy on
04/20/2001; the credit module of 30/200112
begins 1/1/2001 (prepetition) and ends
12/31/2001 (postpetition) |
(1) In all cases but individual debtors in Chapter 7, the credit
should be treated as a postpetition credit. |
25.17.4.3.4 (09-01-2004)
Offsets to Other Federal and State Agencies
1.
Introduction. Certain federal and state agencies provide the
2.
Offset Situations. Offsets
may present various situations requiring corrective
actions, including those listed below.
A.
It appears
upon a preliminary review, the
B.
After an
illegal offset has occurred (as in (a) above) to a
balance due account, a debt will still be due the
Service. The refund may have erroneously paid the
account, partially or in full, due to the illegal
offset. Therefore, the IDRS account balance (either
showing zero or a balance remaining) will not be
accurate. The Service must initiate corrective
actions within two work days.
3.
Assist Debtor Per Guidelines. The
A.
If the
debtor contacts Insolvency for help, Insolvency is
required to take the appropriate steps listed in
25.17.4.3.4.1 (09-01-2004)
FMS
/TOP Offsets
1.
Background.
The Debt Collection Improvement Act of 1996 authorized Treasury's Financial
Management Service (
2.
Treasury Offset Program (TOP) Offsets.
3.
Tax Offsets.
A refund offset to an outstanding IMF, BMF, NMF, or IRAF tax debt is
referred to as a tax offset. Tax offsets appear on a
tax module as:
·
TC 820,
manual credit transfer
·
TC 826,
computer generated tax offset
·
TC 896,
computer generated tax offset from IMF to BMF or
IRAF
4.
TOP Offsets.
TOP offsets occur after the
Note:
Customer Service Handbook 21.4.6
provides additional information on the program.
Document 6209,
25.17.4.3.4.2 (09-01-2004)
Offset Bypass Indicator — BPI 3
1.
Bankruptcy TOP Offset Bypass Indicator – BPI 3. All
manual and systemic refunds are assigned a TOP
Offset Bypass Indicator which identifies for
·
Systemic Input — when CC RFUND is input on an MFT not
eligible for offset, the indicator will be set to
show (3) BANKRUPTCY.
A TC 520 on the account will generate a
BPI 3 on refunds that are issued systemically.
·
Manual Input— (if a BPI 3 was not input previously), manual
refunds issued from accounts with a (–W) or (–V)
freeze require input of a
BPI 3 to indicate no refund offset(s) may be made.
An annotation in the "Remarks" section of
Form 5792 must state: INPUT
BPI 3
2.
BPI Postings. The BPI will be posted/displayed along with
the TC 840/846 on all output screens such as TXMOD,
IMFOL, BMFOL, and on MFTRA transcripts. The BPI will
also show with the pending transaction.
25.17.4.3.4.3 (09-01-2004)
Referral of Taxpayer to
FMS
1.
Appropriate Referral of Taxpayer. Complaints
involving TOP offsets require the agency receiving
the refund to handle any subsequent illegal refund
offset complaint, including the issuance of the
refund. The Service should not be involved in the
refunding process (unless it involves an offset the
Service has done on one of its own (
2.
Agency for Taxpayer Contact. If a taxpayer contacts Insolvency and requests
help in getting a refund back from a state or other
federal agency, Insolvency is to refer the taxpayer
immediately to "the offending agency "
(i.e., the agency who received the refund) for the
required assistance.
A.
Taxpayer to Contact Agency. If the taxpayer knows the name of the agency,
Insolvency should advise the taxpayer to contact
that agency.
Note:
B.
C.
TOP Notice to Taxpayer. When
a taxpayer's refund is offset for child support or a
federal agency debt,
3.
Complaint to Proper Agency. The majority of complaints involving TOP
offsets require the agency receiving the offset to
make the refund, and the
25.17.4.3.4.4 (09-01-2004)
Referral to Adjustments
1.
Insolvency Referral – When
2.
Referrals to Adjustments. Cases
referred to Adjustments by Insolvency require:
·
the
referral is worked expeditiously (the tax offset
must be reversed quickly) to correct a violation of
the automatic stay
·
Form 5792
procedures are promptly followed
·
the manual
refund is issued as soon as possible
·
indicator
" BPI
3 "
is input
·
Insolvency
details the necessary action(s) on the referral
·
accurate
documentation is entered timely on AIS
·
appropriate
monitoring (follow-up) is conducted by the
Insolvency employee requesting the refund
25.17.4.3.4.5 (09-01-2004)
Direct Deposit Indicator (DDI)
1.
Introduction. The Direct Deposit Indicator (DDI) on INOLES
shows the presence of a non-tax debt, although the
system does not identify the specific agency owed
the non-tax debt.
2.
Purpose of DDI. The
establishment of the Direct Deposit Indicator (DDI),
in addition to improving customer service, provides
Electronic Return Originators (EROs) (for example,
tax accounting firms) who offer Refund Anticipation
Loans (RALs), with prompt information about the
likelihood of a refund being reduced by an offset.
(The
3.
Indicators Updated by
Note:
If the ERO did not issue a
4.
CFOL CC INOLES Indicators:
A.
The DDI can
be found on CFOL CC INOLES on the 13th line as Debt
Ind. This indicator helps the Service
determine the existence of a non-tax debt.
B.
To identify
an
·
I— if an
·
F— if a
·
B—if both exist (
·
N— if none
5.
Preventing Violations:
.
Although
the Direct Deposit Indicator was reinstituted to
assist "refund lenders," this program aids
Insolvency in preventing violations of the
Bankruptcy Code. Initial
screening of cases helps identify the DDI.
A.
The Service
should adhere to the requirements of Customer
Service
B.
Insolvency
should handle each bankruptcy case, including No
Liability cases, in strict compliance with the
Bankruptcy Code. Insolvency is committed to
employing all appropriate measures to prevent
illegal offsets while the taxpayer is under the
bankruptcy court's protection.
25.17.4.3.5 (09-01-2004)
Federal Payment Levy Program (FPLP)
1.
Automated Levy Program – Collection of Federal Payments Due to Taxpayer. The
Federal Payment Levy Program (FPLP) is an automated
levy program the
Note:
This program is exempt from third party
contact notice.
2.
Authorization. The law passed under the Taxpayer Relief Act
of 1997 (Public Law 105–34) § 1024, authorizes
the
3.
Bankruptcy Prohibition. During
regular collection activity of the Service
(non-bankruptcy), the FPLP allows systemic
continuous levies on certain federal disbursements
using a paperless process. However, the Service is
prohibited from using this levy program against
persons in bankruptcy unless
the automatic stay has been lifted. (7)
below outlines Insolvency actions regarding this
program as it impacts accounts in bankruptcy.
4.
FPLP Indicators.
A.
Modules
selected for the FPLP remain in their original
Master File status codes. NMF is not included).
Command Codes (CC) TXMOD, ENMOD, IMFOL and BMFOL can
be used for research.
B.
MF
(I/BMFOL) displays the indicator
C.
IDRS (ENMOD
and TXMOD) displays the indicator
D.
Each tax
module (TXMOD, I/BMFOLT) also displays the
following:
·
·
·
5.
Action Codes. Tax liabilities sent to
·
TC 971 AC
060 — module selected for FPLP
·
TC 972 AC
060 — reversal of module selected for FPLP
(computer generated only)
·
TC 971 AC
061 — block or release of module from FPLP
Note:
When a module is "blocked,"
a Federal Payment Levy cannot occur.
·
TC 972 AC
061 — reversal of block on module
·
TC 971 AC 062 — module matched
or levied
under FPLP with identifying DLN
6.
Selected/Match/Levy Indicators. If
a module is selected
for the FPLP, a TC 971 AC 060 posts. Once
7.
Actions to be taken by Insolvency are listed below.
.
When
Insolvency becomes aware a tax module has been
selected for the FPLP (the tax module will show a TC
971/060), a TC 520
must be input timely.
For cases sent to
a.
These cases
are identified during a normal review of cases in
Insolvency.
b.
On FPLP
match/levy modules (tax module shows TC 971 AC 062),
Insolvency must notify the FPLP Coordinator
expeditiously.
c.
Insolvency
employees must use Form 4844 and indicate "
FPLP LEVY
RELEASE "
so the Coordinator can have the module(s) removed
from the FPLP. This will facilitate a prompt release
of a levy, if necessary.
Note:
A FPLP levy release can only be released
electronically
(to be done by the FPLP Coordinator).
d.
Approving Official. The official signing the Form 4844 in Insolvency must have delegation
authority to approve levy releases.
e.
Insolvency
must verify and document the FPLP Coordinator
received Forms 4844 on all cases.
f.
Copies of
Forms 4844 and any attachments must be retained in
Insolvency.
g.
If a levy
payment is received by the Service as a result of a
FPLP levy action while the automatic stay is in
effect, Insolvency must request a manual refund,
following current procedures for returning or
refunding levy proceeds.
Reminder:
When Insolvency becomes aware of a
match/levy made in violation of the automatic stay,
corrective actions must be initiated by the Service within
two workdays after
discovery.
Note:
25.17.4.4 (09-01-2004)
Sale of Property
1.
This
portion of
25.17.4.4.1 (09-01-2004)
Sale of Property Considerations
1.
Insolvency Responsibilities. A
debtor may file a motion for court approval to sell
property. A notice must be sent to creditors, who
have a right to object to the sale.
a.
Insolvency
should begin the necessary actions timely to provide
quality customer service and to protect the
government's interests.
b.
In all such
cases, Insolvency should review the schedules and
proposed sale documents to ensure
the sale
is an arms-length transaction for fair value.
c.
The
proceeds of the sale should be distributed in order
of lien priorities.
2.
Lien on Property. If
a Notice of Federal Tax Lien was filed prior to the
bankruptcy filing which attached to equity in the
property, the debtor may be required under 11 U.S.C.
§ 363(f) to obtain consent for the sale from
certain lienholders, including the
3.
Sale Proceeds. If the debtor sells exempt property, the
proceeds of the sale will normally go to the debtor,
rather than into the estate. However, if a Notice of
Federal Tax Lien is filed, the
4.
Certificate of Discharge. The
order approving the sale may provide the property be
sold free and clear of liens, with liens to attach
to the sale proceeds. Usually this order is
sufficient to clear the title, but the
a.
a statement
of facts concerning the sale;
b.
a legal
description of the property;
c.
a copy of
the court order approving the sale; and
d.
any other
pertinent information.
5.
Certificate of Discharge Handled as In Non-Bankruptcy. After
review, a discharge may be provided in the same
manner as in a non-bankruptcy situation. The
discharge will be prepared by the employee(s)
assigned to handle Certificates of Discharge in the
Advisory section of Technical Services or
Insolvency.
6.
Tax Consequences. The
tax impact of any sale should be evaluated. If the
sale will result in a significant capital gains tax,
this may be an administrative expense payable in a
Chapter 11 case on the effective date of the
confirmed plan. In individual Chapter 11 cases this
takes on additional importance because the
bankruptcy estate is a separate, taxable entity. If
the bankruptcy estate cannot pay the tax on the
effective date, the case will likely convert to
Chapter 7. The argument can
be made that without abandonment, the sale will
significantly diminish the estate because of the
capital gains tax.
Note:
In such cases, consideration should be
given to objecting to the sale without the property
first being abandoned to the individual debtor prior
to the sale.
25.17.4.4.2 (09-01-2004)
Escrow Payoff Requests during a Chapter 13
Proceeding
1.
Sale or Refinance of Real Property. Provisions
for the sale or refinancing of real property may or
may not be incorporated into a debtor's confirmed
Chapter 13 plan, and the property may or may not be
property of the estate. Generally the debtor is not
required to seek court approval, but must receive
the approval of the Chapter 13 trustee.
2.
Trustee Involvement. In some jurisdictions trustees instruct the
3.
Insufficient Proceeds. If proceeds from a sale are insufficient to
satisfy the lien, the lien generally should not be
released. Instead a certificate of discharge can be
provided to discharge from the lien the specific
property sold. Insolvency caseworkers should consult
Counsel with questions about the propriety of
releasing a lien or providing a certificate of
discharge.
4.
Form 10492 Preparation. To prepare an accurate Form 10492, the
Insolvency caseworker must have copies of the
A.
The
B.
The plan
contains a provision for payment of the
C.
The plan
provides for payment of the
D.
The demand
for lien payoff from the escrow agent or title
company is made before the Chapter 13 plan has been
confirmed. This may occur when a sale or refinance
of real property is pending at the time the
bankruptcy is filed. Insolvency should instruct the
debtor to:
• refer to the Chapter 13 trustee or local rules
for instructions;
• file a motion to sell the property free and
clear of the tax lien with the
• file a motion for relief from the stay to allow
the
E.
The debtor
has accrued post petition taxes, and a Notice of
Federal Tax Lien (NFTL) has been recorded for those
post petition liabilities. The Insolvency caseworker
must review the plan and order for confirmation. If
the subject property revested to the debtor and the
confirmation order permits the debtor to sell or
refinance property without court approval, the
Caution:
Insolvency should not file a § 1305
claim in these cases without first consulting
Counsel.
25.17.4.5 (09-01-2004)
Preferences
1.
Preference.
A preference, as defined by 11 U.S.C. §
547, is a prepetition transfer of property or rights
to property to one creditor benefiting that creditor
at the expense of other creditors.
2.
Trustee Authority. The
trustee (not the debtor) has the authority under the
Bankruptcy Code to avoid preferences. The trustee
can recover a preferential payment for the benefit
of the estate.
3.
Preference Criteria. To
qualify as a preference, a tax payment must:
A.
be made on
or within 90 days
before the date of the bankruptcy filing;
B.
be a
payment outside the normal course of business;
C.
be an
amount more than the
D.
be a
payment on account of an antecedent debt, in other
words, a late payment of tax.
Note:
Qualifications for preferences for other
types of creditors under 11 U.S.C. § 547 generally
mirror those for tax payments delineated above.
4.
Trust Fund Payments. Prepetition
voluntary payments of trust fund taxes cannot be
avoided as preferential transfers because they are
not considered to be transfers of property of the
debtor. Rather, the funds are held in trust for the
United States.
25.17.4.6 (09-01-2004)
Bankruptcy Court Tax Determinations — 11 U.S.C. §
505
1.
11 U.S.C. § 505(a). As a general rule, 11 U.S.C. § 505(a) permits
the bankruptcy court to determine the amount or the
legality of any tax, addition to tax, or tax
penalty. This applies to tax liabilities of the
debtor or of the estate whether or not previously
assessed, paid, or contested.
2.
Prior Court Ruling. The
bankruptcy court may not reexamine a tax liability
ruled on by a court of competent jurisdiction before
the filing of the bankruptcy petition.
3.
Criteria for Court Determination. The
bankruptcy court can determine the right of the
estate to a tax refund if the taxing authority does
not rule on the trustee's refund claim within
120 calendar days. 11 U.S.C. §
505(a)(2)(B).
Note:
The regular 6-month determination period
on a refund claim under I.R.C. § 6532(a) is reduced
to 120 days in an effort to close the bankruptcy
estate as soon as possible.
25.17.4.6.1 (09-01-2004)
Prompt Determination Requests from Trustee
1.
Bankruptcy Court Authority. The bankruptcy court has the authority to
determine the amount of any administrative taxes due
upon the completion of the
2.
Prompt Determination Requests. A
trustee in a bankruptcy proceeding may ask the
3.
Timeframes.
A.
Return Selected. The government has 60
calendar days
from the date of the request to notify
the trustee the return(s) has been selected for
examination.
B.
Examination Completed. The
government has a total of 180
calendar days
from the date of the request to complete
the examination and to notify the trustee of any
additional tax due. (A longer period may be granted
under court permission.)
4.
Establishment of Procedures. Revenue Procedure 81–17 establishes the
steps for trustees to submit returns for a prompt
determination.
5.
Court's Mailing Matrix –
6.
Promptness Critical. The
trustee and debtor are discharged from liability if
deadlines are not met, so prompt handling of 505(b)
requests is critical.
7.
Trustee Requests for a Tax Determination. All
requests by a trustee for a tax determination under
11 U.S.C. § 505(b) are to be processed in the
following manner:
A.
Trustee's Written Application. If
the trustee requests a prompt determination of any
unpaid tax liability of the estate, a written
application, in duplicate, signed under penalties of
perjury, asking for a prompt determination, must be
filed where the bankruptcy case is pending, marked:
" PERSONAL
ATTENTION OF INSOLVENCY – DO NOT OPEN IN MAILROOM.
" Filed with the application shall
be an exact copy of the return for the completed
taxable period filed by the trustee and a statement
of the name and location of the office where the
return was filed.
B.
Verification and Transmittal to Examination. Upon
receipt of the above, Insolvency is responsible for
the immediate transmittal of all documents to the
Compliance examination function. The copy of the
return should be prominently marked at the top:
"
C.
Timeframes. Transmittal to the appropriate Compliance
examination function must be done within 3
workdays of
the date the copy of the return is received by the
local Insolvency office as indicated by the "Received
Date" stamp. The transmittal must be
done within this timeframe because Compliance
examination has to review the copy of the return and
advise the fiduciary if the return is to be selected
within 60 calendar days
from the date it was received in
Insolvency.
D.
Complete Package. In
the event any of the documents specified in Revenue
Procedure 81–17 are not received, all documents
received will be returned to the fiduciary,
identifying the missing papers and requesting the
package be resubmitted. New
timeframes will start on the date a complete package
is received by Insolvency.
E.
Controls.
Local management should establish adequate controls between Insolvency and
the appropriate Compliance examination function to
track the receipt and review of copies of the
fiduciary returns to ensure the process is completed
within 60 calendar days of selection.
25.17.4.6.2 (09-01-2004)
Immediate Assessment
1.
Tax Determination by Court. Under 11 U.S.C. § 505(c) and I.R.C. § 6871
(b)(2), after the bankruptcy court determines a tax
liability, the government may generally assess the
tax against the estate, the debtor, or the successor
of the debtor, notwithstanding applicable deficiency
procedures. Once the tax is determined by the court,
generally no bar to assessment exists. The ASED, if
previously suspended in part by the bankruptcy case,
may begin to run thereafter.
Note:
Immediate assessments can be made for
deficiencies incurred by the debtor’s estate
pursuant to I.R.C. § 6871(b)(1).
25.17.4.7 (09-01-2004)
Offers in Compromise and Bankruptcy
1.
Introduction. The Bankruptcy Code provides a means for
balancing the interests of the debtor (taxpayer) and
the Service, as does the administrative offer in
compromise (OIC). An administrative offer in
compromise is one submitted in accordance with the
guidelines and procedures set forth in Rev. Proc.
2003 - 71 and
2.
General Policy. When
a taxpayer has filed for bankruptcy protection, the
Service's general policy on offers in compromise is not
to consider administrative offers in compromise
based on doubt as to collectibility or effective tax
administration from a taxpayer in bankruptcy.
Insolvency considers payment proposals, usually in
the form of plans filed by the debtor in the
bankruptcy case, under guidelines set forth in
3.
General Rule. The general rule
on OICs by the Service is :
A.
Administrative
offers in compromise are returned to the debtor as "Not
Processable" if the taxpayer is a
debtor in a bankruptcy case for which a discharge
has not yet been entered.
B.
However, in
appropriate cases, the Service may work with the
debtor within the bankruptcy case to achieve a
result that is in the best interests of both the
debtor and the Service.
4.
Specific Bankruptcy Chapters. Listed below is the Service's policy for the
various bankruptcy chapters to clarify the
A.
Chapter 7.
Only after a discharge or a dismissal has taken place, can an administrative
OIC be considered by the Service in a Chapter 7
proceeding. Because a Chapter 7 discharge is usually
issued quickly, the taxpayer is not harmed by the
delay. Further, once the discharge is entered, the
Service will be able to determine which taxes are
discharged and will be able to make a determination
of doubt as to collectibility under its
administrative offer in compromise procedures. If
the Service expects a distribution from the
bankruptcy estate, it should consider the use of a
collateral agreement to protect its right to collect
from the bankruptcy estate.
B.
Chapter 11. An administrative OIC can be considered
in a Chapter 11 case in unusual
circumstances after plan confirmation and discharge,
only with respect to tax liabilities which are the
subject of a defaulted plan if the default cannot be
cured or the plan modified. Such an administrative
OIC is only appropriate if unanticipated changes in
circumstances cause an inability to meet the terms
of the plan. The decision for consideration
of an OIC must be made on a case by case basis. The
Service can decline to consider an administrative
OIC after a Chapter 11 default if the particular
facts of the case show an administrative OIC would
be inappropriate.
Note:
Before
the Service can consider processing an
administrative OIC in a Chapter 11 bankruptcy case,
the Service must have made a determination the
debtor's plan has actually defaulted and cannot be
cured.
Even if the Service decides it will consider
an administrative OIC submitted by a debtor, that
decision does not indicate the Service has accepted
the offer.
C.
Chapter 12.
Administrative OICs in Chapter 12 generally will not be considered. However,
in unusual instances, changed circumstances might
justify consideration of an administrative OIC in
defaulted Chapter 12 plan cases, just as in
defaulted Chapter 11 plans, especially since Chapter
12 bankruptcies tend to involve struggling small
businesses.
D.
Chapter 13.
An administrative OIC will not be considered prior to discharge during the
pendency of a Chapter 13 plan.
Note:
This policy does not result in harm to
the debtor because the debtor is not precluded from
resolving his or her tax liabilities in the context
of the bankruptcy proceeding.
5.
Consideration of an Administrative OIC. The
Service's decision to consider
an administrative offer in compromise from debtors
who have taken advantage of the relief offered under
the Bankruptcy Code is limited to the situations
described above. The Service's decision to accept
an administrative offer in compromise falls within
the discretion of the Service.
25.17.4.7.1 (09-01-2004)
Accepted but Not Completed Administrative OICs
1.
The Service's Claim and Incomplete Administrative OICs. When
a taxpayer with an accepted
but not completed administrative offer in
compromise files for bankruptcy, the Service has a
claim for the full amount of the underlying tax
liability because the OIC has not yet been
satisfied. Item 8 (k) of Form 656 provides the tax
being compromised remains a tax liability until the
taxpayer meets all the terms and conditions of the
offer.
2.
A Tax Claim.
If the taxpayer files for bankruptcy before the terms and conditions of an
administrative offer in compromise are completed,
any claim the
3.
Chapter 7 Asset Case. The Service should
file a proof of claim for the full amount of the
unpaid tax liabilities.
A.
In Chapter
7 cases no mechanism exists for the debtor to assume
an executory contract. See 11 U.S.C. § 365.
B.
However, if
once the bankruptcy case is concluded and the
taxpayer promptly resumes payments under the offer,
or the amount of the offer was paid in full as a
result of distributions in the bankruptcy case, the
Service should honor the offer of the postpetition
debtor.
Note:
The five-year compliance provisions of
the OIC still apply.
4.
Chapters 9, 11, 12. Generally, the same guidelines are followed as
for a Chapter 13 (below). Counsel can provide
specific legal guidance.
5.
Chapter 13. When a taxpayer with an accepted but not yet
completed administrative offer in compromise files a
Chapter 13 petition, the Service should file a
protective claim for the full underlying tax
liability to protect the Service's interests.
A.
The proof
of claim should cover the full amount of the unpaid
underlying tax liability because the Service is
entitled to collect the full amount of the unpaid
underlying tax liabilities if the OIC is breached
(non-performance of contract).
B.
However,
the debtor can choose to assume the OIC as an
executory contract in a Chapter 13 plan. This means
the debtor agrees, as part of the Chapter 13
confirmation process, to honor the OIC and fulfill
its terms during the bankruptcy case.
C.
If the
debtor assumes the OIC, the offer should not be
treated as breached, and the plan should provide for
the full amount due under the OIC. As noted above, the
proof of claim will list the full underlying tax
liabilities.
D.
Once the
debtor chooses to assume an OIC, the debtor has
agreed to pay in full the remaining obligation under
the OIC. Accordingly, the Service must honor the OIC
by accepting its payment as satisfying the
obligation.
E.
The debtor
will have a choice (1) to assume the OIC in the
plan, or (2) to be liable for the underlying tax
liability, whichever is in the debtor's best
interest.
F.
The proof
of claim should contain an annotation to reflect it
is being filed as a "Protective
Claim" in the event the debtor does
not assume the OIC as an executory contract in the
plan.
G.
If the
debtor assumes an OIC in a Chapter 13 plan, but the
case is subsequently converted to a Chapter 7, the
Service may claim the full underlying tax liability
as listed on the proof of claim.
Caution:
If
the debtor does not assume the OIC or does not
provide for payment of the unpaid underlying
liability in the plan, the Service should object to
the plan.
6.
Future Compliance Provisions. In
a case under any bankruptcy chapter, if the debtor
has made all payments under the OIC but is still
subject to the future provisions of the offer, a
proof of claim should not be filed.
A.
Chapter 13 . If the debtor later fails to pay
postpetition taxes and is still in a Chapter 13
bankruptcy, the Service can use the normal remedies
available to it to collect liabilities that become
payable during the bankruptcy plan. Generally, the
Service files a Section 1305 claim for the
liabilities or seeks conversion or dismissal of the
bankruptcy case.
B.
Chapters 11 and 12 . In a Chapter 11 or a 12 bankruptcy, if the
case is still pending, the Service can seek
conversion or dismissal of the case for failing to
pay postpetition taxes.
C.
Chapter 7. In Chapter 7, the Service can terminate the
defaulted OIC after the automatic stay is lifted and
collect non-dischargeable liabilities
administratively.
7.
Re-Input of Status 71. If a postpetition taxpayer wishes to continue
to make payments after
bankruptcy, to comply with the terms of a
previously accepted OIC, Insolvency should request
status 71 (OIC status) be re-input on IDRS when
closing the bankruptcy.
8.
Service Coordination. Close
coordination and cooperation among Insolvency, field
Compliance, and Counsel employees is integral to the
prompt and efficient handling of administrative OICs
in bankruptcy.
9.
Communication. A contact list has been established between
Insolvency units and other
25.17.4.8 (09-01-2004)
Bankruptcy Fraud
1.
Bankruptcy Tax Crimes Program. The
Bankruptcy Tax Crimes Program was created to pursue
alleged bankruptcy fraud (and related tax offenses)
commonly encountered by Compliance employees.
2.
Insolvency Detection of Potential Bankruptcy Fraud. During
the pendency of a bankruptcy case, Insolvency
employees may obtain or develop information
indicating a federal criminal offense may have been
committed. The evidence may implicate the debtor,
the trustee, a third party, or a representative in
the proceeding.
3.
Third Party Contacts and Insolvency. If
Insolvency is submitting a fraud referral to
Criminal Investigation, third party contact
provisions under I.R.C. § 7602(c) apply until
the actual referral is made to CI.
4.
Development of Referral. The
information Insolvency obtains may indicate offenses
over which the Service has jurisdiction under Title
26 Internal Revenue Code, for example, filing false
tax returns, and Title 18tax-related
violations. Also, employees in Insolvency
may discover " pure" Title 18 violations,
over which the Service does not have responsibility.
Note:
These Title 18 violations may include:
Title 18 U.S.C. 152, Concealment
of Assets, False Oaths and Claims, Bribery in
Bankruptcy, and Title 18 U.S.C. 157, Bankruptcy
Fraud.
5.
Bankruptcy Fraud Information. Information relating to bankruptcy fraud
procedures is found in Document 9762 (9–96), Desk
Guide Bankruptcy Crime Referrals, and
Document 9225 (rev. 2 – 94), Bankruptcy
Disclosure Handbook.
25.17.4.8.1 (09-01-2004)
Fraud Referrals
1.
Insolvency Fraud Referrals. Insolvency is to route a suspected fraud
referral involving a bankruptcy case to either:
a.
Criminal
Investigation (CI), or
b.
the local
Disclosure Office.
2.
Criminal Investigation (CI) Referrals. Fraud
referrals for tax-related
violations based on Title 26 and Title 18
are routed to CI.
A.
If a potential referral relates to bankruptcy
tax offenses (for example, income tax evasion in
conjunction with
concealment of assets from the bankruptcy
trustee), the matter should continue to be developed
for referral to CI.
B.
Likewise, if a referral relates to a concealment
of assets from the bankruptcy trustee, and
indications of a money laundering violation are
present in addition to
the indications of income tax evasion
, it is handled by CI.
3.
Disclosure Referrals. Fraud
referrals should be directed to the local Disclosure
Office when the criteria below are evident:
.
Suspected non-tax
criminal activity that does not meet
CI referral criteria, including activities relating
to "pure" bankruptcy fraud under 18 U.S.C.
157 and Concealment of
Assets, False Oaths and Bribery under 18
U.S.C. 152.
A.
Potential money laundering violations when no
potential tax violations are suspected.
4.
Disclosure's Responses to Fraud Referrals. If the Disclosure Officer determines the referral from Insolvency merits
further review, the information will be forwarded to
the appropriate agency for additional investigation.
Instructions on the nature of information needed in
the non-tax referral to Disclosure can be found in
5.
Working Fraud Referrals. Insolvency
caseworkers should process a bankruptcy fraud
referral as follows.
.
The
employee originating a bankruptcy fraud referral
forwards the referral to the fraud referral
specialist. See
a.
If additional assistance is needed, the fraud
referral specialist can advise the employee in the
preparation of a quality referral.
b.
If the fraud referral specialist needs guidance
with the referral, the coordinator may contact
Associate Area Counsel (SB/SE) for assistance.
c.
The fraud referral specialist routes the
completed referral either to CI or the local
Disclosure Office, as appropriate.
25.17.4.8.2 (09-01-2004)
Fraud Referral Specialist
1.
Bankruptcy Fraud. When
evidence of bankruptcy fraud is found, Insolvency
should consult the Area fraud referral specialist
for assistance in preparing a referral.
2.
Fraud Coordinator Responsibilities. The
fraud referral specialist ensures referrals are
complete prior to sending them forward. For
assistance in perfecting the referral, the fraud
referral specialist may contact Associate Area
Counsel (SB/SE). Once a Fraud Referral package has
been completed, the fraud specialist forwards it to
the appropriate office.
3.
Quality Referrals. Each
Insolvency office should have a list of criteria for
the selection of cases for referral consistent with
local procedures. Insolvency groups should work
closely with Associate Area Counsel (SB/SE) to
develop quality referrals with a high probability of
acceptance for prosecution. Successful
prosecutions enhance voluntary compliance and
generate a strong deterrent effect.
25.17.4.8.3 (09-01-2004)
Fraud Indicators
1.
Fraud Awareness. Service
employees, in both Insolvency and field Compliance,
who have information concerning a debtor's assets
must be able to identify major indicators of
bankruptcy fraud.
2.
Bankruptcy Fraud Indicators. The indicators listed below are some common
signs of bankruptcy fraud.
A.
Absence of,
or evasiveness by, knowledgeable officers for
testimony purposes at the bankruptcy court's Section
341 meeting of creditors.
B.
Concealment
of assets.
C.
Conduct
contrary to industry practice.
D.
Discrepancies
between pre- and post-bankruptcy filing financial
information provided to the
E.
Failure to
keep usual business records.
F.
Fire,
theft, or loss prior to or after the bankruptcy.
G.
Frequent
amendments to schedules, statements of financial
affairs, and/or monthly operating reports.
H.
Frequent
cash transactions.
I.
Inability
to contact principals at debtor’s stated business
location.
J.
Incomplete
or missing books or records.
K.
Inconsistencies
between recent financial statements, tax returns,
and debtor’s schedules and statement of financial
affairs.
L.
Inflated
salaries, bonuses, or cash withdrawals by officers,
directors, shareholders, or other insiders.
M.
Payoff of
loans to directors, officers, shareholders,
relatives, or other insiders shortly before
bankruptcy.
N.
Recent
departure of officers, directors, or partners.
O.
Serial
bankruptcy cases.
P.
Sudden
depletion of inventory postpetition.
Q.
Transfer of
property to insiders, shareholders, and/or relatives
shortly before bankruptcy.
R.
Unanswered
questions, or incomplete information on debtor’s
schedules and statement of financial affairs.
S.
Unusual
depletion of assets shortly before the bankruptcy
filing.
25.17.4.8.4 (09-01-2004)
Additional Indicators of Tax or Bankruptcy Fraud
1.
Additional Fraud Indicators. The following are additional indicators of either
tax or bankruptcy fraud situations:
·
engaging in
illegal activities
·
indications
that valuable assets belonging to the taxpayer are
being acquired or held in the name of others
·
making
false, misleading, or inconsistent statements
·
personal
living standard and assets inconsistent with income
·
self-serving
statements with no documentary proof
·
submitting
a false document or affidavit
·
trying to
conceal a pertinent fact or record
25.17.4.8.5 (09-01-2004)
Criminal Investigation (CI) Controls on Tax Accounts
1.
CI Controls.
In the course of a bankruptcy proceeding, a debtor may contact (or be
referred to) Insolvency requesting assistance from
the Service (for example, wanting information on a
delayed income tax refund). Insolvency, through case
research or during a cursory review, may identify
Criminal Investigation (CI) controls on the debtor's
accounts (e.g., TC 914, 916).
Caution:
After
Insolvency identifies such accounts, Insolvency must
not make premature disclosure of the existence of a
criminal investigation to the debtor or to a
representative who is authorized to act on the
debtor's behalf.
2.
Confidentiality. No
indication or confirmation of CI involvement can be
given to a debtor or representative even
if the debtor or representative is being persistent,
attempting to obtain more specific information on a
tax account or tax issue. If a debtor or debtor's
attorney asks if a criminal investigation is open on
the debtor's case, the Insolvency caseworker must
contact Counsel and CI immediately to determine the
proper response.Insolvency
must take no actions that might jeopardize an
ongoing criminal investigation.
3.
Prompt CI Contact. Insolvency
must make prompt contact with CI at the Campus on
all inquiries involving account(s) with CI controls.
Campus CI can provide contact information for the CI
Special Agent (SA) who requested the controls.
A.
When CI
controls are identified on accounts, even if the
freeze is only on one of several tax modules,
Insolvency must contact CI immediately to advise CI
of the bankruptcy filing and Insolvency's plans to
file a proof of claim (if applicable).
B.
A meeting
should be scheduled with the SA, the Special Agent
in Charge, the Insolvency specialist and manager,
and SB and Criminal Tax Counsel to discuss
coordinating the civil and criminal cases.
4.
Counsel Advice. If
Insolvency requires legal advice on any case in
which CI advises withholding collection (such as not
filing a proof of claim), prompt contact with
Counsel should follow according to local management
direction. If any issues arise between Insolvency
and CI, Insolvency should seek Counsel's advice. See
25.17.4.9 (09-01-2004)
Unpostables
1.
Generalized Unpostable Framework. The
Campuses provide Insolvency groups weekly listings
of IDRS unpostable transaction codes, returns, and
adjustments relating to bankruptcy cases. Insolvency
is responsible for resolution of the unpostable
conditions.
2.
AIS Reports.
Unpostable assessments are processed from the Campus weekly lists or through
AIS reports. AIS has an advantage over the lists
provided by the Campuses because AIS provides
important monitoring and assessment information,
such as reports identifying cases as imminent
statute cases (based on the original ASED). Through
AIS, the user takes required actions from lists
tailored to specific categories, such as newly added
cases, rather than reviewing a cumulative unpostable
list. See
3.
Examination List. Insolvency
may receive a monthly action list of cases for which
the Compliance examination function has issued a
statutory notice of deficiency and for which
assessment is prohibited by the automatic stay. See
4.
Weekly Nullified Distribution Lists. Unpostable
transactions such as TC 520 are voided, and the
originating unit is notified by the weekly Nullified
Distribution Lists. See
25.17.4.9.1 (09-01-2004)
Resolution of Unpostables/AIS Lists
1.
Local Controls/Monitoring. While
the Campuses provide unpostable listings on a weekly
basis, and AIS report timeframes may be tailored to
suit local preference, management should establish
adequate controls to ensure unpostables are reviewed
and follow-up actions are performed in a timely
manner.
2.
Analyzing of Unpostables. New
unpostables should be analyzed to determine:
·
if the
return or adjustment may be assessed (since BRA 94
most can be assessed)
·
the type of
corrective action required
·
if the
unpostable relates to an open or a closed bankruptcy
case
·
if a case
can be located
3.
Campus Assistance. If
the case is not located, the (highlighted) list
should be forwarded via Form 3210, Document
Transmittal, to the originating Campus.
That Campus will resolve the unpostable by locating
the responsible work unit or by posting the return
if no work unit is located. Document 6209,
4.
Follow-Up.
AIS users can select follow-up dates as a part of the unpostable processing
and as a separate function. AIS
User’s Guide
gives directions for input of follow-up information
to AIS.
5.
ASED Protection. The
follow-up date should be selected to ensure the ASED
does not expire prior to the next scheduled review
of the unpostable list. Factors to consider in
establishing the follow-up date are:
·
the chapter
of the bankruptcy (for example, the Chapter 13 stay
may last as long as five years while the Chapter 7
stay for individuals generally lasts less than six
months)
·
the date
the bankruptcy was filed in relation to how much
time remains on the original statute (imminent ASED)
·
the type of
unpostable (return or adjustment)
6.
Closing Unpostables. Unpostables
may be closed through lDRS using command codes UPRES
and UPCASZ to notify Campus employees to take
corrective actions, or through paper notifications
where the responsible Campus is located elsewhere.
Where paper notification is used, Insolvency should
note the unpostable list with instructions that a
return or adjustment is to be assessed by making
entries, in red,
of:
·
the
petition date in MM/DD/YY format
·
the date
the stay was lifted (MM/DD/YY)
·
the date
the TC 521 was input
·
any other
pertinent information
The list should be sent to the affected
Campus via Form 3210, facsimile, or per local
procedures.
7.
ASED Imminent. Any case in which the
bankruptcy-extended ASED is within 60
days of expiration
must be resolved telephonically with the Unpostable
Unit in the
Campus responsible for the unpostable. All actions
must be documented accordingly, and management
should be informed, as appropriate.
8.
Managerial Involvement. Cases where the bankruptcy-extended ASED has expired must be referred to
management for further direction.
25.17.4.9.1.1 (09-01-2004)
Nullified Distribution Lists
1.
Non-Return/Non Adjustment. The
Nullified Distribution unpostable list typically
consists of non-adjustment or non-return related
transaction codes. These are frequently TCs 520,
521, 522, 550, 560, 971, etc., relating to
bankruptcy case processing, input by Insolvency.
2.
Insolvency Control Base. Nullified Distribution lists are forwarded to
Insolvency for resolution. With these lists, IDRS
systemically generates an open control base that is
assigned to Insolvency. See
25.17.4.10 (09-01-2004)
Failure to Pay Tax Penalty and Failure to Pay
Estimated Income Tax Penalty
1.
Provisions of I.R.C. § 6658. Internal Revenue Code § 6658 provides no
addition to the tax shall be made for failure to
make timely payment of tax during the pendency of a
bankruptcy case, except for taxes which arise from
the failure to pay or deposit a tax withheld or
collected from others and required to be paid over
to the United States (for example, trust fund
taxes).
A.
In the case
of a prepetition tax for which a return becomes due
during the proceeding (the due date of the return is
after the petition date), no failure to pay penalty
will be asserted during the pendency of the
bankruptcy.
B.
In the case
of a tax for a prepetition delinquent return which
was recently filed, or if the prepetition tax was
assessed before the start of the proceeding, the
penalty will be asserted up to the petition date.
C.
In the case
of an additional liability for a prepetition tax
year, the penalty will be asserted from
the date of assessment
to the petition date.
D.
In all of
the instances listed above, no penalty will be
asserted while the bankruptcy case is active. The
penalty is suspended from the petition date. The
penalty resumes on the liability from the date the
case is dismissed or closed on non-dischargeable
liabilities.
2.
If Incurred by Trustee or DIP. A
failure to pay penalty will continue to accrue on
tax incurred by the trustee or debtor-in-possession
unless the failure occurred pursuant to an order of
the court finding probable lack of funds in the
estate to pay administrative expenses.
3.
IDRS.
In most cases, IDRS will properly restrict failure to pay penalties unless a
manual restriction has been placed on the account
with a TC 270 and TC 271. For 941 taxes, IDRS will
also suppress FTP penalties for the entire module
because it cannot differentiate just the withheld
portion.
4.
I.R.C. References. The
penalties described above are found in I.R.C. §
6651 (failure to pay penalty), I.R.C. § 6654
(estimated tax penalty - individual), and I.R.C. §
6655 (estimated tax penalties - corporations).
25.17.4.11 (09-01-2004)
Referrals – Representing
IRS
in Bankruptcy Court
1.
Many cases
require
Note:
All referrals must provide the debtor's
25.17.4.11.1 (09-01-2004)
Direct Referrals
1.
The Direct Referral Program. In an attempt to transition the workload
uniformly from Counsel directly to the United States
Attorney (USA) in compliance with bankruptcy program
changes, a Direct Referral Plan was implemented.
Bankruptcy work for non-Special
Assistant United States Attorneys (SAUSAs) is
referred directly
from Insolvency to the U.S. Attorney's Office or the
Tax Division of the Department of Justice (DOJ).
2.
Authorizing Language. All
referrals to either of these offices are made by
letter and must contain the following authorizing
language:
"You are hereby authorized under
the provisions of I.R.C. § 7401 to take whatever
action you deem necessary to aid the Internal
Revenue Service in collection of the above captioned
debtor’s outstanding federal tax liabilities.
Specifically, we suggest and request that your
office… "
"…move to dismiss or convert this case…
"
or
"…object to confirmation of the debtor’s
proposed plan (or plan of reorganization)..."
or
" …defend the claims filed by the Internal
Revenue Service against the debtor’s
objections..."
or
"…defend the claims filed by the Internal
Revenue Service against the debtor’s motion to
determine the dischargeability of tax…"
3.
Direct Referral Authorization. The
authorization to commence direct referrals to DOJ or
USA on cases where the
A.
motions on
behalf of the
B.
motions to
dismiss or convert cases, except
those involving organizations that claim
an exemption from taxation under I.R.C. § 501;
C.
motions
relating to the debtor's failure to make timely
payments under a plan and/or accrual of
post-confirmation liabilities;
D.
responses
to objections to
E.
responses
to debtor's motion to determine dischargeability of
a tax except
where 1) the debtor has filed consecutive
bankruptcies, 2) the debtor defaulted on an offer in
compromise, or 3) when the denial of discharge would
be premised on 11 U.S.C. § 523(a)(1)(C) (e.g.,
fraudulent return or evasion of tax).
4.
" Mixed" Issues Are Not Direct Referrals. Many
referral cases involve "mixed" referral
issues (for example, a referral is made because of
unfiled returns, but the plan also has feasibility
problems). These "mixed" issues cases are not
considered to be Direct Referral cases. They should
be referred to
5.
All Other Referrals. All
other referrals not falling into the above
categories should be referred directly to Counsel,
using the format and procedures established between
Insolvency and Counsel.
6.
A Quality Referral. A
quality referral by Insolvency contains the specifics
of why representation in court is necessary. All
available helpful information must be
provided to the Service's legal representative. Such
information and data must be attached to the
referral to ensure the government's interests are
protected. (If all data is not available at time of
initial referral, the remainder should be sent as
soon as possible for association with the referral.)
The Bankruptcy Desk Guide or
Direct Referrals to United
States Attorney provide additional
information on the Direct Referrals Program.
25.17.4.11.2 (09-01-2004)
Referrals to SAUSAs
1.
SAUSAs.
Some attorneys in Counsel have been designated as Special Assistant United
States Attorneys (SAUSAs). When locally-assigned
SAUSAs are in place, Counsel may request referrals
be made to them instead of directly to DOJ or USA.
Local procedures must be coordinated with Counsel.
25.17.4.11.3 (09-01-2004)
Referrals on Significant Bankruptcy Case Issues
1.
Significant Case Circumstances. Insolvency must make expedited referrals to Counsel on cases with
significant case issues.
Note:
These referrals must be made to Counsel
regardless of chapter and regardless of whether or
not IDRS shows balance due accounts.
2.
Referral Criteria. Once
such a referral is made, Counsel assumes
responsibility for coordinating the various
A.
All cases
for which a criminal tax prosecution is being
considered or is pending.
B.
All cases
involving taxpayers with assets of over $50 million,
with indications, by audit history or otherwise,
that more than nominal tax may be due. CFOL command
BRTVU gives specific BMF return information. Line
codes are edited from Forms 941, 943, 940, and 1120.
C.
All cases
in which the outstanding assessed liability exceeds
$10 million.
D.
All cases
for which the potential deficiency to the tax
liability exceeds $1 million — (income, excise and
other) — taking into account all open tax years.
E.
Cases
raising difficult or significant post-confirmation
tax issues in the disclosure statement, the Chapter
11 plan, or in related documents, such as the Liquidating
Trust Agreement.
F.
All cases
with potential tax liabilities for which significant
publicity may be generated. The economic impact of
the bankruptcy to the geographical area or the
taxpayer’s industry should be considered.
G.
All cases
in which technical advice or ruling requests are
pending, including requests for change of method of
accounting, if the outcome of the request has a
significant tax impact on the taxpayer or on the
taxpayer’s industry.
H.
All LMSB
taxpayer cases under examination.
I.
All
corporate taxpayers for which an Industry
Specialization Program (SP) issue is present.
J.
Presently
or previously consolidated subsidiaries that file
for bankruptcy for which the parent and/or sibling
entities fall within the above criteria.
K.
Parent
corporations filing for bankruptcy in which
consolidated subsidiaries fall within the above
criteria.
L.
Pre-packaged
bankruptcies — a bankruptcy which includes a plan
of reorganization the creditors negotiated and
accepted prior to the filing of the bankruptcy
petition.
M.
Cases which
do not fall within the above criteria but for which
referral may be deemed to be in the best interests
of the government.
Note:
It is essential for Insolvency to
identify these cases as early as possible in the
bankruptcy process so a timely referral can be made
to Counsel.
25.17.4.12 (09-01-2004)
Litigation Accounts Management System (LAMS) and
Litigation Transcript System (LTS)
1.
Litigation Accounts Management System (LAMS). The
Litigation Accounts Management System (LAMS)
interfaces account information from the Automated
Insolvency System (AIS) with current downloaded
Master File (MF) data. LAMS report options allow
Insolvency managers and other users to compare
selected information from AIS with applicable Master
File data. The user may input report-specific
parameters which permit generation of reports,
tailored to meet specific monitoring and inventory
management needs.
2.
Litigation Transcript System (LTS). The
Litigation Transcript System (LTS) program matches
electronic litigation transcripts from Master File
with the
A.
Weekly Extractions. Master
File data is extracted weekly to a file that is
sorted and transmitted to the AIS database. After
the data is matched and sorted by employee case
assignment number, the transcripts can be printed.
This automated program allows Insolvency employees
to handle their inventories more effectively.
B.
Timeframe. Employees should review the transcripts within
five workdays from receipt.
C.
Data Extracts. MF extracts bankruptcy module data when one or
more of the following conditions apply 1) credit
balance with a new TC 150; 2) other credit balance
with a previously posted TC 150; 3) new assessments;
4) cases closed on AIS; 5) other non-bankruptcy
payments; 6) insufficient Federal Tax Deposits
(FTDs) and; 6) no AIS data.
D.
Identification and Prevention of 11 U.S.C. Violations. LTS
reports assist Insolvency employees identify and
resolve violations of the Bankruptcy Code. Actions
in violation of the automatic stay must be initiated
within two workdays
of the date a violation is detected.
E.
Pending Manual Refund Report. LTS
generates a Pending Manual Refund Report (with cases
sorted by employee number) to identify possible
refund issues that may require immediate handling.
LTS loads the Master File and AIS refund data
automatically to the AIS manual refund screen.
F.
LTS Report of Refunds. For
each debtor's
25.17.4.13 (09-01-2004)
Unfiled Returns
1.
Identification of Unfiled Returns. If
initial research indicates one or more tax returns
are unfiled, Insolvency must determine what, if any,
action is required.
2.
Guidelines for Low Priority Returns. The
following procedures avoid the use of field
Compliance resources when the unfiled returns would
not be pursued if the taxpayer were not in
bankruptcy, while minimizing the risk of loss of
revenue due to unclaimed taxes.
A.
Insolvency
should take no action to secure returns if all
unfiled periods are accounted for by TC 59X,
excluding TC 593, Unable To Locate, or meets B-code
B.
In all
other cases, at a minimum, Letter 1714 must be sent
to the debtor unless fewer than 30 days remain to
the bar date. If the bar date is within 30 days, (3)
below applies.
3.
Insolvency Responsibilities. If
tax returns remain unfiled at the time of the review
in (b) above, Collection Law Enforcement Manual
(LEM) 5.5.3 should be referenced, as well as the
remainder of this section, for guidance in whether
or not to pursue filing of returns. As appropriate,
and per local guidelines, Insolvency must determine
what further action, if any, is required.
4.
BMF and NMF Accounts. For
Business Master File (BMF) and Non Master File (NMF)
accounts, if the aggregate potential tax due meets
the criteria contained in LEM 5.5.3, an unassessed
(estimated) proof of claim should be filed when
appropriate.
A.
If
appropriate, 6020(b) processing can be initiated, up
to and including forwarding the returns for
assessment.
B.
If only
corporate income tax returns are unfiled, the lMF
procedures in (5) below should be followed..
5.
IMF Accounts. For Individual Master File (IMF) accounts, if
the aggregate potential net tax due exceeds the
amount stated in LEM 5.5.3 and
meets other stated criteria in LEM 5.5.3, an
unassessed proof of claim may be filed.
6.
Feasibility of Securing Returns and Filing a Claim. Insolvency
should refer to LEM sections as stated and the
remainder of this subsection for guidance on the
viability of securing returns and filing a claim.
A.
Decision Not to Pursue Filing. If
the aggregate (the sum total of) potential tax due
is less than the amount stated in LEM 5.5.3, or
meets other criteria in LEM 5.5.3,
further resources need not be expended to secure the
return, nor does a proof of claim have to be filed.
B.
Decision To Pursue Filing of Returns. If
the debtor has failed to file returns and pursuit of
the filing of those returns is appropriate per
referenced sections of the LEM and
7.
Reasonable, Factual Basis. The potential tax due on unfiled returns and
the unassessed amount listed on the proof of claim
should generally be based on the last return.
However, all available information needs to be
considered to prepare as accurate an estimate as
possible. This information should include IDRS data,
(such as IRP), the debtor’s bankruptcy schedules,
and statement of financial affairs, when available,
to arrive at a realistic estimate. When an
unassessed proof of claim is filed, the estimate(s)
on the claim must have as factual a basis as
possible and be reasonable.
Note:
Insolvency must not seek to obtain
compliance by the filing of a large amount on an
unassessed (estimated) proof of claim not supported
by available information.
8.
Penalties and Interest. If
an estimated claim has been filed to protect the
government's position for an unfiled tax return,
penalties and/or interest need not be listed on the
claim unless local procedures dictate they be
included.
9.
Court Intervention. A
referral to Counsel (as noted in (6)(b) above) to
request the bankruptcy court compel the debtor to
produce the information necessary to determine the
tax liability is another way to resolve the unfiled
tax returns issue. Insolvency and Counsel may work
together to set local guidelines for determining if
judicial action should be taken in unusual or
complex debtor delinquencies.
10.
Monitoring for Tax Returns. The Insolvency employee assigned to the case
should monitor the status of unfiled returns so
appropriate actions may be taken in the event the
returns are not received by the Service. Management
should have monitoring guidelines in place.
11.
Amend/Withdraw Claim. If
the return is subsequently filed, or if the Service
makes the assessment (e.g., SFR), the proof of claim
must be amended or withdrawn, as appropriate.
12.
Liability Not Pursued. After
a proof of claim has been filed with unassessed
(estimated) amounts, and a determination is made the
estimated liability has no factual basis and will
not be pursued (for example, by examination process
or underreporter unit), the proof of claim should be
amended or withdrawn, as appropriate.
Caution:
Unassessed
claims for unfiled returns should not be withdrawn unless it is determined a return is not
required
for those tax periods.
13.
Adverse Impact of Outstanding Returns. Debtors
should be encouraged to file tax returns as soon as
practical. Returns not filed prior to confirmation
may result in:
·
unassessed
(estimated) amounts on proof of claim
·
motions to
compel
·
objections
to cash collateral (Chapter 11s primarily)
·
objections
to confirmation in Chapters 11, 12, and 13
·
objections
to distribution (Chapter 7 asset cases)
·
objections
for feasibility of plans problems – based on the
inability of the Service to ascertain full amount of
federal tax debt owed
·
Rule 2004
Examinations (Motions to Compel)
·
dischargeability
concerns (confusion at discharge time determining
what taxes meet dischargeability criteria)
14.
Valid Tax Return. For
what constitutes a valid tax return in bankruptcy
proceedings,
25.17.4.14 (09-01-2004)
Innocent Spouse Claims and Bankruptcy
1.
Claims for Innocent Spouse Relief and Bankruptcy. Claims
for relief involving Innocent Spouse issues may
arise after a bankruptcy has been filed. Instances
may arise when joint Master File Tax (MFT) 30
modules appear with a bankruptcy freeze, and one
spouse (usually the non-debtor spouse) files an
Innocent Spouse claim. Generally, the Innocent
Spouse determination needs to be made before
the debtor receives a discharge from the bankruptcy
court as a bankruptcy case could last several years.
However, note (8), Chapter 7
Caution, below,
2.
Protecting the Taxpayer's Rights. Despite
the presence of a bankruptcy freeze, each taxpayer
must be given his/her rights under bankruptcy and
the Innocent Spouse provisions. To grant partial or
full relief under the Innocent Spouse provisions,
the bankruptcy freeze code(s) must be temporarily
lifted.
3.
Offsets.
Consistent with the
4.
Transfer to MFT 31. If it is determined the non-bankruptcy spouse
is to be relieved (fully or partially) of the joint
liability on the MFT 30 module (due to the filing of
the Innocent Spouse claim), a transfer of this
amount must be made to MFT 31 in the name of the
bankrupt spouse.
Caution:
This
transfer requires close coordination between SB/SE
Compliance (Insolvency) and Wage and Investment
(Innocent Spouse) functions to ensure the debtor's
rights are not violated.
Note:
NMF
Exception.
If a problem arises with the
5.
Debtor's Filing of Innocent Spouse Claim. A
proof of claim, filed while an Innocent Spouse claim
is pending, is prepared in the regular manner,
disregarding any future outcome of an Innocent
Spouse claim. If a determination is made concerning
a bankrupt (petitioning) spouse who files a claim
for Innocent Spouse relief, and the debtor
meets the criteria for (full or partial) relief, the
Service's proof of claim must be amended or
withdrawn, as appropriate (if a claim was filed).
6.
Reversal of TC 520 to Allow Processing of Claims. To
allow processing of an Innocent Spouse Claim, while
accounts are in bankruptcy, the TC 520 bankruptcy
freeze code will need to be reversed on the specific
tax module(s). See below.
A.
Claim Determination Received From Examination. To
begin processing of the claim, Examining Support
Processing (
B.
Transaction Codes Identified to Examination. Insolvency
will then identify for
C.
Temporary Lifting of Freeze. Insolvency
will allow a temporary lifting
of the bankruptcy freeze code only after
Exam's L— freeze code has posted. The
L— freeze guarantees prohibited notices will not
be generated on a taxpayer in bankruptcy.
D.
First Form 3177 — TC 522 to Lift Freeze. If
the L— freeze code is present, Insolvency will
prepare an initial Form 3177 for input of TC 522 to temporarily
lift the bankruptcy freeze (–V or —W) on the
affected MFT 30 module.
E.
Reversal of TC 520 by
Caution:
Important
-Maintaining the —V Freeze. If this is the only module that has a TC 520: Insolvency should ensure that
a TC 520 is input promptly on another
tax module in order to maintain the —V entity
freeze until the transfer has taken place on the
module with the reversal and also until the TC 520 is re-input to MFT 31. See (g) below. The Service
must do everything possible to prevent a violation
of the Bankruptcy Code.
F.
Second Form 3177 — For Re-input of TC 520. Insolvency
will prepare a second Form 3177 (it should be
prepared the same time the first Form 3177 is
prepared – see (d) above) to give
Note:
It is critical the original
transaction date for the TC 520 and the original
closing code be shown.
G.
Monitoring. Insolvency must monitor closely to ensure the
TC 520 was re-input by
H.
Full Relief — if the relief has been fully
granted, the TC 520 will post on the MFT 31 account
I.
Partial Relief— if the relief is only partially
granted, the TC 520 will post to both the MFT 31 for
the spouse in bankruptcy and also the joint MFT 30
module after the posting of a TC 402
J.
Complete Documentation. Documentation
of all of the actions taken to complete this process
must appear on the AIS history screen.
7.
Joint and Several Liability. In some instances, after processing of
Innocent Spouse Claim(s), a joint MFT 30 module may
remain where both taxpayers still owe jointly and
severally for a portion of the surviving liability.
·
Balance to Joint MFT 30 Module —
the remaining portion of the liability should be
posted back to the joint MFT 30 module after the
transfers to MFT 31 have been completed
·
Partial Request — the transfer request to the
·
Additional Form 3177 —
Insolvency must prepare an additional Form 3177
advising
Reminder:
Insolvency is responsible for preparing
all Forms 3177 involving TCs 520 and 522. Insolvency
must also resolve the bankrupt spouse's account(s)
upon discharge.
8.
Chapter 7 Caution: Given
the overall short timeframes Chapter 7 debtors are
in bankruptcy, it is generally more appropriate for
the Chapter 7 Innocent Spouse Claims to be worked
outside of bankruptcy. To accomplish this,
Insolvency and
25.17.4.15 (09-01-2004)
Installment Agreements and Bankruptcy
1.
Background — Status 60. Section 6159 of the Internal Revenue Code
allows the Service to enter into installment
agreements to facilitate the payment of a tax.
I.R.C. § 6159(a). When the Service accepts an
installment agreement from a taxpayer, IDRS status
code 60 is entered on IDRS to reflect the
agreement's validity.
2.
Form 900, Tax Collection Waiver. Pursuant
to I.R.C. § 6502(a), as amended by the
3.
Bankruptcy Does Not Terminate a Valid Installment Agreement. After
an installment agreement becomes effective, the
Internal Revenue Code limits the conditions
terminating such an agreement; a
bankruptcy petition is not one of them.
See I.R.C. § 6159(b) and Treas.
Reg. §
Note:
A termination of an installment
agreement while a taxpayer is in bankruptcy could be
viewed as an act to collect the underlying tax
liabilities, and hence, a violation of the
bankruptcy automatic stay. See 11 U.S.C. § 362
4.
Change to Status 72. If a taxpayer files a bankruptcy petition
after entering into an installment agreement,
Transaction Code (TC) 520 bankruptcy freeze code is
input. This action causes the status code to change
to status code 72 in place of status code 60.
5.
Termination of Installment Agreement – Appeal Rights. If
an installment agreement appears to be in default,
before an installment agreement can be terminated:
a.
a notice
and explanation of the reasons for termination must
be given in writing to the taxpayer 30
days in
advance;
b.
the Service
must provide for an independent administrative
review of the termination, if the taxpayer so
requests. I.R.C. § 6159;Treas
Reg. §
c.
the
taxpayer has the right to appeal the rejection to an
Appeals officer should the Service still decide to
terminate the installment agreement. I.R.C. §
7122(d)(2).
6.
Payments Received on a Pre-Existing Installment Agreement. Individual
debtors sometimes make voluntary
postpetition payments (either by check or
automatic debits from bank accounts or wages) for
liabilities pursuant to an
installment agreement that was entered into before
bankruptcy. See below.
A.
Chapter 7 Individual . Voluntary
postpetition payment(s) made by an individual
Chapter 7 debtor, either by check or automatic
debits from bank accounts or wages for the
above-stated purpose, can be accepted by the
Service. Such payment(s) will be applied to non-dischargeable
period(s). Acceptance of such payments is not
considered to be a violation of the automatic stay
as long as the payments are truly voluntary (i.e.,
no harassment or coercion by the
Caution:
The
payments cannot be from property of the estate. However, since installment payments are
typically made from current income, which is not
property of the estate in individual Chapter 7
cases, it can be presumed, in most cases, the
payments are not from property of the estate.
B.
Chapter 13. In
a Chapter 13 bankruptcy, property of the estate
generally includes all property acquired
postpetition, and payments should be made through
the plan. So installment
agreement payments, either check or debit, should not
be accepted after a Chapter 13 bankruptcy filing.
Note:
Insolvency must ensure no future
installment agreement payments will be received by
contacting the debtor or representative and also the
payment source (e.g., employer), as appropriate. The
Chapter 13 trustee should be advised of the
suspension of such an agreement. Applicable
documentation must be added to the AIS history.
C.
If payments of this type are received in
Chapters 11 and 12, consultation with Counsel may be
necessary.
7.
Re-input of Status 60. At the end of a bankruptcy, the IDRS status code should be returned to its
pre-bankruptcy status of "60," whenever
possible to do so.
·
Insolvency
may need to annotate and flag status 60 cases
meeting this criteria at the beginning
of the bankruptcy process
·
"IADIS"
print-outs are supplied by IIP and should be
retained by Insolvency to provide to the Campus for
reinstatement purposes at the conclusion of a
bankruptcy
·
a statement
should be included with the referral transmittal to
the Campus Collections Program when requesting the
re-input of status 60 to: "
WAIVE USER FEE
"
·
presently
the input of the TC 521 and the request for a
"reinstatement" of status 60 are done per
local procedures on applicable cases
Caution:
Status
60 accounts that are continuous levy (Agreement
Locator Number 08) and electronic funds transfer cases are excluded.
8.
Violation of the Taxpayer's Rights. The
Service must strive to prevent any violation of the
taxpayer's rights while the debtor is under the
protection of the bankruptcy court. See 11 U.S.C. §
362. Therefore, for the most part, installment
agreements should be regarded as suspended – and
not terminated – during the pendency of a
bankruptcy proceeding.
Documentation. Proper documentation in the case files must reflect pertinent information relating to a valid installment agreement and the bankruptcy process. AIS histories may become a part of the bankruptcy court litigation process.