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Common Issues

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Part 25. Special Topics

Chapter 17. Bankruptcy

 

 

Section 4. Common Bankruptcy Issues


25.17.4  Common Bankruptcy Issues

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 IRM 25.17.3.4.1.1, Community Property; IRM 25.17.13.7.1,Property of the Estate After Confirmation; IRM 25.17.7.13, Bankruptcy Estate Income Taxes – I.R.C. § 1398; and IRM 25.17 11.4, Internal Revenue Code § 1398 Issues.

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. IRM 25.17.13.7.1 gives additional information about the post-confirmation estate in a Chapter 13 bankruptcy.

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 IRS levy may provoke a bankruptcy filing. Both Insolvency and Counsel expend time and resources resolving levy disputes, in and out of court. If not properly resolved, the Service may be liable for damages if a violation of the automatic stay has occurred.

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 IRS prepetition, is property of the bankruptcy estate subject to turnover.

A.      Levy Funds Not Received By Petition Date. Accordingly, if an IRS levy on accounts receivable, bank accounts, wages, insurance proceeds, or other intangibles has not resulted in the receipt of funds by the IRS at the time the bankruptcy is filed, they are property of the bankruptcy estate.

B.      Prepetition Seizure. Any tangible property seized prepetition, but not sold prepetition, is property of the bankruptcy estate subject to turnover. The IRS may have a right to adequate protection before turnover. See (3) below.

C.      Levy Funds Received Prepetition. When the IRS has received a levy payment prior to the bankruptcy filing (prepetition), ownership has transferred to the IRS , and the payment is not property of the estate.

Note:

However, such a payment may be subject to recovery by the estate as a preference. See IRM 25.17.4.5, Preferences.

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 IRS with an interest in the levied–upon property. In any case where the IRS is entitled to adequate protection, the IRS should immediately contact the debtor-in-possession or the trustee to reach an adequate protection agreement, notify the court, and request relief from the automatic stay. Although adequate protection can be requested in other chapters, it is requested most often in Chapter 11 bankruptcies. IRM 25.17.11.3, Initial Processing; IRM 25.17.11.3.2, Adequate Protection and Turnover; and IRM 25.17.11.3.3, Cash Collateral/Property Depreciation of the Estate provide additional information on adequate protection.

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 IRS seeks prompt relief from the automatic stay.

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 IRM 25.17.4.3.1, Manual Refunds – Form 5792.

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. IRM 5.1.17.5, Recording Third Party Contacts, states multiple contacts with the same third party on different dates require the completion of a separate Form 12171 for each contact. See IRM 25.17.3.10.1, Third Party Contacts.

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 IRS serves a wage levy against the debtor for postpetition debts, the levy should state it reaches only those wages which exceed the payments to the trustee.

B.      Pre-Levy Notice. IRM 25.17.3.6, Collection Due Process (CDP) Cases, provides information on debtors' rights, including pre-levy notice when levy action is under consideration for postpetition tax debts.

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. IRM 25.17.4.1; IRM 25.17.7.14; and IRM 25.17.13.7.1. give additional information on property of the estate.

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. IRM 25.17.14.4 deals with " OIs" and Exempt or Abandoned Property.

Caution:

Collection from exempt property is prohibited as long as the automatic stay is in effect.

5.       Pension Plans. See IRM 25.17.2.9.1.1(3), Pension Plans; IRM 25.17.14.4., "OIs" and Exempt or Abandoned Property. and IRM 25.17.14.4.1, Collection from Exempt or Abandoned Property.

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 October 22, 1994 , the effective date of the Bankruptcy Reform Act (BRA), unless the Tax Court petition period is suspended by the automatic stay. See IRM 25.17.4.2.1, BRA 94 and its Effect on Assessments.

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 IRS will never receive less than the original statute plus 60 days for an ASED extension, or the original statute plus 6 months for a CSED extension.

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) TIN Indicators.

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 ( SSN ), then Service personnel handling the account(s) must know to which individual's SSN the CSED extension and freeze code apply. CSED Indicator Codes make this identification possible. An Individual Master File (IMF) CSED taxpayer identification number ( TIN ) indicator is input as part of the transaction data of the TC 520.

D.      CSED Indicator Codes. The CSED TIN indicator is input by the Insolvency Interface Program (IIP) during initial processing. The indicator codes can also be input manually (i.e., as part of the manual TC 550 extensions in bankruptcy). The applicable IMF CSED TIN indicator codes are P — indicating the CSED applies to theprimary TIN ; S — indicating the CSED applies to the secondary TIN ; and B — recording the CSED applies to both TINs.

Note:

The TC 520, with the appropriate closing code and the CSED TIN indicator, can alert IDRS users which taxpayer spouse is in bankruptcy and to whom of the taxpayers the CSED extension applies. These indicators help the Service, during routine collection actions (e.g., a levy under consideration against a spouse's wages), to avoid a violation of the automatic stay. The indicators are particularly helpful to Service employees when community property issues arise.

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 IRM 25.17.3.4.1.1, Community Property, and IRM 25.17.14.6.1, Joint Account and Non-Debtor Spouse.

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 ( CNC ) closure based on financial data (TC 530 cc24 through 32) need not have the CSED for the non-petitioning spouse protected.

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 IRS , including:

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 October 22, 1994 , in most cases, the automatic stay for assessment of any tax, including original tax returns, adjustments, Trust Fund Recovery Penalty (TFRP), and agreed audit deficiencies no longer applied.

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 October 22, 1994 , the automatic stay does not prohibit the IRS from assessing any tax where the Service would not be required to issue the taxpayer a statutory notice of deficiency. These include 1) the taxpayer's self-assessments arising from filed returns; 2) agreed audit deficiencies; 3) Trust Fund Recovery Penalty (TFRP) assessments; and 4) audit deficiencies where the statutory period for petitioning the Tax Court has expired prior to the filing of bankruptcy.

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 October 22, 1994 , I.R.C. § 362(a)(8) stays the taxpayer from filing a Tax Court petition, and I.R.C. § 6213(f)(1) suspends the taxpayer's time for filing a Tax Court petition for the period of the automatic stay plus 60 days thereafter. Accordingly, for taxpayers with an outstanding notice of deficiency, the ASED is suspended as a result of the bankruptcy petition.

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 ( INS ), the examination function will make a timely determination if any returns of the taxpayer are under examination, and, if not, whether an examination will be made because of this notification.

2.       EXAM ( INS /AIMS) and INSOLVENCY (AIS). Since INS is an interface between the Automated Insolvency System (AIS) and Exam's Audit Information Management System (AIMS), its effectiveness depends upon both systems having current information. For INS to function as designed, Insolvency must enter date information timely on AIS, such as petition, bar, conversion, dismissal, and discharge dates. All actions taken on the case should be input on the system as the events occur, including all case closing actions.

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. INS does not pick up bankruptcies filed in geographical areas outside of where the primary examination case is assigned. As a safeguard, Insolvency must run IIP Process D to detect the —L freeze, which indicates accounts selected for an audit and which may require interoffice coordination.

C.      Alternatively, or, in addition, access to the Automated Insolvency System (AIS) (read only capabilities) can be granted to the examination function. IRM 25.17.5.5, Insolvency Interface Program (IIP), and IRM 25.17.5.5.1(1)(c) address timeframes.

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 IRS has a right to offset credits owed to a taxpayer against debts the taxpayer owes to the Service. This right is codified in I.R.C. § 6402 and related Treasury Regulations. The Bankruptcy Code preserves the Service's non-bankruptcy rights to setoff in 11 U.S.C. § 553.

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 IRM 25.17.4.3.3(2), Postpetition Credits and Prepetition Debts.

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 IRM 25.17.6.2.2, Cursory Review.

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 IRM 25.17.4.3.2, Table — Credits, Refunds, Offsets, of this section.

 .        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 IRS employee (outside of Insolvency), receives an inquiry regarding a refund, credit, or offset issue on a debtor whose bankruptcy case is still active (i.e., open TC 520), the employee must promptly contact the Insolvency office assigned to the case for resolution. Insolvency actions will depend on the bankruptcy chapter, the petition date, when the credit became available, and standing orders or local rules in effect in a specific bankruptcy court.

10.   Refund Considerations/Problems: Insolvency must consider issues surrounding potential refunds for accounts under bankruptcy protections such as:

·         a FMS /TOP offset potential exists

·         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.
(2) Credit must be applied to any non-dischargeable tax, penalty, or interest due.
(3) Any balance must be refunded to the trustee or the debtor, per local guidelines.

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.
(2) If a prepetition tax liability is identified, sufficient credit must be retained to satisfy the liability. (3) The balance (if any) is refunded to the trustee. (4) A letter should be sent to the trustee advising of the Service's right of setoff and the amount of funds, if any, available for the estate.

A claim is required…


(1) If a refund is available, and Insolvency determines the refund should be used as a setoff, the amount being retained for setoff must be indicated on the proof of claim. See IRM 25.17.4.3 (6), Refund Determination.

Reminder:

In general, prior to a Ch 11 or 13 confirmation, a refund may be retained to preserve the IRS 's future setoff rights, but the Service cannot make a setoff while the stay is in effect without permission of the court. Notice of retention of a refund should be given on a promptly filed claim or amendment. See IRM 25.17.4.3(6) and (7).

Chapter 12 and Chapter 13 plans have been confirmed...


(1) Local guidelines should be followed to seek a refund offset. See IRM 25.17.4.3(6), Refund Determination.

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.


(2) Local guidelines will direct if a transaction code should be input to hold the refund, if applicable. (3) If the lifting of the stay is not requested and the plan is not in default, the Service will generally request a prompt refund be issued, either to the trustee or debtor, per local guidelines. If the refund is to be retained, concurrence must be received from Counsel.

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) IRM 25.17.4.3(3), Violations of the Automatic Stay,provides guidance. IRM 25.17.4 3 (3)(b), Erroneous No Liability Case deserves special attention.
(2) Corrective actions must be initiated within two workdays of discovery of such an offset.
(3) If appropriate, an expedited manual refund should be requested to go to the trustee or debtor.
(4) Insolvency must monitor the case to ensure duplicate refunds are not issued.
(5) After offset correction is made, should a balance due exist, Insolvency must file a proof of claim if the bar date has not passed. If too late, Counsel advice should be sought.

Note:

Also see IRM 25.17.4.3.4.1, FMS /TOP Offsets,and IRM 25.17.4.3.5, Federal Payment Levy Program (FPLP).

3.       Language for Claiming Setoff Amounts. IRM 25.17.6.5.1.1, Language for Setoff, provides wording to include on the proof of claim when the Service is claiming a right of setoff.

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. IRM 25.17.4.3(1) and (2) address the Service's right of setoff.

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 IRM 25.17.7.5, Automatic Stay, and IRM 25.17.14.8(1), Preventing Violations of the Discharge Injunction. (5) below discusses an exception to this general rule.

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 IRM 25.17.4.15(6), Payments Received on a Pre-Existing Installment Agreement.

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...


(1) If standing orders or local rules /agreement allow: Application of a credit to prepetition tax period(s) can be made pursuant to such rules or orders. In Chapter 7, application should be made to non-dischargeable period(s).
(2) Otherwise, if no standing orders or local rules apply, the credit can generally be applied to postpetition tax period(s). Counsel may be consulted, if necessary.
(3) If actual offset might be deemed a violation of the stay, Insolvency should consider retaining the refund and sending a referral to lift the stay to allow an offset.
(4) Any remaining balance must be refunded to the trustee or debtor pursuant to any local procedures or agreements.

The automatic stay is not in effect...

(1) The credit should be applied to non-dischargeable prepetition tax, penalty, and interest.
(2) Application should be to postpetition tax periods.
(3) Any excess must be refunded to the debtor.

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.
(2) After 20 calendar days without further explanation or complaint by the trustee, the credit can be refunded to the debtor.

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.
(2) In Chapter 7 : If the Chapter 7 trustee of an individual debtor requests the refund, it may be allocated on a pro rata basis to the estate as directed by court order.
(3) If a prepetition liability exists, the trustee should be advised of our right of setoff, otherwise:
— Letter 1465 should be issued through AIS to the trustee with copy to the debtor.
— The refund should be issued to the party listed in the agreement made in response to Letter 1465 through AIS.
— If no agreement is reached, a check should be sent to the trustee in the name of the debtor and the trustee.

25.17.4.3.4  (09-01-2004)
Offsets to Other Federal and State Agencies

1.       Introduction. Certain federal and state agencies provide the IRS information about debts owed to them. By statute, outside of bankruptcy, the Service must offset any credits not needed for federal tax liabilities to these agencies. Identification of these cases should be made during initial case processing.

2.       Offset Situations. Offsets may present various situations requiring corrective actions, including those listed below.

A.      It appears upon a preliminary review, the IRS is not currently owed any tax. However, the "no tax" determination may be inaccurate if the IRS made an offset to full pay an IRS balance due account in violation of the automatic stay.

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 FMS database relies on timely notifications from governmental agencies to keep accounts information accurate, reflecting eligibility for offsets. When an offset to another federal/state agency does occur, it may be that the FMS database does not reflect current/accurate information from that agency, thereby resulting in violations of the automatic stay.

A.      If the debtor contacts Insolvency for help, Insolvency is required to take the appropriate steps listed in IRM 25.17.4.3.4.3, Referral of Taxpayer to FMS , to assist the debtor. Often, the correct response from Insolvency is to refer/direct the taxpayer promptly to the agency (if known) who has the refund, or, if not, to FMS .

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 ( FMS ) to combine the Tax Refund Offset Program with the Treasury Offset Program (TOP). The IRS no longer maintains the Debtor Master File (DMF) program to offset tax overpayments to non-tax child support or federal agency debts. FMS now offsets tax refunds to these debts through TOP when legally appropriate. The program is known as the TOP Offset Program.

2.       Treasury Offset Program (TOP) Offsets. FMS initiates refund offsets to outstanding child support or federal agency debts. These offsets are referred to as TOP offsets. A TOP offset is generated on the module as a TC 898 with an offset trace number (OTN), an offset amount, and a debtor- TIN field which is present if the offset is for a secondary spouse.

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 IRS has certified a refund to FMS for payment (TC 840/846 on account), but before FMS direct deposits or mails the refund check. A TOP offset reduces the amount of the IRS refund by the amount of the TC 898 offset. TOP offsets can occur against either or both SSNs on a FS02, married taxpayers filing a joint return, so one or two TC 898s may be input for each TC 840/846 refund issued, one with and one without a debtor TIN .

Note:

Customer Service Handbook 21.4.6 provides additional information on the program. Document 6209, ADP and IDRS Information , serves as a source for additional transactions and reason codes.

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 FMS whether the refund is eligible for offset by TOP.

·         Systemic Inputwhen 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 ( IRS ) tax accounts).

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:

IRS does not provide information on the specific agency.

B.      FMS Help Desk. If the taxpayer does not know the name of the agency, Insolvency will tell the taxpayer to call the FMS Help Desk 1–800–304–3107 , which can provide assistance to the taxpayer on the TOP Offset/refund offset issue.

C.      TOP Notice to Taxpayer. When a taxpayer's refund is offset for child support or a federal agency debt, FMS issues a TOP offset notice to the taxpayer. The notice includes the name, address, and phone number of the agency and the telephone number of the FMS Help Desk. It will be helpful for debtors to have this information at hand when they call the FMS Help Desk.

3.       Complaint to Proper Agency. The majority of complaints involving TOP offsets require the agency receiving the offset to make the refund, and the IRS is generally not involved. Any resulting legal dispute is between that agency and the debtor, and not the IRS .

25.17.4.3.4.4  (09-01-2004)
Referral to Adjustments

1.       Insolvency Referral – When IRS has Violated the Stay. When it is appropriate and within proper guidelines, Insolvency will make an expedited referral to Adjustments when the Service has made an illegal offset (applying a debtor's refund against a tax debt) in violation of the automatic stay. In this case, the IRS is considered the offending agency.

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 RAL issuer receives the same level of information about the type of debt.)

3.       Indicators Updated by FMS . The FMS TOP indicator, the DDI, is based strictly on the existence of a debt at the time of filing, which is obtained from a file, supplied by FMS (used for diverting credit elections). This indicator is updated weekly, and the debt may be inactivated or deleted within TOP before a refund is issued.

Note:

If the ERO did not issue a RAL , no debt information will be sent. An indicator of (N) means no debt.

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 IRS tax debt and/or a Financial Management Services ( FMS ) –Treasury Offset Program (TOP) non-tax debt, the four indicators are:

·         I— if an IRS tax debt/freeze

·         F— if a FMS -TOP non-tax debt

·         B—if both exist ( IRS and FMS -TOP non-tax debt )

·         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 IRM 21.4.6 to provide quality customer service to debtors and to protect their rights while under the protection of the bankruptcy court.

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 IRS has implemented with the Department of the Treasury, Financial Management Service ( FMS ). Outside of bankruptcy, the FPLP is a program that collects funds due the taxpayer from federal payments (e.g., federal contracts, federal pensions, and Social Security payments). It applies these funds towards federal taxes the taxpayer owes. More federal programs are being added each year by use of a "phase-in" process. See IRM 5.11.7, Automated Levy Program.

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 IRS to levy up to fifteen percent of specified payments continuously. I.R.C. § 6331(h). The FPLP was developed to implement this law.

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 FMS LEVY>1 on the entity screens if at least one module has been selected in the FPLP.

C.      IDRS (ENMOD and TXMOD) displays the indicator FMS >1 on the entity (ENMOD) screens if at least one module has been selected in the FPLP.

D.      Each tax module (TXMOD, I/BMFOLT) also displays the following:

·         FMS LEVY/CD>1 Currently not included in the FPLP, however, at one time the module was included for FPLP

·         FMS LEVY/CD>3 Currently included in FPLP (TC 971 AC 060)

·         FMS LEVY/CD> (other alpha/numeric code) Current or pending block from FPLP

5.       Action Codes. Tax liabilities sent to FMS for levy under the FPLP can be identified by 97X action codes listed below:

·         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 FMS matches a federal disbursement with a delinquent module, a TC 971 AC 062 posts. TC 971 AC 062 also indicates a levy has been issued.

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 FMS but not matched, the input of the TC 520 should reverse the module in time to prevent a levy action (TC 972/060).

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:

FMS is the levy source for all levies issued through the FPLP — not the federal payment agencies.

25.17.4.4  (09-01-2004)
Sale of Property

1.       This portion of IRM 25.17 contains the procedures to follow when motions are received for the sale of property of the estate. Also see IRM 25.17.7.10, Subordination of Federal Tax Lien , and IRM 25.17.7.11, Sale of Property by the Trustee.

25.17.4.4.1  (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 IRS . In such cases, Insolvency should consider giving conditional consent under I.R.C. § 7425(c)(2), based upon immediate payment to the IRS of the lien equity in the property being sold.

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 IRS , rather than the debtor, may be entitled to proceeds of the sale because exempt property remains subject to filed tax liens.

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 IRS may be requested to provide a Certificate of Discharge of the property from the lien. The federal tax lien will then no longer attach to the specific piece of property being sold. The certificate can be provided unless a legitimate reason exists not to do so. Insolvency should request:

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 IRS to issue a written communication, often a Form 10492, Notice of Federal Taxes Due, to the escrow company so the Service will be paid directly from the escrow funds. Other trustees make the demand to the escrow company directly so all funds flow through them for disbursement to the creditors. In either case, Insolvency must advise the trustee of the amount necessary to satisfy the Service's secured claim so a release of the lien can be filed or a certificate of discharge provided.

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 IRS 's claim and the Chapter 13 plan including amendments or modifications as well as the order confirming the plan. The preparation of Form 10492 varies depending upon the facts of a particular case, but most fall into one of the following scenarios:

A.      The IRS has an allowed secured claim, and the Service's claim is over secured. See IRM 25.17.6.5.1(5). The confirmed plan makes no provision for payment of the secured claim with post petition interest under 11 U.S.C. § 506(b). Form 10492 should include post petition interest computed at the IRC rate against the total amount of the secured claim, less any post petition plan payments received from the trustee and allocated to the secured claim.

B.      The plan contains a provision for payment of the IRS 's secured claim at a specific interest rate. Form 10492 should compute post petition interest on the amount provided for in the plan at the interest rate set forth in the confirmed plan. Command code COMPA should not be used to compute post petition interest unless the plan specifies the IRC rate of interest will be used. Post petition payments from the trustee allocated to the secured claim must be deducted.

C.      The plan provides for payment of the IRS 's secured claim for less than is shown on the IRS 's proof of claim. The Insolvency caseworker should consult with Counsel to determine if the Service is bound by the terms of the confirmed plan or if the Service may insist upon payment of the amount shown on its secured proof of claim.

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 IRS 's lien to attach to the proceeds of the sale; or
• file a motion for relief from the stay to allow the IRS to issue Form 10492 to be paid prior to confirmation of the plan.

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 IRS may be allowed to issue Form 10492 for the full amount of the post petition liability including accruals. If the plan specifically provides the subject property will be sold or refinanced to fund the plan, the IRS may be prohibited from making an escrow demand for the post petition taxes unless sufficient equity exists to pay all of the debtor's prepetition claims and post petition tax debts. Counsel should be consulted in those cases. Insolvency may consider issuance of a Certificate of Discharge or Subordination under IRC 6325 for the NFTL related to the post petition taxes.

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 IRS would have received in a Chapter 7 bankruptcy proceeding; or

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 IRS examination per 11 U.S.C. § 505(b).

2.       Prompt Determination Requests. A trustee in a bankruptcy proceeding may ask the IRS to make a prompt determination of any unpaid liability of the estate for any tax incurred during the administration of the case. The trustee can request this by submitting a tax return and requesting a prompt determination of that return.

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 IRS Address. Pursuant to Bankruptcy Rule 5003(e), the clerk of each bankruptcy court is required to keep a register of the local government offices, including that of the IRS . Each Insolvency office should ensure the local bankruptcy clerk maintains the most current and correct Insolvency office address in its mailing matrix. See IRM 25.17.5.2.2, 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: " COPY ONLY – FURNISHED PER REV . PROC. 81–17. " Insolvency must verify the return sent to them is a copy. If an original return is received, Insolvency must duplicate it, furnish a copy (so marked) to the examination function, and immediately forward the original for normal processing to the Campus.

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 IRM 5.8, Offer in Compromise. Administrative and legal problems would be created if a tax liability were simultaneously the subject of a court-supervised bankruptcy case and the administrative offer in compromise process.

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 IRM 25.17.11.5.2, 25.17.12.6, or 25.17.13.5.5 depending upon the type of bankruptcy case filed.

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 IRS 's position on the processing and consideration of OICs in bankruptcy-related situations, :

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 IRS files in a bankruptcy proceeding will be a tax claim. The Service's policy on treatment of an accepted administrative OIC for specific bankruptcy chapters when payments have not yet been completed is discussed below.

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. IRM 5.8,Offer in Compromise, provides additional information on administrative OICs. Counsel should be consulted for assistance and legal advice on case-specific issues on an as-needed basis.

9.       Communication. A contact list has been established between Insolvency units and other IRS offices who work on bankruptcy-related cases, including OIC groups and Campuses, to facilitate communication among these units. The list should be updated periodically to remain an effective communications tool for employees who work administrative OICs and bankruptcies.

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 IRM 11.3.28.8, Disclosure of Return Information...Concerning Nontax Criminal Violations .

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 IRM 25.17.4.8.2 (below).

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 IRS (e.g., to revenue officers).

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 IRM 25.17.6.11, Criminal Investigation (CI) Involvement .

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 IRM 25.17.4.9.1(2), AIS-Generated Reports,and IRM 25.17.5.4, Automated Insolvency System (AIS).

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 IRM 25.17.4.9.1, Resolution of Unpostables/AIS Lists.

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 IRM 25.17.4.9.1.1, Nullified Distribution Lists.

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, ADP and IDRS Information, lists the conditions causing unpostable transactions.

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 IRM 25.17.4.9(4), Weekly Nullified Distribution Lists.

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 IRS representation in bankruptcy court, either to respond to actions or to initiate actions. All such cases will be referred to one of the offices as listed in IRM 25.17.4.11.1 (see below).

Note:

All referrals must provide the debtor's TIN (s) in full (not redacted).

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). IRM 25.17.4.11.2 concerns referrals made to SAUSAs in Associate Area Counsel (SB/SE) and IRM 25.17.1.2.1 discusses the role of Associate Area Counsel.

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 IRS ’s proof of claim is less than $1 million , includes the following:

A.      motions on behalf of the IRS , objections to plans based on the debtor's failure to file tax returns and responses to the debtors' objections to unassessed (estimated) claims filed by the IRS in cases where the debtor failed to file an income tax return;

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 IRS claims where the debtor disputes whether the tax was paid or return was filed;

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 IRS Counsel as had been the practice prior to the Direct Referrals Program.

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 IRS functions to ensure timely processing. Listed below are the cases to be referred when one or more of the listed circumstances are present.

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 TIN records of the AIS database.

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 TIN , LTS generates a weekly Report of Refunds when a docket is open on AIS, a module has a current —V or —W freeze condition, or a TIN is added to the Manual Refund data screen for possible refund. IDRS overpayment information is added weekly to AIS menu Option 10. See IRM 25.17.4.3.1, Manual Refunds — Form 5792 and IRM 25.17.11.3.6, Compliance Monitoring.

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 TDI suppression criteria.

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 IRM 25.17, Insolvency may consider requesting a Motion to Compel the debtor to file the returns. As an alternative, a Motion to Dismiss may be filed, but a dismissal request can become more problematic in a Chapter 13 case after confirmation has been granted.

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, IRM 25.17.2.9.1.2, A Valid Tax Return, can be referenced.

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 IRS 's policy not to take collection action when an Innocent Spouse claim is pending, the Service generally will not make setoffs while an Innocent Spouse claim is pending. However, in cases when both Innocent Spouse claims and bankruptcies are pending, specific bankruptcy procedures should be followed as an exception to this general policy. In such cases, the Service will claim secured status on its proof of claim based upon any setoff rights it may have.

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 TIN (e.g., TIN invalid), the account must be transferred to Non–Master File (NMF) and not to MFT 31.

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 ( ESP ) will contact Insolvency with their determination of the Innocent Spouse Claim and coordinate the necessary actions to request the transfer to MFT 31.

B.      Transaction Codes Identified to Examination. Insolvency will then identify for ESP the transaction codes to be transferred from the joint MFT 30 module to MFT 31 for the taxpayer/debtor in bankruptcy.

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 ESP . ESP will then be allowed to reverse the TC 520 on the MFT 30 module. Once the temporarily lift of the bankruptcy freeze takes place, ESP can process the Innocent Spouse Claim.

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 ESP the authority for re-input of the TC 520 to the MFT 31 module on the spouse in bankruptcy.

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 ESP on the module(s) protected under bankruptcy.

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 ESP MFT 31 area should be identified as a " Partial Request "

·         Additional Form 3177 — Insolvency must prepare an additional Form 3177 advising ESP they are being granted the authority to re-input the TC 520, using the same transaction date and closing code originally input to the MFT 30 module

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 ESP should coordinate closely to take the necessary and appropriate actions.

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 IRS Restructuring and Reform Act of 1998 (RRA 98), the Service can no longer obtain waivers of the statute of limitations (Form 900) for collection except in two situations: one being in conjunction with a valid installment agreement, and, the other, a release of a levy.

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. § 301.6159 –1(c) and (c)(2)(i).

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. § 301.6159 –1; IRM 5.14.8; and

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 IRS ). See IRM 25.17.4.3.3(5), Voluntary Payments – Guidelines.

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.

 

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