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Common Issues | |||||||||
Part 25. Special
Topics
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Chapter 17. Bankruptcy
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Section 4. Common
Bankruptcy Issues
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25.17.4 Common Bankruptcy Issues
- 25.17.4.1
Property
of the Estate
- 25.17.4.2
ASED/CSED
- 25.17.4.3
Credits,
Refunds, and Offsets
- 25.17.4.4
Sale
of Property
- 25.17.4.5
Preferences
- 25.17.4.6
Bankruptcy
Court Tax Determinations — 11 U.S.C. § 505
- 25.17.4.7
Offers
in Compromise and Bankruptcy
- 25.17.4.8
Bankruptcy
Fraud
- 25.17.4.9
Unpostables
- 25.17.4.10
Failure
to Pay Tax Penalty and Failure to Pay Estimated
Income Tax Penalty
- 25.17.4.11
Referrals
– Representing IRS in Bankruptcy Court
- 25.17.4.12
Litigation
Accounts Management System (LAMS) and Litigation
Transcript System (LTS)
- 25.17.4.13
Unfiled
Returns
- 25.17.4.14
Innocent
Spouse Claims and Bankruptcy
- 25.17.4.15
Installment
Agreements and Bankruptcy
25.17.4.1 (09-01-2004)
Property of the Estate
1.
The Bankruptcy Estate. The
filing of the bankruptcy petition creates the
bankruptcy estate. The estate consists of all of the
debtor’s interests in any property at the time the
case is filed. 11 U.S.C. § 541(a)(1). It also
encompasses the interest of the debtor and the
debtor's spouse (the non-debtor or non-petitioning
spouse) in community property states. 11 U.S.C. §
541(a)(2). See
2.
After-Acquired Property. In
a Chapter 12 or 13 bankruptcy, after-acquired
property, including wages
and income, becomes property of the
estate, as does after-acquired community property.
11 U.S.C. §§ 1207 and 1306. In general, some
property, especially wages or other income used to
fund the plan, may continue to be property of the
estate after confirmation.
3.
Counsel Guidance. Complex
issues surround what constitutes the property of a
bankruptcy estate. Counsel should be contacted for
guidance when case-specific issues initially arise.
25.17.4.1.1 (09-01-2004)
Levies and Bankruptcy
1.
Introduction. A levy served prepetition on a taxpayer who
subsequently files for bankruptcy protection may
lead to a hearing in bankruptcy court. Indeed, an
2.
Levies and Insolvency. Pursuant
to United States v. Whiting
Pools, Inc., 462 U.S. 198 (1983), property,
whether tangible or intangible, levied
upon prepetition but not
transferred to the
A.
Levy Funds Not Received By Petition Date. Accordingly,
if an
B.
Prepetition Seizure. Any
tangible
property seized prepetition, but not sold
prepetition, is property of the bankruptcy estate
subject to turnover. The
C.
Levy Funds Received Prepetition. When
the
Note:
However, such a payment may be subject
to recovery by the estate as a preference.
See
3.
Right to Adequate Protection. The courts generally recognize the Service's
right to adequate
protection when
a levy is issued prepetition. The levy provides the
4.
Prepetition Levy/Postpetition Levy Payment. Payment(s)
received after a bankruptcy has been filed (postpetition),
based on a prepetition
levy, should be returned, unless the
5.
Timeframe for Corrective Actions. Corrective
actions must be initiated within two
workdays of
the date the Service becomes aware of the payment.
Return of the payment will be expedited per local
guidelines, to either the trustee or the debtor,
using Form 5792 (manual refund) procedures. See
6.
Third Party Contact — Levy Release. Whenever
Insolvency handles a release of levy, Form 12175
must be completed. A
release of a levy is considered to be a third party
contact. Form
12175 is the source of the third party contact list
provided to the taxpayer/debtor.
7.
Form 12175 Completion. On
the date Insolvency completes Form 12175
(instructions are on the reverse of form), the form
should be sent to the Third Party Contact
Coordinator. A copy of the form must be retained in
Insolvency, and the case history must be properly
documented to show action(s) taken.
8.
Chapter 13
– Postpetition Levy Action. In
a Chapter 13 case, if the plan does not provide for
a postpetition tax liability, generally the
postpetition liabilities can be collected (including
by use of levy action) from any asset not dedicated
to the plan. In re
Lambright, 125
B.R. 733 (Bk. Ct. N.D. Tex. 1991). However,
Insolvency must follow local rules/agreements or
standing orders impacting this position.
A.
Levy Language for Postpetition Tax Liabilities. If
wages and future earnings of the debtor are
designated to fund the plan, and the
B.
Pre-Levy Notice.
Caution:
The
automatic stay may prohibit collection of
postpetition tax liabilities after confirmation of
the Chapter 13 plan. Counsel should be consulted for
legal advice because judicial districts differ as to
which assets (if any) are protected property of the
estate after confirmation.
9.
Documentation. All actions taken on a federal levy matter,
while the debtor is under the protections afforded
by the Bankruptcy Code, must be timely and
accurately documented. Insolvency's documentation on
a case may be used in bankruptcy court.
Note:
Although a new bankruptcy case filing
may not be loaded on AIS at the time a levy issue is
handled by Insolvency, all documentation on the
matter should be transferred to the AIS history
screen at the earliest possible date.
10.
Counsel Assistance. Insolvency
should contact Counsel for assistance on problematic
levy issues arising during the pendency of a
bankruptcy. Levy concerns must be addressed under
strict timeframes so the debtor's rights are
protected. The Service may be held liable for
damages if violations of the Bankruptcy Code (11
U.S.C.) occur.
25.17.4.1.2 (09-01-2004)
Exempt and Abandoned Property
1.
Exempt Property. "Exempt
property" is excluded by state or federal law
from the estate and cannot be liquidated by the
trustee. Exempt property is not liable for any debts
of the debtor except alimony, security interests, non-dischargeable
tax debts, and dischargeable taxes secured by a
Notice of Federal Tax Lien.See 11 U.S.C.
§ 522.
2.
Individuals and Exempt Property. Only
individuals may claim exempt property. Debtors must
select either federal or state exemptions; selection
from both is not permitted.
A.
Federal or State Exemptions. The
election between federal and state exemptions is
permitted unless the state in which the debtor
lives, by law, specifically prohibits election. In
those states, the debtor is allowed only those
exemptions provided by state law.
B.
Spouses.
In the case of a husband and wife whose estates are jointly administered,
the debtors are not permitted to elect different
exemption options.
C.
Federal Exemptions . 11 U.S.C. § 522(d) lists the federal
exemptions available to the debtor.
3.
Abandoned Property. "Abandonment"
severs a bankruptcy estate's interest in property.
Under the Bankruptcy Code, the bankruptcy court may
permit the trustee to abandon any property of the
estate that is burdensome or of inconsequential
value to the estate.
A.
Affirmative Abandonment. The
trustee may actively abandon property, or a party in
interest may request abandonment. The trustee may
abandon the property to the debtor or to a party
with a possessory interest. Notice of hearing is
required.
B.
Administrative Abandonment. If
the property is listed in the schedule of assets,
but is not administered by the trustee, then it is
abandoned to the debtor upon closing of the estate.
4.
Lien Rights.
Discharged taxes may be collectible from exempt or abandoned property if a
prepetition NFTL has been properly filed and
recorded. 11 U.S.C. § 522(c)(2)(B). Collection from
such property will be made only after Insolvency has
made a determination the property is available for
collection and collection actions are appropriate.
Caution:
Collection
from exempt property is prohibited as long as the
automatic stay is in effect.
5.
Pension Plans. See
25.17.4.2 (09-01-2004)
ASED/CSED
1.
Automatic Statute Computations. Master
File computes appropriate statute extensions for
assessment and collection in most instances when the
TC 521 posts (reversing the TC 520 bankruptcy freeze
code).
Note:
The statutory period for assessment
is not affected by bankruptcy for cases filed after
2.
Suspension Timeframes.
A.
Assessment Statute Expiration Date (ASED). On
bankruptcy cases with a petition date before the
enactment of BRA 94, the running of the statutory
period for assessment (ASED) is suspended during
the period the assessment is prohibited (while the
automatic stay is in effect) and for 60 days
thereafter. I.R.C. § 6503.
B.
Computation of a New ASED. To
compute a new ASED, 60 days are added to the
unexpired time (number of days) remaining on the
original statute as of the petition date. Then that
amount of time is added to the date of discharge or
dismissal (or the date the stay was lifted) to
establish the new ASED. (For ASEDs on examination
cases, Compliance examination should be consulted.)
C.
Collection Statute Expiration Date (CSED).
The running of the statutory period for collection (CSED)
is suspended for the period
collection is prohibited (while the automatic stay
is in effect) plus six months. I.R.C. §
6503.
D.
Computation of a New CSED. Computation of a new CSED is similar to an
ASED computation. Six months are added to the
unexpired time (number of days) remaining on the
original statute as of the petition date and that
total is added to the discharge or dismissal date
(or the date the stay was lifted) to establish the
new CSED.
Note:
The
3.
CSED Recomputation – Manual Input of TC 550.
A.
For
Non–Master File (NMF) accounts, a manual input of
TC 550 is necessary.
B.
The input
of a TC 550 must be timely input (for example, when
the court grants a discharge or dismisses a case).
C.
The
presence of a TC 520 in the module will not prevent
TC 550 from posting.
D.
If a TC 550
is input to a module with an unreversed TC 520 with
a bankruptcy closing code, automatic computation of
the CSED when the TC 521 posts will not occur.
Generally, no TC 550 is necessary to update the CSED
on modules to which a TC 520 was input after July
1986 and a TC 521 was input after January 1987.
4.
CSED — Individual Master File (IMF)
A.
Posting of CSED. The CSED for a tax module is displayed on IDRS.
This information is invaluable to Compliance
employees in determining the time remaining on a
collection statute (i.e., if collection actions may
be taken on a delinquent account).
B.
CSED and Joint Assessments — Both Spouses in Bankruptcy. With
the filing of a bankruptcy petition and the
subsequent input of a TC 520, the CSED is extended.
However, if the tax module is for an IMF joint
assessment, the statute is extended against both the
husband and the wife, only
if both have
filed bankruptcy.
C.
CSED and Joint Assessment — Only One Spouse in Bankruptcy. If
only one spouse files bankruptcy, and the joint (prepetition)
tax return was filed under the non-petitioning
spouse's Social Security Number (
D.
CSED Indicator Codes. The
CSED
Note:
The
TC 520, with the appropriate closing code and the
CSED
5.
CSED Protection — OI For Non-Petitioning (Non-Debtor) Spouse. When
considering collection from a non-petitioning
spouse, an Other
Investigation (OI) may be appropriate.
However, as long as plan payments are sufficient to
satisfy the claim, collection activity outside of
bankruptcy and against the non-petitioner's spouse
may not be warranted. To protect the collection
statute, Insolvency must be aware of CSED problems
that may develop on the non-debtor spouse. See
Caution:
In
community property states, local Counsel advice
should be sought before taking collection action
against a non-debtor spouse.
6.
OI Potential. If, at the time a bankruptcy petition is
filed, a case is assigned to an RO, an OI may be
initiated to ensure continuity of case actions and
to protect statute expirations.
A.
Chapter 11 — Individuals. As individual Chapter 11 cases typically
involve large dollar accounts and are less likely to
have a confirmed plan, an OI for collection against
a non-petitioning spouse is generally appropriate.
B.
Chapter 7.
OIs are particularly useful in Chapter 7 cases (for example, investigating
exempt and abandoned property and lien equities).
C.
Queue CSED Expirations. Protection
of the CSED on a non-petitioning spouse is
unnecessary if the case will, absent the bankruptcy,
expire in the queue (where IDRS accounts are
maintained in a "Hold" file and assigned a
lower priority status than current accounts).
Likewise an account with an unreversed
currently-not-collectable (
25.17.4.2.1 (09-01-2004)
BRA 94 and Its Effect on Assessments
1.
BRA 94.
The Bankruptcy Reform Act (BRA 94) brought about significant changes
affecting the
A.
Sovereign Immunity. BRA
94 waived the government's sovereign
immunity against judgments in connection
with enumerated provisions (preferences, violations
of stay, etc.). However, sovereign immunity remains
in effect on the awarding of punitive damages, and
attorney fees are capped.
B.
Assessments Allowed. Before
BRA 94, the Bankruptcy Code prohibited assessment of
a tax liability unless the court granted relief from
the automatic stay. After
Note:
Deficiencies in which the statutory
period for petitioning the tax court has expired prior
to the bankruptcy petition can also be
assessed.
2.
Impact on ASEDs. BRA
94 has had an impact on ASED computations. In most
cases, the stay of assessment and suspensions of the
Assessment Statute Expiration Date no longer
applies, beginning on or after the effective date of
BRA 94. The Service must now take timely action to
protect the ASED whenever this is applicable. See
(b) below and also (3) and (4).
A.
Most Taxes Can Now Be Assessed. For
debtors who filed bankruptcy on or after
B.
Unagreed Audit Deficiencies. On
unagreed audit
deficiencies, the ASED is computed from the date of
issuance of a statutory notice until the date a TC
521 is input at the close of the bankruptcy.
Examination is responsible for the input of the
transaction code to suspend the ASED.
Note:
Computation of the ASED for audit cases
is made by the examination function.
3.
Tax Court and ASEDs. For
taxpayers who filed bankruptcy on or after
4.
Consent to Extend ASED. Under BRA 94, the Service may obtain a valid
consent to extend the statute of limitations on
assessment from entities in bankruptcy. A TC 560,
input by examination, indicates an extension of the
ASED.
25.17.4.2.2 (09-01-2004)
Examination and Insolvency
1.
Insolvency Notification System. Using
the Insolvency Notification System (
2.
EXAM (
3.
Examination Contacts to Insolvency. If
an examination is open, a Compliance examination
employee will:
A.
contact the
responsible Insolvency employee; but
B.
continue
with established examination bankruptcy procedures;
and
C.
advise
Insolvency of any proposed exam-initiated
deficiencies or adjustments that might result in a
refund or a credit to the taxpayer. This should be
done at the earliest
possible time before the bar dateby
sending Insolvency a memorandum, or a locally
developed form (along with a copy of the transmittal
letter to the examination report), or a copy of the
Revenue Agent Report (RAR).
Note:
Insolvency will not perform a periodic
follow-up with the examination function.
Responsibility to notify Insolvency rests entirely
with the examination function.
4.
Exam's " HOLD" File. The
examination function establishes a "HOLD"
file of cases for which a statutory notice has been
issued, and assessment is stayed because a Tax Court
petition cannot be filed under 11 U.S.C. §
362(a)(8). Periodically, Examination transmits a
list of these cases to Insolvency.
A.
Timeframe for Insolvency to Contact Exam. Within
five workdays of
receipt of the exam list, Insolvency will advise the
examination function which assessments (if any) can
be made. Insolvency's response will show the date
the stay was lifted, if applicable.
B.
Determining the —L Freeze.
C.
Alternatively,
or, in addition, access to the Automated Insolvency
System (AIS) (read only capabilities) can be granted
to the examination function.
5.
Insolvency Follow–Up/Monitoring. Because confirmations take place quickly in some bankruptcies (especially in
Chapter 13), monitoring methods must be established
by Insolvency for cases involving examination
issues. If research indicates one or more tax
periods are being examined, and the assigned exam
function has not contacted the Insolvency group,
Insolvency should contact the exam unit to gather
current information on the status of the audit.
6.
Reminders — Changes Due to BRA 94 — Assessment of Taxes.
·
the Service
is free to make most assessments, notwithstanding
the automatic stay
·
the Service
may assess an agreed tax
deficiency — see 26 U.S.C. § 6213(d)