Overview
Bankruptcy Terms
Bankruptcy Legislation
Bankruptcy Section 6658
Bankruptcy Fraud
Statute of Limitations
Golden Parachute
Definition of "pending"
Chapter 9 Cases
Collection
Delinquent Accounts
Common Issues
IRS Case Processing
Proof of Claim
Chapter 7 Cases
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Chapter 11
Chapter 12
Chapter 13
Closing

25.17.3  Debtors' Delinquent Accounts

• 25.17.3.1   Introduction
• 25.17.3.2   Insolvency's Responsibilities and Authority
• 25.17.3.3   Taxpayer/Debtor Contacts
• 25.17.3.4   Automatic Stay
• 25.17.3.5   Referrals to Insolvency on Bankruptcy-Related Issues
• 25.17.3.6   Collection Due Process (CDP) Cases
• 25.17.3.7   Taxpayer Advocate Service (TAS)
• 25.17.3.8   Revenue Officers and Insolvency
• 25.17.3.9   Trust Fund Recovery Penalty
• 25.17.3.10   Summons and Bankruptcy
• 25.17.3.11   Courtesy Investigations – Insolvency-Initiated

25.17.3.1  (09-01-2004)
Introduction

1.       This section outlines general procedures to be followed by all IRS employees when bankruptcy conditions are present under a variety of account processing situations.

25.17.3.2  (09-01-2004)
Insolvency's Responsibilities and Authority

1.       Responsibilities. Insolvency implements bankruptcy policy guidelines, controls and monitors bankruptcy cases for the IRS , and takes appropriate case actions on all of the bankruptcy cases assigned to Insolvency.

2.       Authority. Insolvency personnel have delegated authority to:

·         prepare and file proofs of claim

·         refer bankruptcy case actions to the Department of Justice or the U.S. Attorney’s Office, either directly or through local Counsel

·         resolve bankruptcy issues administratively

3.       Contacts. Insolvency personnel deal directly with Associate Area Counsel (SB/SE), Department of Justice, Assistant U.S. Attorneys, bankruptcy court employees, trustees, debtors and their attorneys, and IRS employees in other functions throughout the Service.

4.       Advice and Guidance. Insolvency personnel are trained in specific areas of bankruptcy law that deal with tax administration and debtor protection. When confronted with bankruptcy issues beyond the scope of their knowledge and expertise, they are to seek guidance from the local Counsel office.

5.       Directions From Insolvency. Insolvency employees provide directions on bankruptcies to various IRS functions. When other Service personnel contact Insolvency regarding a bankruptcy–related issue, they should comply with the advice and guidance given them by Insolvency. If additional assistance is required, Insolvency employees will contact Counsel on behalf of other IRS employees. See IRM 25.17.1.3, The Role of Insolvency.

25.17.3.3  (09-01-2004)
Taxpayer/Debtor Contacts

1.       Obtaining Pertinent Information. When the Service is advised through oral or written contact a taxpayer has filed a bankruptcy, or issues remain from a prior bankruptcy, pertinent information should be collected to help Insolvency research the issue. Suggested information to gather from the taxpayer are:

A.      the current status of the taxpayer's bankruptcy (i.e., opened or closed);

B.      the date the petition was filed;

C.      the court location where the bankruptcy was filed;

D.      the chapter under which the bankruptcy was filed;

E.      the case (docket) number;

F.      the taxpayer identification numbers (TINs); and

G.     if the case is closed, the method of closure (dismissal or discharge) and the closure date (or general timeframe).

Note:

If a taxpayer responds to a notice of deficiency by sending the Service a copy of the bankruptcy petition, the receiving office must fax a copy of the petition to the Insolvency office handling the case in that bankruptcy court.

2.       Prompt Referral to Insolvency. IRS employees (e.g., Compliance employees, including field revenue officers, examination function employees, or personnel from Campuses), who have contact with taxpayers in bankruptcy and are aware of debtor concerns or complaints, should promptly contact the local Insolvency office (same day notification, when possible). Referral information should be faxed to Insolvency using Form 4442, Inquiry Referral, or by any locally-devised format. Telephonic notification may also be used. All actions must be promptly documented by the Service employees.

3.       TABLE – Actions for Service Employees to Take to Assist Insolvency. The following table explains the actions Service employees should take when a bankruptcy issue exists. These actions will help Insolvency process the bankruptcy case if a new filing has occurred or perform necessary research if issues remain from a prior bankruptcy.

25.17.3.4  (09-01-2004)
Automatic Stay

1.       Automatic Stay . The filing of a bankruptcy petition under any chapter acts as an injunction, or legal prohibition, of further action against the estate, debtor, or property of the debtor. The injunction is called the automatic stay. 11 U.S.C. § 362.

2.       Effective Date. The automatic stay takes effect immediately upon the filing of a bankruptcy petition with the court. 11 U.S.C. § 362.

3.       Factors Affecting IRS Actions. The complexity of bankruptcy laws and differing court procedures obscure what actions are or are not permitted in every case. Variables can impact IRS procedures, including, but not limited to: bankruptcy chapter and court location, name(s) bankruptcy filed under, entities, the type of tax(es), tax periods, local bankruptcy rules, standing orders, prior bankruptcies, and court decisions. IRM 25.17.2.9, The Effect of Bankruptcy on Collection,and other parts of this IRM provide more information about actions that can or cannot be taken by the Service during a bankruptcy proceeding.

4.       Protection of the Taxpayer's Rights. The taxpayer's rights afforded by the Bankruptcy Code must be protected. IRS policy dictates all IRS employees exercise due diligence to ensure the automatic stay is not violated by taking prohibited actions after a taxpayer has filed bankruptcy. 11 U.S.C. § 362. The Service must also prevent violations of the discharge injunction under 11 U.S.C. § 524.

A.      If it is unclear whether a particular action has resulted in a stay violation, Service employees should immediately consult with Insolvency or seek advice from Counsel through Insolvency. The Service at large is charged with preventing violations from occurring and initiating corrections on those that do occur within two workdays.

B.      Most automatic stay violations can be resolved via timely notification to the appropriate Insolvency unit, depending on the status of the account at that point of the bankruptcy filing. Violations generally involve 1) inadvertent lien filings, 2) serving levies on periods protected by the bankruptcy, 3) systemic notices generated prior to notification of the bankruptcy filing, 4) seizure activity, or 5) refund offsets.

5.       Damages and Attorney Fees. The IRS may be required to pay damages and attorney fees (but not punitive damages) when prohibited actions take place after the IRS has been notified of a bankruptcy filing. Damages can be awarded the debtor even though the employee who took the prohibited action was unaware of the bankruptcy filing.

6.       Automatic Stay Prohibitions. Most collection activity taken after a bankruptcy filing is a violation of the automatic stay. The automatic stay prohibits many actions, including:

A.      starting or continuing judicial or administrative collection proceedings for prepetition debts, such as Collection Due Process (CDP) notices and hearings, making seizures (668B) or serving levies (668A, 668W));

B.      verbally requesting payment for tax periods ending before the bankruptcy petition date;

C.      sending notices requesting payment on prepetition periods;

D.      recommending suit or summons enforcement to collect liabilities unless recommended by Counsel and the stay has been lifted;

E.      making a setoff of any debt owed by the debtor that arose before the commencement of the case against any claim made against the debtor;

Caution:

Although a creditor's setoff rights may be protected under 11 U.S.C. § 553, the automatic stay may prohibit the exercise of those rights.

F.      attempting to recover a claim from the debtor that arose before the commencement of the case, including trying to enforce a judgment;

G.     attempting to recover a claim for prepetition debts from community property, even if the claim is against a non-debtor spouse;

H.      creating, perfecting, or enforcing a lien on prepetition periods (lien refiles are allowed); or

I.         retaining prepetition refunds indefinitely without requesting the automatic stay be lifted – other than temporary retention of refunds prior to Chapter 11 or Chapter 13 confirmation, or longer with written Counsel recommendation. See IRM 25.17.4.3, Credits, Refunds, and Offsets.

7.       Impact of BRA 94 on ASED. The Bankruptcy Reform Act of 1994 (BRA 94) expanded the tax exceptions to the automatic stay. In most cases, the stay of assessment and suspension of the Assessment Statute Expiration Date (ASED) no longer apply for agreed cases commencing on or after October 22, 1994 . On unagreed audit deficiencies, the ASED will be determined from the issuance of a statutory notice until the TC 521 is input. Compliance examination function employees are responsible for the input of the transaction codes effective for suspension. See IRM 25.17.4.2, ASED/CSED; IRM 25.17.4.2.1, BRA 94 and its Effect on Assessments; and IRM 25.17.4.2.2, Examination and Insolvency.

Note:

Insolvency will input TC 521s – reversing the freeze code – when appropriate to do so.

8.       Duration of the Stay. The stay against property of the estate continues until the property is no longer property of the estate. The stay of any other act continues until the earliest of the date the case is dismissed or closed by the court, or until a discharge is granted or denied. 11 U.S.C. § 362.

9.       Prepetition Levy Proceeds. If proceeds of a prepetition levy are received by the IRS after a bankruptcy petition is filed, they are property of the bankruptcy estate. Insolvency must be contacted for advice on handling the proceeds. Insolvency may initiate an action to turn the funds over to the trustee or make a referral to Counsel to take legal action for adequate protection when the IRS has such a right. See IRM 25.17.3.5, Referrals to Insolvency on Bankruptcy-Related Issues, and IRM 25.17.4.1.1, Levies and Bankruptcy.

10.   Certain Activities Allowed. The automatic stay does not prohibit the following activities:

A.      an audit to determine tax liability;

B.      the issuance of a notice of tax deficiency;

C.      issuance of a Notice of Determination granting or denying relief from joint or several liability (Innocent Spouse relief), unless the notice is part of a Collection Due Process determination;

D.      the making of an assessment for most taxes and issuance of one informational notice;

E.      securing a tax return;

F.      accepting payments made with tax returns (TC 610) for prepetition years;

G.     refiling a valid prepetition Notice of Federal Tax Lien (NFTL);

H.      beginning or continuing an action or proceeding by a governmental unit to enforce police or regulatory power; or

I.         opening or continuing a criminal action or proceeding against the debtor.

Note:

Since BRA 94, debtors receive one notice of assessment of a delinquent prepetition tax return. Subsequent notices should not be issued. If they are, Insolvency must be contacted immediately.

25.17.3.4.1  (09-01-2004)
Violations of the Automatic Stay

1.       Expeditious Corrective Actions. Actions in violation of the automatic stay must be corrected within a specific timeframe established by the Service and outlined in (2) below. 11 U.S.C. 362. Corrective actions may include the release of prepetition continuous wage levies and expedited issuance of refunds after the Service has illegally offset overpayments to dischargeable tax periods.

2.       Service-Wide Timeframe. The requirement for the Service to take corrective actions is within two workdays of the Service's knowledge of an actual or potential violation of the Bankruptcy Code. When notified of a possible stay violation, Service personnel should immediately telephone or fax Form 4442 , Inquiry Referral, or a locally-devised form to the Insolvency unit assigned to the case.

3.       Documentation. The success of a quality bankruptcy program relies on proper and timely documentation. All information input on a case file must be as accurate and concise as possible. Case histories may become evidence if litigation develops. Also see IRM 25.17.3.4.1.1, Community Property; 25.17.4.3.3, Postpetition Payments and Credits; and IRM 25.17.7.5.1, Payments from Debtors on Dischargeable Taxes.

25.17.3.4.1.1  (09-01-2004)
Community Property

1.       Background. Community property is a form of marital property rights recognized in nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Puerto Rico is also a community property jurisdiction. Spouses in Alaska may elect to have statutory rules apply to some or all of their property. All property acquired during marriage is presumed to be community property. Generally, property acquired as a gift, as an inheritance, or before marriage is considered separate property. However, the specific rules concerning what constitutes community or separate property are governed by state law and vary among jurisdictions.

2.       Community Property and the Bankruptcy Estate. All community property, as of the commencement of the case, under the sole, equal, or joint management of the debtor spouse, becomes a part of the bankruptcy estate, including the interest of the non-debtor spouse. 11 U.S.C. § 541(a)(2)(A). Community property also becomes property of the estate to the extent it is liable for an allowed claim against the debtor. 11 U.S.C. § 541(a)(2)(B).

3.       Impact of the Automatic Stay on Community Property. Because the non-debtor spouse's interest in community property also becomes a part of the estate, the automatic stay bars attempts to collect the non-debtor spouse's separate tax liabilities from community property.

Example:

The wages earned by the non-debtor spouse are presumed to be community property and will most likely be included in the bankruptcy estate.

4.       Counsel Advice. Questions about whether certain community property becomes part of the estate should be directed to Counsel through Insolvency.

25.17.3.5  (09-01-2004)
Referrals to Insolvency on Bankruptcy-Related Issues

1.       Enforcement Action — Potential or Actual. Insolvency receives contacts regarding distraint actions taken against the debtor that remain outstanding and unresolved. Debtors may be aware they are facing imminent enforcement action or such action is pending, and they want to advise the Service of their bankruptcy filing. When an IRS employee outside of Insolvency learns of an enforcement action (e.g., outstanding levy or an open seizure action) and confirms the taxpayer has filed a bankruptcy, the employee must immediately contact the appropriate Insolvency office. See IRM 25.17.3.4(9), Prepetition Levy Proceeds.

2.       Prompt Referral to Insolvency. When a referral to Insolvency is appropriate, the Service employee must promptly notify the Insolvency unit assigned to the court where the bankruptcy was filed. Form 4442, Inquiry Referral, or any locally-devised form, may be faxed for the expedited referral. Telephonic referral may also be done. The Insolvency Locator listing on SERP identifies phone and fax numbers for local Insolvency offices.

3.       Information Required. Service employees are expected to advise Insolvency of pertinent information concerning distraint action(s), including:

·         details about the enforcement action

·         the name, address, telephone and facsimile numbers of any levy source(s)

·         receipt of any levy payment(s) after the petition date

·         knowledge of a possible illegal refund offset learned from the debtor or research from IDRS

·         if a seizure is still open, if expenses are being incurred, and if so, how much

·         additional bankruptcy information as instructed by IRM 25.17.3.3,Taxpayer/Debtor Contacts

Caution:

If a seizure action is to be kept open (with Counsel's written concurrence), Insolvency should be aware of escalating expenses of a seized asset and the amount the Service can expect to receive if the asset goes to sale. For example, the sale of a vehicle will not be justified if high storage costs will result in minimal or no net equity.

4.       Insolvency Actions. Insolvency may direct reversal of a collection action. However, in some cases, seeking relief from the stay, moving for dismissal, or requesting an adequate protection order from the court may be appropriate. Counsel's involvement, through Insolvency, is required on these matters as they arise.

5.       Discharged Periods. Occasionally, balances discharged by the bankruptcy proceeding are erroneously generated back into the collection system.

6.       Corrective Actions. When the Service receives notification of a problem concerning discharged liabilities, immediate actions must be taken to correct the situation. If appropriate, after research has been completed, Insolvency will initiate an expedited request for adjustment actions to be taken on the discharged liabilities. Collection actions that have occurred must be corrected expeditiously, including the release of levies and return of offset refunds. See IRM 25.17.3.4.1(2), Service-Wide Timeframe.

Reminder:

Discharge Injunction (11 U.S.C. § 524). When collection actions have been taken on discharged liabilities, in violation of the discharge injunction under 11 U.S.C. § 524, corrective actions must be initiated by Insolvency within two workdays of such notification, or after direct discovery by Insolvency. Also, when working an actual discharge order, discharge actions must begin within 30 calendar days of the received date of the discharge order.

25.17.3.6  (09-01-2004)
Collection Due Process (CDP) Cases

1.       The Revenue Restructuring and Reform Act of 1998 (RRA 98). Prior to January 19, 1999 , the Service was not required to notify the taxpayer when a Notice of Federal Tax Lien was filed. Also, no provision was in place to send the taxpayer a notice giving the taxpayer an opportunity for a hearing prior to a levy. The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98) added sections to the Internal Revenue Code which give taxpayers Collection Due Process (CDP) lien and levy hearing rights. The Act was signed into law on July 22, 1998 , and is codified at I.R.C. § 6320, Hearing on Filing Lien Notice, and I.R.C. § 6330, Hearing Before Levy.

2.       Responsibility for CDP Hearings. The responsibility for CDP hearings lies with the Office of Appeals.

3.       CDP and Insolvency Responsibilities. Collection Due Process issues are not often encountered after a bankruptcy is filed; however, questions and issues may still arise while a case is assigned to Insolvency. The debtor must be provided assistance and given information if an issue surfaces concerning CDP procedures.

Caution:

At the end of a bankruptcy, when investigations involve exempt/abandoned property, the Service must adhere to all CDP requirements of RRA 98.

4.       The Automatic Stay and the CDP Process. When a taxpayer files a bankruptcy petition, the automatic stay halts a range of collection activities. These include proceedings to recover a prepetition claim against the debtor, acts to recover a prepetition claim against the debtor's property, acts to create, perfect, or enforce a lien against property of the debtor or the estate, and the commencement or continuation of a proceeding in Tax Court. 11 U.S.C. § 362(a). The automatic stay also affects the Service's ability to issue a notice for a CDP hearing, Appeal's ability to conduct a CDP hearing, and the court's ability to review a CDP determination.

5.       Actions Prohibited by the Automatic Stay. Some of the actions prohibited by the automatic stay on periods protected by the bankruptcy include filing NFTLs and proposing levies. If an NFTL is filed after the stay is in place, the lien must be withdrawn. If a levy is proposed after the bankruptcy petition is filed, it must be abandoned. Any CDP notices issued in conjunction with those activities must be rescinded. Counsel should be consulted as needed.

6.       General Rule – CDP Hearings and Bankruptcy. Generally CDP hearings should be postponed or suspended while