Delinquent Accounts

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
Payments
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 the automatic stay is in effect during bankruptcy. Additionally, any Tax Court or district court proceedings reviewing a CDP determination by the IRS must be suspended.

7.       CDP Resources . Additional information, guidance, and assistance on the Collection Due Process can be obtained from the following resources:

·         the Area Collection Due Process Coordinator

·         IRM 5.1.9, Collection Appeal Rights

·         I.R.C. § 6320 and 6330

25.17.3.7  (09-01-2004)
Taxpayer Advocate Service (TAS)

1.       Taxpayer Advocate Service . The Taxpayer Advocate Service (TAS) is designed to ensure taxpayers' rights are protected, to serve as an advocate for the taxpayer within the IRS , and to represent the interests and concerns of taxpayers.

2.       Taxpayer Advocate . Taxpayer Advocates (TAs) take action on behalf of taxpayers when complaints or inquiries relating to federal taxes have not been resolved through normal channels, and they meet certain TA criteria. Local TAS guidelines for TAS referrals should be followed. See IRM Part 13, Taxpayer Advocate Case Procedures.

3.       Taxpayer Requests Help. A taxpayer may contact the IRS regarding a federal tax-related issue when clarification or assistance is needed to resolve the problem. The taxpayer may have previously sought help on this same matter, but the Service has not acted timely.

4.       Service Employees' Responsibilities . TAS requires Service employees who come in contact with taxpayers seeking TAS involvement obtain sufficient information on the issue(s) in question so anyone reviewing the case can determine the quality of the following items:

·         details of contact with the taxpayer, including

·         what facts were considered

·         what the taxpayer was told

·         time and dates of contacts

·         what decisions were made (if any)

·         information on a referral if a referral was made

·         how the matter was resolved

5.       Taxpayer Assistance Order. The TAS may issue a Taxpayer Assistance Order (TAO) when the taxpayer is suffering, or is about to suffer, a significant hardship as defined in I.R.C. § 7811 and its implementing regulations.

6.       Significant Hardship. The criteria for significant hardship were defined and mandated by RRA 98. Significant hardship is defined in I.R.C. § 7811 as: "a serious privation caused or about to be caused to the taxpayer as the result of the particular manner in which the revenue laws are being administered by the Internal Revenue Service. Mere economic or personal inconvenience to the taxpayer does not constitute significant hardship." The finding that a significant hardship exists is different from relief. Such a finding will not automatically result in relief being granted.

7.       Identification of Need for Taxpayer Assistance. All employees have a responsibility to identify situations when an Application for Taxpayer Assistance Order (ATAO) may be appropriate. If, during a taxpayer contact, the appearance of a hardship situation exists, Insolvency must complete Form 911, Application for Taxpayer Assistance Order (see items 11 – 13 below), and refer the taxpayer to the Taxpayer Advocate Service. IRM Part 13 or IRM 21.1.3.18 provides more information.

8.       Taxpayer Advocate Case Criteria. A complaint or inquiry about a federal tax matter which meets any of the following conditions will be included in the Taxpayer Advocate Service Program:

·         taxpayer is suffering or is about to suffer a significant hardship

·         taxpayer is facing an immediate threat of adverse action

·         taxpayer will incur significant costs if relief is not granted (including fees for professional representation)

·         taxpayer will suffer irreparable injury or long-term adverse impact if relief is not granted

·         taxpayer has not received a response or resolution to the problem or inquiry by the date promised

·         a system or procedure has either failed to operate as intended or failed to resolve the taxpayer's problem or dispute within the IRS

·         taxpayer has experienced a delay of more than 30 calendar days to resolve a tax account problem

Note:

A delay is defined as a lapse of more than 30 days from the date of the taxpayer's initial inquiry or from the end of the prescribed/normal processing period, whichever is later.

Exception:

If the taxpayer requests TAS assistance, the case must be automatically referred, regardless of whether the case meets any of the above criteria.

9.       Non-Referrals to TAS. Service employees should not send a complaint or inquiry to TAS if the problem has been corrected or will be resolved on the same date the case is identified as meeting TAS criteria. In addition, the following types of cases should not be referred to the TAS:

·         the taxpayer has not used, or refuses to use, established administrative or formal appeals procedures

·         facts in the case clearly indicate the taxpayer is employing frivolous strategies to avoid filing or paying federal taxes

·         the complaint or inquiry consists only of questions concerning the constitutionality of the tax system

·         the taxpayer is advised of a resolution that will occur within one business day of the inquiry

10.   Procedures. Each territory will establish and maintain procedures to:

·         coordinate between the local TAS office and Compliance to expedite resolution of the referred cases

·         provide a control system in Compliance to track all cases referred to the TAS

·         ensure referrals are made within one business day of identifying a case meeting TAS criteria

11.   Form 911. All referrals to TAS are considered possible significant hardship cases and must be made on Form 911, Application for Taxpayer Assistance Order (ATAO).

12.   Referrals From the TA's Office. When the actions required exceed the TA's delegated authority, assistance from Compliance is requested.

A.      In the rare occurrence an employee and the TA cannot agree on relief after attempting to reach a satisfactory resolution, the matter must be elevated to the Compliance employee's manager.

B.      If an agreement is not reached, the case file must be forwarded (along with a description of the unit's position) to the local TAS office.

13.   Application for Taxpayer Assistance Order (ATAO). IRS employees may receive Form 911 – ATAO from the taxpayer or the taxpayer's representative. It must be internally generated by an employee when the TAS criteria are met, and the employee is unable to provide relief because of administrative procedures. A description of the problem must be documented in the case file history to indicate relief was considered and whether the Service would not or could not relieve the hardship.

14.   TAO Program. The TAO program has two phases: (1) Form 911, Application for Taxpayer Assistance Order (ATAO) (Taxpayer's Application for Relief from Hardship); and (2) issuance of Form 9101, Taxpayer Assistance Order (TAO)

 .        Form 9101 requires Compliance to cease, or take, an action that relieves the taxpayer of a significant hardship due to procedures of/from administering the I.R.C.

A.      The National TA or a designee, generally the local TA, can issue a TAO to grant relief, such as stopping or postponing a scheduled action.

B.      The local TA will consult with Compliance to get the case facts and attempt to come to an agreeable resolution before issuing a TAO.

15.   Additional TAS Information. Additional historical and background information on the evolution of the Taxpayer Advocate Service is found in the Taxpayer Bill of Rights (TBOR), TBOR2, and The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98) . This information is published in the Taxpayer Advocate Case Procedures, IRM Part 13.

25.17.3.8  (09-01-2004)
Revenue Officers and Insolvency

1.       Insolvency Contacts. Revenue officers (ROs) must immediately contact their local Insolvency office upon becoming aware of a bankruptcy when no TC 520s (to freeze accounts) are posted to the taxpayer’s accounts on the Integrated Data Retrieval System (IDRS). Insolvency may not be aware a taxpayer has filed bankruptcy.

Note:

Bankruptcy courts are not required to notify the IRS of a bankruptcy petition in Chapter 7 and Chapter 13 proceedings unless the debtor lists the IRS as a creditor. Other circumstances may cause the IRS to fail to receive a notice, such as incorrect mailing addresses or clerical errors.

2.       Revenue Officer Responsibilities. Upon learning an assigned taxpayer has filed bankruptcy, ROs should:

A.      Stop all enforced collection activity.

B.      Record pertinent bankruptcy filing information (e.g., entity in bankruptcy, case number, chapter filed, court location, filing date, etc.).

C.      Make contact with Insolvency as soon as possible (same day bankruptcy notification received is preferred). Contact can be by faxed or personal (including telephonic) means of communication.

Note:

Insolvency will perform research and assume responsibility for the case, including the input of appropriate freeze codes.

D.      Secure all delinquent returns and process them normally.

E.      Advise Insolvency immediately when returns have been secured, and send copies to Insolvency for proof of claim computations.

F.      Advise Insolvency of any pending TFRP investigation or recommendations.

G.     Provide any other pertinent case information to Insolvency.

H.      Retain open assignments until TC 520s have posted to IDRS and ICS notifies the accounts are closed at the field Compliance level. TC 520 freezes the taxpayer account to prevent systemic notices and collection actions – one informational notice is allowed.

3.       Additional Information for ROs.

a.       Mailing Matrix. All case information at the bankruptcy court should list the IRS address as that of the local Insolvency unit.

b.       Payments. Any prepetition check payments must be sent to Insolvency for proper processing, or ROs may call Insolvency the same day a check is received for instructions on check processing or, if warranted, the return of a check to the source.

c.       Contact Points. ROs may use local contact listing that is (or should be) established between Insolvency and RO groups for sharing of information on bankruptcy filings, as well as other bankruptcy-related casework. The contact list should be updated periodically to ensure it is current.

Reminder:

To avoid violations of the automatic stay, ROs and Insolvency must make immediate contact with each other's offices whenever it is learned that a taxpayer, who is assigned to an RO group, has filed for bankruptcy protection.

d.       Discharge/Dismissal Issues . ROs should contact the local Insolvency office to resolve issues with discharge/dismissal situations. A taxpayer may be confused or uncertain as to the disposition of the bankruptcy case (whether a dismissal or a discharge took place, and if tax accounts were discharged). Insolvency will assist the RO with the issue and discuss appropriate actions. Insolvency will enlist Counsel's guidance, as needed.

Note:

If a case was dismissed, a discharge would not have been granted, and normal collection actions can proceed as if the bankruptcy never occurred, as regards to tax, interest, and applicable penalties.

e.       IRMs. ROs must adhere to IRMs, including IRM 25.17.1 - 14, Special Topics, Bankruptcy, for guidance on bankruptcy issues. IRMs are available on the Intranet.

f.         Documentation. History documentation is the official record of activity on an account. The accurate and complete reporting of events is important throughout the pendency of a bankruptcy case. Should litigation ensue, the case history will become the primary record of the bankruptcy case.

4.       Monitor for Bankruptcy Status. The RO must monitor the account until IDRS shows a change to status 72 indicating the bankruptcy freeze code (TC 520) has posted to IDRS. The RO will receive an Integrated Collection System (ICS) notification the balance due account has been closed.

25.17.3.9  (09-01-2004)
Trust Fund Recovery Penalty

1.       Withheld and Collected Taxes. Trust fund taxes are taxes required to be withheld or collected by a third party (for example, an employer) and paid over to the government. I.R.C. § 7501(a). The Trust Fund Recovery Penalty (TFRP) allows the Service to assess responsible persons when trust fund taxes are not paid over to the government. I.R.C. § 6672.

A.      The person assessed the TFRP had the duty, authority, and status to direct collection (responsibility), and a decision was made to not pay over and account for the tax (willfulness).

B.      The penalty facilitates the collection of this tax and enhances voluntary compliance.

C.      Most TFRP assessments relate to employment taxes due from corporations.

2.       Urgency. Proper identification of trust fund taxes in bankruptcy is critical as time is of the essence. In bankruptcies, the Service is often working against short deadlines for confirmations and bar dates. If the Service fails to file a timely proof of claim for trust fund taxes, the Service may not be paid and taxes will be discharged.

3.       Forms Reporting Trust Fund Taxes. Forms 941, 942, 943 (Withholding from Wages and Federal Insurance Contributions Act) and CT-1 (per the Railroad Retirement Tax Act) report trust funds. Subtitle D of the I.R.C. identifies miscellaneous excise taxes considered trust funds and reported on Form 720. See Chapter 25 of Subtitle C, Sec. 3505(b) (Liability of Third Parties Paying Wages).

Note:

The TFRP applies to employment taxes that involve withholding of income or FICA taxes (reported on Forms 941, 942, and 943) and also excise taxes which require collection of the tax by a third party (Form 720 taxes).

4.       Treated Like a Tax. The TFRP is assessed and collected in the same manner as a tax. I.R.C. § 6671(a).

5.       One Time Collection. Withheld income and employment taxes or collected excise taxes are collected only once, whether from the business and/or from one or more of its responsible persons.

6.       Prepetition Trust Fund Quarters. Any TFRP accruing before the bankruptcy petition is filed constitutes a prepetition tax liability, even if the TFRP assessment was not made before the bankruptcy was filed.

7.       Preparation of Claim. The government's proof of claim should include the full amount of any trust fund pending (e.g., include all applicable Form 941 tax quarters). If an accurate amount is not known at the time the proof of claim is prepared, Insolvency can file an unassessed (estimated) claim, and an amendment can be prepared when possible.

8.       ASED Protection. The Assessment Statute Expiration Date (ASED) must be protected. Returns should be secured as soon as possible and the Trust Fund Recovery Penalty investigation begun immediately upon learning a bankruptcy has been filed. Quality IDRS research should be conducted, and files should be reviewed (such as the debtor's petition, schedules, and statement of financial affairs) to determine the names, titles, addresses, and social security numbers of potentially responsible persons.

Note:

Returns filed fraudulently or under I.R.C. 6020(b) have no ASED.

9.       Information at 341 Meeting. All available administrative means should be used to complete the TFRP investigation. For example, an Insolvency employee or a RO may find it advantageous to attend the first meeting of creditors (341 Meeting) to interview a potentially responsible person , such as an officer of a company.

10.   General Rules for TFRP Investigation:

A.      if corporate trust fund taxes are due, and the case is assigned to a revenue officer, the RO's manager will generally issue ICS 01 for the TFRP investigation;

B.      if corporate trust fund taxes are due, and the case is not assigned to an RO, Insolvency may issue Form 2209 or ICS 01 for the TFRP investigation.

11.   TFRP Investigation Criteria. Generally, the TFRP Other Investigation (OI) issuance is based on Law Enforcement Manual (LEM) criteria for TFRP, considering dollar limitations and collectibility factors. Not all trust fund taxes require an OI. If the LEM criteria is met, local guidelines must be followed on:

·         when to generate a field investigation

·         how to monitor the case

·         a determination of the responsible persons

·         whether/when to assess the TFRP

12.   TFRP OI Responses. Revenue officer group managers will ensure investigations meeting underlying balance due risk factor categories presently being worked will be worked to conclusion. For cases meeting the criteria, the RO will issue L-1153 (Notification Letter Regarding Proposed Trust Fund Recovery Penalty Assessment), make a non-assertion recommendation, or secure the necessary ASED waivers. Investigations not meeting the investigation criteria will be returned to Insolvency with no action. Insolvency employees must document the findings of the OI in the AIS history.

13.   Chapter 11. In corporate Chapter 11 bankruptcies, whenever possible and appropriate, signed Form 2750, Waiver Extending Statutory Period for Assessment of Trust Fund Recovery Penalty should be secured from all potentially responsible persons to extend the TFRP assessment statute. The TFRP is generally recommended against officers of a corporation. However, the TFRP can be recommended against any person/entity determined to be responsible for collecting and paying trust fund taxes, including a limited partner, corporate entity, trustee, spouse, etc.

 .        Assessment must be made if the expiration of the statute is imminent, the LEM criteria are met, and a waiver has not been signed to extend the statute.

A.      Bankruptcy does not suspend the running of the TFRP ASED. The fact that a corporation is in bankruptcy does not extend or suspend the statute for assessment of the TFRP against a responsible person.

B.      The duration of payout for many Chapter 11 plans extends well beyond the normal ASED time period.

Caution:

A waiver, which will extend the ASED to the date agreed to by a responsible person, will not extend the ASED for any other responsible person.

14.   Chapter 7. In corporate Chapter 7 (liquidating) bankruptcies, unless compelling evidence indicates assets in the bankruptcy estate are sufficient to satisfy the trust fund liability, Insolvency will generally recommend assessment of the TFRP.

15.   Expedite Information to Insolvency. The TFRP investigation must be completed promptly and the case file forwarded to Insolvency according to local procedures. Insolvency should receive the TFRP proposed liability amount on an expedited basis. The front of the file should be prominently marked as " BANKRUPTCY. "

16.   Potential TFRP Assessments — Estimated. If a potentially responsible person has filed bankruptcy, and the TFRP has not yet been assessed and an investigation is pending, Insolvency should be notified so the liability may be included on the proof of claim prior to the bar date (or by confirmation date, if Insolvency so requests). If necessary, Insolvency should be provided with as accurate an estimate as possible of the TFRP so it can be included in a timely-filed proof of claim. An amendment will be prepared later when an accurate amount is known.

17.   Monitoring of Corporate Bankruptcies. Local Insolvency offices need to establish a follow-up system for trust fund taxes in corporate bankruptcies to ensure:

 .        all periods to which a TFRP applies have been addressed appropriately; and

A.      the statute for assessment of the trust fund penalty does not expire.

18.   Chapter 13. When a potentially responsible person is in a Chapter 13 bankruptcy, due to the quick confirmations that take place in these proceedings, prompt contact with Insolvency to relay this information is essential.

19.   Coordination – Field and Insolvency. Revenue officers and Insolvency must maintain close contact to coordinate all necessary actions required for the TFRP process and suspension of accounts assigned to field Compliance.

25.17.3.9.1  (09-01-2004)
The TFRP Assessment Decision

1.       TFRP Determination by Insolvency. When the TFRP file is received, with the trust fund investigation completed, Insolvency will decide if the TFRP will be assessed during the corporate bankruptcy.

2.       Considerations. To make the TFRP assessment determination, Insolvency should consider all available information, including:

A.      potentially responsible individuals signed/not signed Form 2750, Waiver Extending Statutory Period for Assessment of Trust Fund Recovery Penalty;

B.      pyramiding of additional unpaid liabilities after the petition date;

C.      corporation continuing to operate at a loss;

D.      liquidation of assets (appears) insufficient to pay liability;

E.      excessive compensation being paid to officers during the proceeding;

F.      inability to effectuate a plan;

G.     unreasonable delay in proposing a plan; and

H.      default occurring on plan (e.g., pattern of late plan payments, missing or sporadic plan payments, plan in arrears, etc.).

3.       Factors Determining Suspension of Collection. Once Insolvency determines assessment of the TFRP is appropriate, collection may or may not be suspended against responsible persons in certain situations. Pertinent factors to consider include the following:

A.      a plan is (or has been) confirmed in the corporate bankruptcy;

B.      the corporate bankruptcy plan appears feasible and includes payment of the trust fund liability;

C.      an adequate protection agreement is in place requiring regular payments from the corporate bankruptcy;

D.      (if plan is confirmed), all payments are being made regularly, no arrearage exists, and the debtor is meeting all other plan provisions; and

E.      no problems with current tax compliance are in evidence (e.g., all tax returns are filed – corporate and personal).

4.       Coordinate With Insolvency. Revenue Officers must contact Insolvency for local guidelines addressing lien determination and conditions under which accounts are to be suspended, if applicable.

25.17.3.10  (09-01-2004)
Summons and Bankruptcy

1.       Bankruptcy Code. The Bankruptcy Code does not prohibit the gathering of tax information, unless it is an act to collect a prepetition tax in violation of the automatic stay.

2.       Alternatives Preferred. Although a summons may be served during bankruptcy, it is not a preferable course of action unless recommended by Counsel. The following actions should be attempted in lieu of issuing a summons:

·         the first meeting of creditors can be attended in order to question potentially responsible persons (regarding potential TFRP assessment)

·         under Bankruptcy Rule 2004, court ordered production of records can be requested and examined for liability information

·         I.R.C. § 6020(b) provisions can be used (note (5) below), and Substitutes for Return (SFRs) can also be prepared by the Service

·         Motions to Compel may be filed

·         the proof of claim may list unassessed (estimated) liabilities for unfiled tax returns and/or a potential TFRP assessment

Note:

The amount(s) listed should be as factual as possible, based on internal sources and/or from information contained in the debtor's bankruptcy filings.

3.       Production of Records. Service of a summons is permitted when production of records is needed to prepare a personal or corporate tax return from a debtor-in-possession (DIP) or an officer of a DIP to prepare postpetition employment or excise tax returns.

4.       Collection Summons Prohibition. During the pendency of the automatic stay, service of a collection summons is not permitted when production of records is needed.

Note:

A summons to determine a TFRP liability is not considered a collection summons and is allowable.

5.       IRC 6020(b) Returns. Normally, delinquent employment tax returns are prepared under I.R.C. § 6020(b). When a tax return is secured or prepared under these procedures by field Compliance, a copy must be sent to Insolvency expeditiously. The information is needed for proof of claim purposes.

6.       Third Party Contacts and Summons in Bankruptcy. See IRM 25.17.3.10.1 (3), A Third Party Contact.

25.17.3.10.1  (09-01-2004)
Third Party Contacts

1.       RRA 98. To provide protection to the taxpayer regarding IRS 's collection and examination activities, legislation was enacted to notify the taxpayer of contacts the IRS makes with third parties. RRA 98 and I.R.C. § 7602(c).

2.       IRS Third Party Contact Requirements. For third party contacts made to collect or determine a tax liability, I.R.C. § 7602(c) requires the IRS to:

A.      provide advance notice to the taxpayer that third party contacts may be made;

B.      periodically provide a list of all third party contacts to the taxpayer; and

C.      provide a list of third party contacts to the taxpayer upon request.

3.       A Third Party Contact. A third party contact has been made when an IRS employee initiates contact with a person other than the taxpayer and asks questions about a specific taxpayer with respect to that taxpayer's federal tax liability, including the issuance of a levy or summons to someone other than the taxpayer.

Caution:

Unless an adversary proceeding or contested matter exists, contacts made by Insolvency could possibly be considered third party contacts.

4.       Exceptions. IRM 5.1.17(3) lists several exceptions, including litigation, which includes bankruptcy proceedings. Counsel should be contacted with questions regarding the litigation exception and bankruptcy.

Note:

Any tax period under investigation by Criminal Investigation (CI) is not subject to the requirements of I.R.C. § 7602(c). A criminal investigation is initiated when an administrative referral based on a firm indication of fraud is made to CI.

Caution:

Third party contacts to develop fraud referrals are contacts under I.R.C. § 7602(c) and must be reported.

5.       Release of Levy. A release of levy is considered a third party contact and must be recorded by Insolvency. IRM 25.17.4.1.1(6) covers third party contacts and release of a levy.

6.       Contacts With Trustees. Most contacts with a trustee are not considered third party contacts under I.R.C. § 7602(c) while the bankruptcy case is pending as long as the contact relates to matters and issues involved in the bankruptcy case.

Caution:

Although contacts made with a trustee relating to an open bankruptcy, such as asking about payments being made under the Chapter 13 plan are not considered third party contacts,once a discharge is granted or the case has been dismissed, such contacts with a trustee are considered a third party contact.

7.       Attorney of Record. Contacting the attorney of record for the debtor is not considered a third party contact while the case is open and under the jurisdiction of the bankruptcy court. The contact must be confined to issues affecting the bankruptcy filing.

8.       Form 12175 Requirements:

A.      a third party contact must be recorded daily (or as soon as possible) on a Form 12175, Third Party Contact;

B.      multiple contacts with the same third party on different dates require a separate Form 12175 for each contact;

C.      when Form 12175 is completed, the form is forwarded to the Third Party Contact Coordinator ( IRM 5.1.17.5); and

D.      a copy is associated with the case file, and AIS must be documented accordingly.

9.       Recordation of Contact. Insolvency must report all third party contacts; record all contacts timely; and document all actions taken, concisely with:

A.      date of contact;

B.      name(s) and title(s) of person contacted;

C.      address of person contacted;

D.      business entity information;

E.      purpose of contact; and

F.      any other pertinent information.

10.   Assistance. The local Third Party Contact Coordinator and/or local Counsel is available should additional guidance be needed.

11.   Taxpayer Authorization. I.R.C. § 7602(c) does not apply to any contacts the taxpayer may have authorized. Form 12180,Third Party Contact Authorization Form, can be used to document the taxpayer's authorization. Although oral authorization is allowed, it is preferable to have Form 12180 completed and retained with the case.

Note:

The taxpayer may not prevent an IRS employee from contacting a third party by refusing to provide prior authorization. IRM 5.1 General Handbook, Chapter 17, Third Party Contacts provides additional information

25.17.3.11  (09-01-2004)
Courtesy Investigations – Insolvency-Initiated

1.       Protection of the Government's Interests. Prompt completion of Insolvency-initiated courtesy investigations enables Insolvency to file proofs of claim by the bar date, timely respond to objections and other motions before the court, and recommend appropriate legal action. When working these assignments, Compliance employees (e.g., ROs, Advisors, etc.) are encouraged to:

A.      exercise caution to avoid violations of the automatic stay, the discharge injunction, or other provisions of the Bankruptcy Code as the taxpayer's rights must be protected, and IRS may be required to pay damages if such acts occur;

B.      work closely with Insolvency to protect the government’s interests; and

C.      take only the actions and obtain only the information specified by Insolvency. Should additional, pertinent information develop during the course of the investigation, Service employees must advise Insolvency promptly to determine an appropriate plan of action.

2.       Asset Investigation for Exempt/Abandoned Property. Insolvency may initiate asset investigations requiring field actions relating to exempt or abandoned property if a previously-filed Notice of Federal Tax Lien is still valid . Coordination with Insolvency is necessary when legal questions and issues arise. Refer to IRM 25.17.14.4, "OIs" and Exempt or Abandoned Property.

3.       Field Actions. Required field actions may include:

·         reviewing and analyzing bankruptcy court–filed information

·         valuation of the subject property

·         levy

·         seizure

4.       RO Report to Insolvency. The revenue officer should furnish a timely report containing relevant facts to Insolvency, including, but not limited to the following:

·         the date and manner (e.g., telephonic, personal contact) of any request made for payment of the tax or the filing of tax return(s)

·         the nature of the debtor's response

·         an estimate of the debtor's liability

·         the basis for the estimate of any unfiled returns

·         a report on apparent declines in value of the estate, if applicable, such as negative cash flow or reduced inventory levels

·         any information/data on a pending trust fund assessment

·         any other areas of concern, including non-compliance of tax obligations

5.       Required Actions on Postpetition Accounts. When seeking postpetition unfiled tax returns or payment of a postpetition balance due account, RO's should take the following actions:

 .        request immediate filing of the returns — giving a short, specific deadline;

a.       request payment of postpetition amounts due, and, if appropriate, try to work out alternatives if the debtor is unable to full pay;

b.       inform the debtor of actions the government may take if non-compliance continues (such as a motion for dismissal from bankruptcy or a conversion to a Chapter 7 bankruptcy); and

c.       seek guidance from Insolvency and/or Counsel (through Insolvency), if necessary.

Caution:

Enforcement actions may be taken only through the direction and guidance of Insolvency and Counsel.

Note: