Closing

Part 25. Special
Topics
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Chapter 17. Bankruptcy
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Section 14. Closing
a Bankruptcy Case
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25.17.14 Closing a Bankruptcy Case
25.17.14.1 (09-01-2004)
Overview
1.
Closure of Accounts. Accounts unpaid at the close of bankruptcy
proceedings must be adjusted, reactivated, or
reported currently not collectible (for Chapter 7
corporations and Chapter 11 liquidations), as
appropriate. A discharge of debt in bankruptcy
relieves the debtor of any personal liability for
the debt. However, the debt may still be collected
by either a distribution in the proceedings,
exercise of a right of setoff that existed prior to
the filing of the bankruptcy petition, or from
property encumbered by a valid pre-bankruptcy tax
lien.
2.
Automated Discharge System (ADS). The
Automated Discharge System (ADS) and Insolvency
Interface Program (IIP) bridge the Automated
Insolvency System (AIS) to Integrated Data Retrieval
System (IDRS). Through ADS, the discharge process in
Insolvency is largely automated.
·
ADS /IIP
automate tasks that would otherwise be performed by
Insolvency staff
·
ADS/IIP
eliminate many manual tasks through automated
processing
·
IIP
performs automated research and inputs transactions
on IDRS
·
ADS expands
the functionality of AIS by automating the processes
involved in the disposition of bankruptcy cases
after discharge
·
the program
selects tax modules eligible for abatement
·
the ADS
process identifies additional cases that require
further review by Insolvency employees
·
the program
inputs case closing actions on IDRS after any
required approval
3.
Preventing Violations of the Bankruptcy Code. Insolvency
must adhere to the provisions of the Bankruptcy Code
when closing bankruptcy cases by avoiding actions
that may result in a violation of the Bankruptcy
Code. See
IRM
25.17.14.3, Timeframes for
Required Actions.
25.17.14.2 (09-01-2004)
Lift of Stay
1.
Lift of Stay. "Lift of stay"
means the freeze on collection actions no longer
applies. However, the stay is in effect against
specific property of the estate, and it continues
until the property is no longer property of the
estate. The stay otherwise continues until the
earliest
of:
·
the date
the case is closed by the court
·
the date
the case is dismissed
·
the date a
discharge is granted or denied in the case of an individual
Chapter 7 debtor, or
·
the date a
discharge is granted or denied if a Chapter 9, 11,
12, or 13 bankruptcy
2.
Releasing the Bankruptcy Freeze Code. Insolvency
employees must enter a TC 521 to reverse the
bankruptcy freeze code at the earliest point
possible when one of the above situations occurs and
the case meets all other closing requirements.
Reminder:
NMF
Accounts.
Any account with "N" after the
TIN
, must be reversed at the Campus level. Insolvency
can use Form 3177, Request
for Terminal Action, for the TC 521 input
on NMF cases. NMF accounts must have the CSED
extended manually by input of TC 550.
Note:
Any
TIN
with an asterisk (*) must have its bankruptcy freeze
code reversed at the close of a bankruptcy
proceeding.
25.17.14.3 (09-01-2004)
Timeframes for Required Actions
1.
Closing Actions Commenced. All necessary closing actions on a case must
be initiated by Insolvency within 30
calendar days
of notification or receipt of the
discharge order.
2.
Collection Determination. Prior to making adjustment(s), Insolvency must
determine further collection is not probable from
trustee payments or from property to which a valid
prepetition Notice of Federal Tax Lien attaches.
Exception:
Adjustments may be delayed for a limited
number of reasons, including an Other
Investigation (OI) of abandoned or exempt
property and consideration of exceptions to
discharge under 11 U.S.C. § 523(a)(1)(C) such as
fraudulent returns or willful attempts to evade or
defeat taxes.
3.
Adjustments/Individual Chapters 7 and 11. According
to local guidelines, Insolvency may adjust
unsecured, dischargeable liabilities in individual
Chapter 7 or 11 cases if:
·
the
liabilities have been discharged
·
future
distribution is non-existent or highly unlikely
·
no pending
actions remain before the court
·
no
likelihood of a violation of the Bankruptcy Code
exists (e.g., the discharge injunction under 11
U.S.C. § 524)
Note:
See
IRM
25.17.14.9, Closing Chapters
7 and 11 Bankruptcies.
4.
Adjustment Delays. Delay of adjustment action(s) should be based
on local guidelines and with managerial approval. If
appropriate, written concurrence from Counsel should
be sought. See
IRM
25.17.3.11, Courtesy
Investigations Insolvency Initiated;
IRM
25.17.7.18, The Discharge
Injunction; and
IRM
25.17.14.7.1,The Fraud or
Willful Evasion Exception.
25.17.14.4 (09-01-2004)
"OIs" and Exempt or Abandoned Property
1.
Impact of RRA 98. The Internal Revenue Service Restructuring and
Reform Act of 1998 (RRA 98) has a significant impact
on the collection operations of the Service,
including the need to reevaluate the proper use of Other
Investigations (OIs) in bankruptcy. When
investigating exempt and/or abandoned assets at the
time of a bankruptcy discharge, Insolvency should
issue OI's appropriately.
2.
Components of RRA 98. Prior to requesting an OI concerning exempt
and/or abandoned property, Insolvency should weigh
certain components of RRA 98, such as:
A.
alternative
means of collection prior to seizure I.R.C. §
6331(j);
B.
seeking
advice of Counsel before requesting an OI for the
possible seizure of a personal residence as a
District Court judge or a magistrate must approve a
levy on a principal residence I.R.C. § 6334(e);
C.
the
prohibition against seizure of real property used as
the debtor's residence, or any non-rental real
property used by the debtor, or any other individual
as a residence, if the liability is less than $5,000
I.R.C. § 6334(a)(13);
D.
the
requirement the Area Director must approve all
seizures of tangible personal property or real
property used in the trade or business of the debtor
I.R.C. § 6334(e)(2)(A);
E.
the sale of
seized property at less than minimum bid is a
violation of the law I.R.C. § 6335(e);
F.
"no equity" seizures
are prohibited I.R.C. § 6331(j);
G.
the value
of personal effects exempted from seizure per RRA 98
increased to $6,250 I.R.C. § 6334(a)(2); the
value of books and tools exempted from seizure
increased to $3,125 I.R.C. § 6334(a)(3); and
H.
the value
of personal effects, books and tools exempt from
seizure is indexed for inflation I.R.C. §
6334(g).
3.
Other Factors to Consider. Prior to issuing an OI, Insolvency must adhere
to, and fully consider, the provisions of RRA 98,
along with the Service's Mission Statement. Various
factors for consideration include:
·
recent
legal changes
·
Compliance
workload priorities
·
Insolvency
staffing and resources
·
(field)
Compliance staffing and resources
·
reasonable
expectations of potential net dollars to be applied
towards the tax liability (for example, a valid lien
is on file for a large amount of tax, but the equity
in the asset(s) may be minimal)
·
discharge
timeframes
·
commitment
by the Service to work within the guidelines of the
Bankruptcy Code while the taxpayer is emerging from
bankruptcy, seeking a fresh start
4.
Mitigating Factors. Collection against exempt and/or abandoned
property, including residences and retirement
accounts, should employ an equitable and fair-minded
approach to individuals who are emerging from the
bankruptcy process. Mitigating factors may preclude
sending out an OI, such as lack of equity in assets,
complicated title issues, alternative means of
collection, complex non-debtor spousal issues, or
other unusual circumstances which may exist.
·
although
assets may have equity, and collection may be
readily accomplished (e.g., cash value of insurance,
IRAs, etc.), Insolvency should pursue such equity at
the discretion of local management
·
complex
circumstances may be present, such as other lien
creditors, title concerns, and community property
issues
25.17.14.4.1 (09-01-2004)
Collection from Exempt or Abandoned Property
1.
Collection Determination. Upon discharge, exempt property is subject to
collection of non-dischargeable taxes and
dischargeable taxes for which a Notice of Federal
Tax Lien was filed prior to the petition date, and the
lien remains valid against the specific property.
See
IRM
25.17.5.7.2, Refiling of
Liens.A determination must be made if
collection action should be pursued against such
property. See
IRM
25.17.2.9.1.1, Collection
From Exempt Property After Discharge, and
IRM
25.17.7.21, Collection From
Exempt or Abandoned Property.
2.
Collection of Dischargeable and Non-Dischargeable Liabilities. After
consultation with Counsel, Insolvency must determine
if the automatic stay provisions apply to any
property.
A.
Dischargeable Taxes. For dischargeable
liabilities, if a valid prepetition Notice of
Federal Tax Lien has been filed, the Service must
determine if it may collect on its lien from exempt
property, or property that has been abandoned or
otherwise not administered by the trustee.
B.
Non-Dischargeable Taxes. A determination may also be made if the
Service can collect non-dischargeable
liabilities from the exempt, abandoned,
non-administered, or after-acquired property of an
individual debtor.
3.
Maintain Freeze Codes Pending Determination. When
a valid prepetition NFTL is on file for taxes to be
discharged, the TC 520 control remains on the
applicable account until the collection potential
against the debtors exempt or abandoned property
is reviewed. The equity in exempt or abandoned
assets may be pursued, per local guidelines, when
warranted.
Caution:
Freeze
codes must remain on accounts while discharged
accounts are under consideration for distraint
activity, or when such activity is taking place. The
Service must prevent refund offsets from occurring
on dischargeable periods.
4.
Counsel Guidance. Should collection concerns arise, (for
example, if certain property is exempt, or if
collection action against the property is allowable
under the Bankruptcy Code) Insolvency should refer
the matter to Counsel. See
IRM
25.17.14.4 concerning the appropriate use of Other
Investigations (OIs).
5.
Collection Determination. Local guidelines are to be followed when
requesting revenue officer (RO) assistance. Or an
Insolvency Advisor may determine the collection
potential in the debtor's exempt or abandoned
property.
6.
Insolvency Actions. If Insolvency determines assets merit
investigation, the following actions should be
taken.
a.
Assignment of OI. Insolvency
employees should use the Integrated Collection
System (ICS) process or manually issue Form 2209, Other
Investigation, to the RO group, or assign
the investigation to an Advisor.
b.
Information to OI Assignee. The
bankruptcy schedules (for listing of exempt and/or
abandoned assets) must be provided to the RO or
Advisor, or the assigned employee may review
bankruptcy court files to determine if such property
is listed.
c.
Maintenance of Freeze Code. If
collection from exempt/abandoned property is
contemplated or is actively being pursued, a TC 520
freeze code with an appropriate closing code must be
kept on the account module(s), following local
procedures.
d.
Modified Final Notice. Prior
to taking action on exempt or abandoned property,
Insolvency must determine if the liabilities should
be listed in a modified Final Notice. Counsel can
provide guidance on specific language to be used in
this situation.
Caution:
If
Collection pursues distraint action against
dischargeable taxes, the property subject to levy
must be listed as property exempt or abandoned in
the bankruptcy proceeding.
7.
Adjustments/Liens. After collection has been effected from exempt
and/or abandoned property, or determination has been
made no collection potential exists, Insolvency
should adjust the accounts included on a prepetition
Notice of Federal Tax Lien and discharged by the
Bankruptcy Code. The NFTL generally should be
released when adjustment, due to discharge, is
requested. Counsel should be consulted on any
significant issues that arise concerning lien
releases.
IRM
25.17.4.1.1, Levies and
Bankruptcy, and
IRM
25.17.4.1.2,Exempt and
Abandoned Property, provide additional
information.
Reminder:
At the end of a bankruptcy, when
investigations involving exempt/abandoned property
may be conducted, the Service must adhere to all CDP
requirements of RRA 98. See
IRM
25.17.3.6, Collection Due
Process (CDP) Cases.
25.17.14.5 (09-01-2004)
Dismissal
1.
The Effect of the Dismissal Order. Except
for certain confirmed Chapter 11 cases, the
dismissal order, per 11 U.S.C. § 349, returns the
debtor to a prepetition status, including the
accrual of applicable penalties and interest. Aside
from CSED extensions and potential tolling issues,
the tax account is unaffected, as if the bankruptcy
petition were never filed. Property of the estate is
"revested"
in the debtor.
2.
CSED.
The Collection Statute Expiration Date (CSED) on all cases is extended for
the period of time during which the
IRS
was prohibited from collecting the tax due to the
bankruptcy case, and for six additional months even
in a case that is subsequently dismissed.
IRM
25.17.4.2, ASED/CSED,
provides ASED and CSED information.
3.
Effective Date. A dismissal becomes effective only
when the judge signs the order and when
the clerk enters it on the docket and not when the
order is orally stated from the bench. This is the
date to be used when inputting TC 521 to remove the
bankruptcy freeze on IDRS. According to Federal
Rules of Civil Procedure Rule 58, which is
applicable to Bankruptcy Practice Rule 9021, "judgment
is effective only when so set forth and when
entered..."
25.17.14.5.1 (09-01-2004)
Closing Dismissed Cases
1.
Insolvency Actions. When closing dismissed cases, required actions
include those listed below:
A.
resolutions
of any unpostable assessments through IDRS, if
applicable (see
IRM
25.17.4.9, Unpostables);
B.
input of TC
521 in the majority of cases, the input is done
by IIP;
C.
monitoring
to ensure the TC 521 posts;
D.
documentation
on AIS History Screen of all closing actions taken
as they occur;
E.
documentation
on AIS Entity Screen of the method of closure and
the date the case was dismissed by the court.
Note:
IRM
25.17.14.2(2) and
IRM
25.17.14.10 address reversal of freeze codes.
25.17.14.5.2 (09-01-2004)
Reinstatements
1.
Reinstatements. Sometimes debtors, despite being dismissed,
are soon back in bankruptcy (often within 30 days), reinstated
by the trustee,usually by becoming
current on their delinquent plan payments. This
situation may inadvertently cause a violation of the
automatic stay to occur.
Caution:
Before
final closing of a dismissed case, Insolvency should
research the current court status of the case to see if the debtor
has been reinstated, or if the dismissal order still
stands. Results of the research should be documented
on AIS.
2.
Preventing Violations of the Bankruptcy Code If
the debtor has been reinstated, Insolvency must
follow procedures to return the tax account to the
bankruptcy process to avoid a violation of the
Bankruptcy Code.
3.
Proper Documentation. Once a reinstatement is discovered, Insolvency
must promptly and accurately document all actions
taken on the case. The Service needs to protect the
rights of the debtor, but it also must protect the
interests of the government.
4.
Counsel.
Prompt consultation with Counsel on a reinstatement issue may be
appropriate.
25.17.14.6 (09-01-2004)
Closing "Full Pay/Provided For" Cases
1.
Abatement of Small Balances Prior to Discharge. After
all plan payments have been received and/or all plan
provisions have been met, an abatement may be done
when the aggregate amount of the liability remaining
on any prepetition period, whether dischargeable or
nondischargeable, including tax, penalties and
interest, falls below the criteria prescribed for
IMF taxpayers in LEM 5.3.2, Routine
BAL
DUE Issuance.
2.
Exceptions to Small Balance Abatements. Abatement
of small tax balances does not apply in the
following situations:
·
the debtor
is under a pending or active investigation by the
Criminal Investigation Division regardless of
whether the investigation relates to a tax liability
otherwise eligible for abatement
·
the debtor
is a party to any pending litigation with the
Service regarding the liability to be abated
3.
Closing Actions. The following actions should be taken when
preparing to close a case that is full paid, or is
otherwise provided for in a plan, no actions are
pending, the likelihood a violation of the
Bankruptcy Code will occur is remote, and the case
meets all other closing requirements.
A.
Input of TC 521(s) after TC 971(s) posts. See
IRM
25.17.14.15 for MFT 31 procedures for split
liabilities.
B.
If a NMF account, preparation of Form 3177, Request
for TerminalInput, for input of TC 521
and input of TC 550 to extend the CSED.
C.
Monitoring to ensure all TC 521s have posted.
D.
Documentation on AIS history screen of all
closing actions taken.
E.
Documentation on AIS entity screen of the method
and date of closure.
25.17.14.6.1 (09-01-2004)
Joint Account and Non-Debtor Spouse
1.
Joint Tax Liability. When appropriate, after the debtor has
received (or will be receiving) a discharge from a joint
tax liability, the Service may consider pursuing
collection from the non-petitioning (non-debtor)
spouse.
Caution:
See
IRM
25.17.3.4.1.1, Community
Property.
A.
Split
Accounts. MFT
31 procedures are outlined in
IRM
25.17.14.15, Adjustment
Methods for Discharged Liabilities. Joint
accounts are split when only one spouse files
bankruptcy and receives a discharge of tax(es).
B.
NFTL Name Change. When it is appropriate to make adjustments to
the tax account on behalf of a spouse who has
received a discharge from tax(es), and a valid lien
exists, Insolvency should notify the Automated Lien
System (
ALS
) Unit of the necessary lien changes to ensure the
lien will reflect only
the name of the non-debtor spouse.
C.
Return to Regular Collection. After
the transfer of the non-debtor spouse's liability
(to an MFT 31 individual account), the account will
return to the collection stream and be treated as a
routine collection account.
25.17.14.7 (09-01-2004)
Discharge and Exceptions to Discharge
1.
Bankruptcy Discharges. A discharge may be granted to:
·
individual
debtors in Chapters 7 or 13
·
corporations,
partnerships, and individual debtors in Chapters 11
or 12
Note:
Discharges are not granted in corporate
or partnership Chapter 7 cases or liquidation
Chapter 11 cases.
2.
When a Discharge Becomes Effective. A
discharge is effective:
A. &n |