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

25.17.14  Closing a Bankruptcy Case

• 25.17.14.1   Overview
• 25.17.14.2   Lift of Stay
• 25.17.14.3   Timeframes for Required Actions
• 25.17.14.4   "OIs" and Exempt or Abandoned Property
• 25.17.14.5   Dismissal
• 25.17.14.6   Closing "Full Pay/Provided For" Cases
• 25.17.14.7   Discharge and Exceptions to Discharge
• 25.17.14.8   Discharge Injunction
• 25.17.14.9   Closing Chapter 7 and 11 Bankruptcies
• 25.17.14.10   Reversal of Freeze Codes (TC 521)
• 25.17.14.11   Release of Liens
• 25.17.14.12   ASED/CSED Considerations
• 25.17.14.13   Closing the Case
• 25.17.14.14   Maintenance of Closed File Information
• 25.17.14.15   Adjustment Methods for Discharged Liabilities

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 debtor’s 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