IRS Case Processing

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

25.17.5  Opening a Bankruptcy Case

• 25.17.5.1   Introduction
• 25.17.5.2   Notification of Bankruptcy Proceedings
• 25.17.5.3   Asset/No Asset Cases
• 25.17.5.4   Automated Insolvency System (AIS)
• 25.17.5.5   Insolvency Interface Program (IIP)
• 25.17.5.6   Bankruptcy "Freeze" Code (TC 520)
• 25.17.5.7   Liens and Insolvency

25.17.5.1  (09-01-2004)
Introduction

1.       This section provides instructions for initial case processing in Bankruptcy Court proceedings. Some procedures contained in this IRM section may need modification to coincide with a jurisdiction's local rules and court-issued standing orders.

25.17.5.2  (09-01-2004)
Notification of Bankruptcy Proceedings

1.       Notification. The Insolvency function may be informed of a new bankruptcy filing in the following ways:

A.      paper copies of petitions, notices, or other documents provided by the applicable court, the debtor, or debtor’s counsel;

B.      oral notification by the debtor or the debtor's attorney;

C.      reports or information from revenue officers or other Service personnel; or

D.      electronic notification from the bankruptcy court.

2.       Notice of Specific Chapters.

·         Chapters 7, 12, 13 — Notice of Chapters 7, 12, and 13 cases is given the IRS when the Service is listed as a creditor in the debtor’s schedules

·         Chapter 11 — Notice to the Service is required in all Chapter 11 cases, even though the IRS may not be listed as a creditor

3.       Notice to the IRS of "No Liability" Cases. Some debtor's attorneys, in filings other than Chapter 11, routinely list the Service as a creditor on all cases as a precautionary practice. Consequently Insolvency receives unnecessary notices of "No Liability" cases causing unproductive case work. When those attorneys are identified, Insolvency should contact them to determine if they have a legitimate reason to list the IRS as a creditor on each bankruptcy they handle. The Service can request the attorneys stop noticing the IRS unless they have actual knowledge, or a reasonable belief, their clients are indebted to the IRS .

Note:

Local outreach efforts with bankruptcy attorneys may curtail superfluous noticing. If local attorneys are not the cause of the mailing of unnecessary notices, Insolvency should contact the applicable court to resolve the matter. Counsel assistance may be requested to facilitate a resolution to the problem.

25.17.5.2.1  (09-01-2004)
Notices Not Received

1.       Lack of Notice. Insolvency should contact the applicable bankruptcy court locally to determine the reasons for notices not being received. The issue should be resolved at the local level with the assistance of Counsel, if required. In rare instances, the matter might justify elevation, through proper channels, to the National Office to contact the Administrative Office of the United States Courts.

25.17.5.2.2  (09-01-2004)
Mailing Matrix

1.       Correct IRS Mailing Address. Each bankruptcy court's mailing matrix must list the correct mailing address for the Internal Revenue Service.

A.      Only One IRS Address for Mailing Matrix. The local Insolvency office must provide the bankruptcy court with the current address of the Insolvency unit handling that location. Out–of–date addresses for the Service must be removed from the court's mailing matrix.

B.      Periodic Monitoring . Local Insolvency group managers should establish procedures to monitor the Service's address on the court matrix periodically to ensure it is current. See Bankruptcy Rule 5003(e).

25.17.5.3  (09-01-2004)
Asset/No Asset Cases

1.       Asset Cases. All proceedings under Chapters 9 and 11 are treated as asset cases by Insolvency. All Chapter 12 and 13 cases, for which notification has been received, are treated as asset cases.

2.       Asset/No Asset Determination. In proceedings under Chapter 7, Insolvency must determine if the bankruptcy is an asset or a no asset case.

A.      Many bankruptcy courts follow a policy that all Chapter 7 petitions are no asset unless the court issues a notice of possible dividends and sets a bar date.

B.      Other bankruptcy courts issue a notice identifying a case as an asset or a no asset case.

25.17.5.4  (09-01-2004)
Automated Insolvency System (AIS)

1.       Automated Insolvency System (AIS) — Insolvency's Database System. Insolvency's automated control system on cases filed under the Bankruptcy Code is the Automated Insolvency System (AIS). AIS is a comprehensive standardized control and processing application used nationwide for processing bankruptcy cases. AIS provides several utility programs to support the effective management of an Insolvency workload.

2.       Functions and Capabilities. AIS's numerous files link together to store and display data, produce documents, and generate reports. The software employed in the AIS application has the capability to look up, add, or modify data needed to manage a bankruptcy inventory.

Example:

AIS posts vouchers for payments and runs data-specific reports as needed. The system also creates a variety of forms, including proofs of claim, letters, and reports.

3.       Requirements for Automated Case Processing. All bankruptcy cases involving the IRS should be loaded on AIS. Below are the minimum requirements for automated bankruptcy case processing:

·         loading of entity screen information

·         recording all case actions on the history screen

·         documentation of any activity taken on a case, even though the action might have occurred prior to the case's being loaded on AIS

·         all proof of claim (POC) processing activity

·         documentation of information relating to liens, including refilings and liens filed in violation of the automatic stay

·         accurate and prompt loading of the payment plan monitoring screen

·         updating of applicable screens when new or changed information comes to Insolvency, including bar date, confirmation date, plan provisions and modifications of plans

·         input of specific data to history screen, including information relating to unfiled returns, non-compliance issues, disputes, negotiations, litigation, monitoring results, and data on case closures

Reminder:

The information entered on AIS may be used in court proceedings, so all information must be concise, factual, and entered timely. The history screen should reflect all actions taken, because AIS is an official record of case activity for legal purposes.

4.       Additional AIS Information. Various AIS processes are referenced in IRM 25.17.1 - 14, Special Topics, Bankruptcy. System enhancements periodically refine and improve AIS capabilities. Insolvency employees must stay up-to-date on any enhancements and periodic postings of AIS Alerts on the Intranet.

·         the AIS User’s Guide provides comprehensive instructions and guidance for using AIS

·         local procedures may give alternative instructions on opening and maintaining bankruptcy cases on AIS in specific jurisdictions

25.17.5.5  (09-01-2004)
Insolvency Interface Program (IIP)

1.       Insolvency Interface Program (IIP). The Insolvency Interface Program (IIP) is a set of software programs that interface with the Automated Insolvency System and the Integrated Data Retrieval System (IDRS). lIP provides:

·         connectivity between AIS and IDRS

·         automated data retrieval and input of bankruptcy transaction codes

2.       Daily Running of IIP Processes. IIP must be run daily to meet the timeframes established for input of critical actions. Timely running of IIP protects the debtor from improper IRS actions that can result in violation of the automatic stay and minimizes the chances of damages being assessed against the IRS . The IIP User's Guide outlines instructions on its use.

25.17.5.5.1  (09-01-2004)
Timeframes – Initial Case Processing Actions

1.       Timeframes. Initial processing of new cases must be completed within five workdays of receipt. To ensure completion of all needed case actions within the required timeframe, certain actions must be done daily. Initial processing actions include:

A.      loading the case on AIS;

B.      running IIP process C;

C.      running IIP process D, including input of TC 520s with appropriate closing codes;

D.      resolving cases on the Potentially Invalid TIN (PIT) report by initiating the appropriate actions to resolve invalid TINs;

E.      prompt processing of cross-referenced taxpayer identification numbers (TINs) including asterisk (*) accounts;

F.      researching for NMF cases; and

G.     contacting various Compliance offices expeditiously regarding status 22, 26, 60, and 71 cases from the process D output so other IRS units will have current information on new bankruptcy filings.

2.       Prevention of Violations of the Automatic Stay. Compliance collection actions that violate the automatic stay must be resolved quickly to protect the debtor's rights and to shield the Service from a suit for damages.

Caution:

Prepetition continuous wage levies, shown as status 60 (08) cases, must be released immediately.

25.17.5.6  (09-01-2004)
Bankruptcy "Freeze" Code (TC 520)

1.       " Freeze" Codes. Transaction Code (TC) 520, with an appropriate bankruptcy closing code (CC), must be input timely when a bankruptcy case is opened. The use of these codes enables the IRS to comply with the automatic stay provisions of the Bankruptcy Code by "freezing" the prepetition tax modules so collection actions do not take place. They also allow the IRS to take full advantage of various standing court orders which allow assessments, offsets, or refunds to the debtor.

2.       Timeframe. The bankruptcy freeze code must be input within five workdays from the date the Service first becomes aware of the bankruptcy filing.

3.       Transaction Code TC 520. TC 520 is a modular input with entity impact. A TC 520, when used in conjunction with a bankruptcy closing code, will:

·         post to any module whether or not that module is currently on Master File (MF)

·         generate a Daily Transaction Register (DTR) or Integrated Collection System (ICS) notification when the transaction posts to a module

·         prompt the issuance of litigation transcripts when any subsequent transaction posts while the TC 520 is present

·         change the module status to 72 for the module to which it was input except for CC 84 (a CC often used in Chapter 7)

·         prevent all subsequent notices on prepetition tax periods, after one informational notice

·         suspend the Collection Statute Expiration Date for the tax accounts on the Master File

Note:

If a CC 84 is on a module and the CSED warrants an extension, the CSED must be extended by a manual input of a TC 550.

4.       Date of TC 520. The TC 520 transaction date is input to show the same date as the filing of the bankruptcy petition.

5.       Collection Statute Expiration Date (CSED). The Master File automatically computes the extended CSED for modules with a TC 520 transaction date later than July 1986 and a TC 521 transaction date later than January 1987. However, Non–Master File (NMF) accounts require a manual TC 550 input to extend the collection statute.

6.       Factors Determining the TC 520/CCs. The required TC 520 closing code(s) input varies, depending on certain factors, such as the chapter of bankruptcy filed, the existence of any standing order(s) and local rules, and the results of bankruptcy research performed. The effect of TC 520 on assessments will depend on the date of the bankruptcy filing.

25.17.5.6.1  (09-01-2004)
Closing Codes

1.       Effects of Various Closing Codes. Bankruptcy closing codes are used in conjunction with Transaction Code 520 to alert all functions of the Service to cease collection activity when a bankruptcy is filed. Bankruptcy closing codes determine what the TC 520 will allow and restrict.

2.       Compliance with Legal Requirements. Standing court orders and local rules/agreements affect the processing of bankruptcy cases in some jurisdictions, including the manner in which refunds and offsets are handled. The selection by Insolvency of the appropriate TC 520 closing code helps the Service comply with the legal requirements of each judicial district.

3.       Updated Closing Codes. In January, 2002, eight new bankruptcy closing codes became available to use with Transaction Code 520. These closing codes add additional options for handling issues systemically. In particular, they modify the – V freeze for postpetition modules and allow postpetition offsets. The specific features of each of the updated closing codes are described in (6), Table 2, below.

4.       Retirement of Some Existing Closing Codes. With the addition of the newer closing codes, some of the existing (older) closing codes are being retired. IDRS no longer allows TC 520 inputs with closing codes 86, 87, 88, or 89. However, open cases with unreversed TC 520s with those closing codes will continue to be processed by Master File in accordance with the specifications below. Both sets of closing codes (the old and the new), showing their effects and characteristics, are listed in Tables 1 and 2 respectively, below.

5.       TABLE 1 — "OLDER" CLOSING CODES — Their Effect on Accounts in Bankruptcy:

6.       " OLDER" CLOSING CODES – Effects and Their Characteristics – Additional Information:

A.      CC 81 — Does not prevent assessments from posting to any module in the entity, and it does not affect the subsequent processing of modules that do not contain a TC 520 CC 81. It freezes the entity from all offsets and refunds. Shows Alpha freeze of —W and IDRS status of 72.

B.      CC 83 — Freezes the entity from all offsets. Refunds will not be frozen on pre– and postpetition modules. Shows Alpha freeze of —V and IDRS status of 72.

C.      CC 84 — Allows assessment, offset, refund, sends out standard notices and generates litigation transcripts, but does not suspend the balance due account for the module to which it is input. Shows Alpha freeze of —W and IDRS status — No Change.

D.      CC 85 — Does not prevent refunds if no balance due modules or balance due indicators are present in the entity. Otherwise, refunds and offsets are frozen. Shows Alpha freeze of —V and IDRS status of 72.

E.      CC 86 — Allows assessments of all returns and adjustments, but prevents issuance of all balance due notices, except for one "information" notice. Refunds and offsets are not frozen. Shows Alpha freeze of —V and IDRS status of 72.

F.      CC 87 — Allows all assessments but prevents the issuance of all balance due notices except one "information" notice. Systemic offsets are unaffected. Refunds are frozen. Shows Alpha freeze of —V and IDRS status of 72.

G.     CC 88 — Freezes the entity from all refunds and offsets. Shows Alpha freeze of —V and IDRS status of 72.

H.      CC 89 — Allows assessments, but prevents the issuance of all balance due notices except one "information" notice. Prevents offsets. Refunds will be issued to the taxpayer. Often used in Chapter 13. Shows Alpha freeze of —V and IDRS status of 72.

Note:

The freeze indicators used for bankruptcy (Alpha —V and —W freezes) affect notices, offsets, and refunds, depending on the CC used.

7.       TABLE 2 — UPDATED CLOSING CODES – Effective January 2002 – Their Effect on Accounts in Bankruptcy:

8.       All new closing codes have the -V freeze indicator. Section 11 of Document 6209, ADP and IDRS Information, gives additional information on closing codes.

25.17.5.6.2  (09-01-2004)
Input of TC 521

1.       A TC 521 reverses a TC 520. All of the TC 520 closing codes operate independently of each other. For example, a TC 521 CC 81will not reverse a TC 520 CC 83 or a CC 67. A TC 521 with 999 statistical indicator will reverse all open TC 520s in a module with CC 81, 83, or 85 through 89, and CC 60 through 67.

Note:

The Insolvency Interface Program (lIP), in conjunction with the Automated Insolvency System (AIS), will release all TC 520 CCs. However, TC 520 CC 84 must be in the AIS Transaction Code File before lIP will automatically release it. The TC 520 Closing Code Workshop, (December 2001), and the IIP User's Guide, provide additional information.

25.17.5.7  (09-01-2004)
Liens and Insolvency

1.       Valid Prepetition Federal Tax Lien. Under I.R.C. § 6321, a federal tax lien attaches to all property and rights to property of the taxpayer, whether real or personal. A Notice of Federal Tax Lien (NFTL), filed prior to bankruptcy, is valid and may allow the Service a secured status in bankruptcy.

2.       Effectiveness of the NFTL. Exemptions provided by state law as set forth in 11 U.S.C. § 522 are ineffective against the execution and the creation of a federal tax lien filed prior to bankruptcy, and such a lien is still valid.

3.       Secured Amount Cannot Exceed Equity. Even with a valid NFTL on file prior to bankruptcy, the Service's secured amount listed on a proof of claim cannot exceed the equity in the debtor's assets, if known.

4.       AIS- ALS Interface. The Automated Insolvency System (AIS) interfaces with the Automated Lien System ( ALS ) to generate copies of tax liens. Additional lien research, if necessary, should be conducted according to local guidelines.

5.       Proof of Claim and Lien Copies. If the IRS has a secured proof of claim, a copy of the ALS -generated (valid prepetition) Notice of Federal Tax Lien may be attached if required or requested by the local bankruptcy court (or trustee). IRM 25.17.6.2.3(2), Lien Attachment, provides information on attaching a lien copy to a proof of claim. Also see IRM 25.17.5.7.2, Refiling of Liens, and IRM 25.17.14.11, Release of Liens.

25.17.5.7.1  (09-01-2004)
Erroneous Lien Filing

1.       Withdrawal of Lien. If research reveals a Notice of Federal Tax Lien (NFTL) was filed in violation of the automatic stay (for example, the federal tax lien was filed the day after the date of the bankruptcy filing), a Withdrawal of Notice of Lien Filing must be expeditiously prepared and issued to the recording office.

2.       Insolvency Responsibility. Insolvency is responsible for promptly notifying the originator (for example, a revenue officer) of an erroneously-filed lien.

3.       Timeframe. The contact to the lien originator must be made immediately because corrective actions must be initiated within two days of the date the Service first becomes aware of the violation of the automatic stay.

4.       Prevention of Stay Violations. The Service may be liable for damages if timely corrective actions are not taken.

5.       Notification to Originator of Lien. The originator of the lien filed in error is responsible for the Lien Withdrawal process. Therefore, the Insolvency office must contact the lien originator promptly to advise of the erroneous lien filing so the lien can be quickly withdrawn (by the originator).

6.       Information to the Lien Originator. Insolvency is obligated to advise the originator (or originating office) of the procedures for a Lien Withdrawal after an erroneous lien has been filed.

A.      Form of Filed Notice of Federal Tax Lien. Insolvency must alert the originator to the two–workday timeframe to which the Service must adhere when addressing violations of the automatic stay, including erroneous lien filings. Insolvency should remind the originator Form 10916, Withdrawal of Filed Notice of Federal Tax Lien, must be issued promptly.

B.      Letters. Insolvency must also advise the originator appropriate letters, as required by RRA 98, must be sent out promptly. They are L03333, ARC 6320, Notice Rescission Letter, and Form 12596, Withdrawal of Request for Collection Due Process Hearing Under I.R.C. § 6320.

C.      Attorney to be Copied . Insolvency should provide the name and address of the debtor's attorney to mail a copy of the Lien Withdrawal letter.

7.       If Insolvency Issues a Lien Withdrawal. Occasionally, the Lien Withdrawal letter (Form 10916) and other appropriate letters must be sent to the debtor and representative directly from Insolvency, for instance, if the originator of the lien cannot be determined. If so, Insolvency should take appropriate actions listed below.

a.       Initiate corrective actions within two workdays of the date of the erroneous lien discovery.

b.       Prepare Form 10916 expeditiously.

c.       Have form signed by a properly delegated authority.

d.       Prepare and send out the appropriate letters required under RRA 98. See IRM 25.17.5.7.1(6) above.

Caution:

A Notice of Inadvertently Filed Notice of Federal Tax Lien cannot be used to withdraw the lien, nor can a Certificate of Release.

8.       Notice to Creditors. If the debtor submits a written request for copies of the Lien Withdrawal notice to be forwarded to any creditor or credit reporting agency, the Service must comply promptly with the debtor's request. However, before the Service can honor such a request, the debtor must:

·         provide to the Service the corresponding names and addresses for this information; and

·         grant the Service written authority to disclose this information

25.17.5.7.2  (09-01-2004)
Refiling of Liens

1.       Timely Refiling of NFTL. When the statutory period for collection has been extended or suspended, it may be necessary to refile the Notice of Federal Tax Lien to maintain the continuity of priority established by the original filing when the IRS has a secured proof of claim. Since the filing of a bankruptcy proceeding suspends the statutory period for collection of taxes, Insolvency should refile liens within the required period of time. IRM 25.17.6.2.2.1 addresses lien refiling identification during a cursory review.

Note:

Normally, refiling of a tax lien by itself is not considered a violation of the automatic stay under 11 U.S.C. § 362 since a lien is not being created, merely extended.

2.       Timely Lien Refile Determination/Use of AIS. To protect the government's interests, Notices of Federal Tax Liens must be refiled timely. If liens are not refiled timely, the government may lose its lien priority against other creditors. Insolvency can use AIS to do the follow-up work necessary to identify lien refilings.

3.       Information to ALS . After Insolvency has determined a lien must be refiled, the lien refile request will be prepared by Insolvency and forwarded promptly to the Automated Lien System ( ALS ). ALS will ensure the lien is refiled. Insolvency should establish monitoring measures to follow-up on lien refilings to determine if they are being done on a timely basis.