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

.25.17.1  Overview of Bankruptcy

• 25.17.1.1   Federal Bankruptcy Law
• 25.17.1.2   The Bankruptcy Court
• 25.17.1.3   The Role of Insolvency
• 25.17.1.4   Coordination with Other Government Agencies
• 25.17.1.5   Disclosure and Bankruptcy
• 25.17.1.6   Glossary — Bankruptcy Terms

25.17.1.1  (09-01-2004)
Federal Bankruptcy Law

1.       Authority. The U.S. Constitution grants Congress authority to enact federal bankruptcy laws. The Bankruptcy Act of 1898 formed the basis of federal bankruptcy law until 1979 when the enactment of the Bankruptcy Code (11 U.S.C.) repealed the old law and codified procedures making the bankruptcy process less burdensome for the debtor. A major amendment to the Bankruptcy Code came about with the enactment of the Bankruptcy Reform Act of 1994 (BRA 94) affecting the government's treatment of debtors, notably by granting permission to assess taxes while the debtor is under the protection of the automatic stay.

2.       Principle of Bankruptcy. The general underlying principle of bankruptcy provides a debtor, unable to pay all creditors, a way to pay what the debtor can afford while receiving forgiveness for debt that cannot be paid.

Note:

IRM 25.17.1.6, Glossary – Bankruptcy Terms, gives a definition of "bankruptcy."

3.       Automatic Stay. The most notable feature of bankruptcy law is the creation of the automatic stay upon the entry of the order for relief.

A.      When a debtor files a petition in bankruptcy, the court enters an order for relief, which immediately stops and prohibits any attempt by creditors to collect prepetition debts owed by the debtor or otherwise exercise control over property of the estate or the debtor. 11 U.S.C. § 362 .

4.       Debtor. Most bankruptcy proceedings begin when the debtor (the person unable to pay his, her, or its debts) files a petition in bankruptcy court seeking financial relief from creditors. Individuals, corporations, partnerships, railroads, municipalities, and other forms of government have the right to file bankruptcy. IRM 25.17.1.6, Glossary — Bankruptcy Terms, defines "person" as it relates to bankruptcy.

Note:

While in bankruptcy (and throughout this IRM chapter), a taxpayer is generally referred to as adebtor.

5.       Advantages to Debtors. Bankruptcy is attractive to debtors because it offers desirable goals. When negotiations with creditors fail, debtors may be faced with immediate garnishment of their salaries and repossessions of their assets. Business debtors may have their businesses closed through repossession or foreclosure.

A.      Temporary Relief. Bankruptcy offers immediate temporary relief from creditor pressure by staying all creditor actions against the debtor.

B.      Long-Term Relief. Bankruptcy can provide long-term relief by allowing a debtor to extend the time for payment of a debt.

C.      Permanent Relief . Finally, bankruptcy can provide permanent relief by discharging debts. The relief provisions of the Bankruptcy Code can give the debtor a fresh start.

6.       Creditor. Occasionally, creditors will force a debtor into bankruptcy by involuntary means. Creditors include those persons and entities who have claims against the debtor, usually for debts incurred before the bankruptcy was filed (prepetition debts). Because many debtors and bankruptcy estates continue to incur debt after the bankruptcy petition date, creditors can also hold postpetition claims.

7.       Advantages to Creditors. Bankruptcy also offers advantages to creditors, such as:

A.      Greater Recovery on Claims. Bankruptcy can offer a greater recovery on creditors' claims. Traditional debtor/creditor remedies usually lead to the piecemeal dismantling of the debtor's business through repossession and sale of the debtor's assets. Such actions by creditors may cause a business to fail.

B.      Preserves Value of Business. Bankruptcy can preserve the going-concern value of a business. The going-concern value of an operating business enterprise can exceed its liquidation value.

C.      Operating Enterprise Sale . Bankruptcy allows the sale of a business as an operating enterprise and restrains creditors from precipitous actions.

D.      Equitable . Each creditor receives a fair share of the funds available.

8.       Bankruptcy Code. The Bankruptcy Code provides an orderly method for the debtor's financial rehabilitation (Chapters 11, 12, and 13) or the liquidation and distribution of a debtor's assets (Chapter 7). It is a federal law, intended to be applied uniformly among all states and possessions.

9.       Filings. Since the adoption of the Bankruptcy Code, the number of bankruptcies has risen dramatically. Between 1980 and 2003 annual bankruptcy filings rose from 287,570 to 1,660,245. In calendar year 2003, total bankruptcy filings in the United States increased 5.2 percent from the number of filings in calendar year 2002. (Data released by the Administrative Office of U.S. Courts.)

25.17.1.2  (09-01-2004)
The Bankruptcy Court

1.       Jurisdiction. Bankruptcy courts generally have jurisdiction over all matters concerning payment of a debtor's financial obligations under the Bankruptcy Code and administration of the bankruptcy estate. Bankruptcy court jurisdiction includes the authority to determine the amount of tax due by the debtor or estate and what taxes will be discharged, meaning the debtor no longer will be personally liable. The bankruptcy court also has jurisdiction over any matters concerning collection of tax debts at issue in the bankruptcy case, or collection from any property of the estate.

2.       Bankruptcy Judges. Bankruptcy judges are appointed under Article I of the U.S. Constitution by the appellate circuit courts for a term of 14 years.

25.17.1.2.1  (09-01-2004)
Associate Area Counsel

1.       Office of Division Counsel. The Office of Division Counsel (Small Business/Self-Employed SB/SE) provides primary legal services on a local basis to the Small Business/Self-Employed and Wage and Investment Operating Divisions. It holds responsibility for collection and bankruptcy work, regardless of the type of taxpayer entity involved.

2.       Area Counsels/Associate Area Counsels. The Office of Division Counsel (Small Business/Self-Employed) headquartered in New Carrollton, Maryland, is divided into eight SB/SE Area Counsels with 49 local offices. Associate Area Counsel, present in offices formerly staffed by District Counsel or Associate District Counsel, report to the Area Counsel for their geographic area.

3.       Local Associate Area Counsel. Local Insolvency offices should deal directly with attorneys in their local Associate Area Counsel (SB/SE) office on issues requiring case-specific legal advice and guidance. Throughout IRM 25.17 Bankruptcy, the term "Counsel" is used to indicate Associate Area Counsel (SB/SE).

4.       Communication – Counsel and Insolvency. A good working relationship between Insolvency and Counsel fosters quality bankruptcy programs. Ongoing dialogue between Insolvency and Counsel should be maintained to ensure proper actions are taken by Insolvency. Counsel can apprise Insolvency of current court decisions and issues that arise, particularly at the local level.

5.       Outreach. Insolvency and Counsel are encouraged to promote continuing interaction with trustees and members of the bar association to work cooperatively at the local level in resolving matters of mutual concern. Outreach efforts afford a venue to resolve recurring bankruptcy issues and concerns with stakeholders.

25.17.1.2.2  (09-01-2004)
Department of Justice — Tax Division

1.       The Service's Lawyer. Under federal law, the Department of Justice is the Service's lawyer in the United States bankruptcy court and represents the Internal Revenue Service (IRS) in bankruptcy court.

2.       Delegation of Authority. Although the Assistant Attorney General (Tax Division) has the authority to handle most bankruptcy referrals, normally that authority is delegated to the United States Attorney in routine proceedings. See IRM 25.17.1.2.3, United States Attorney.

3.       Direct Referrals. Ordinarily SBSE Counsel has authority to make referrals of bankruptcy cases to the Department of Justice. However, pursuant to guidelines established by the Department of Justice, the United States Attorneys, and the Office of IRS Chief Counsel, Insolvency has the to authority to refer some types of cases directly to the Assistant Attorney General (Tax Division) or to the U. S. Attorney's Office.

4.       SAUSAs. In some areas, Counsel attorneys are commissioned as Special Assistant United States Attorneys (SAUSAs). SAUSAs are assigned litigation responsibility for certain types of bankruptcy proceedings and issues.

25.17.1.2.3  (09-01-2004)
United States Attorney

1.       Delegated IRS Representative for Bankruptcy Court. In its capacity as the IRS representative for bankruptcy proceedings, the United States Attorney's Office is served with all legal bankruptcy documents. Although primary litigation responsibility rests with the Department of Justice Tax Division, it may be delegated to the local United States Attorney's Office, or to Special Assistant United States Attorneys (SAUSAs) in Associate Area Counsel (SB/SE), depending on the judicial district, the legal issues inherent in the case, and the type of proceeding involved in the specific case. The U. S. Attorney's office (i.e., Assistant United States Attorneys (AUSAs)) frequently represent the government in bankruptcy court proceedings for formal court appearances.

Note:

In addition to representing the IRS in bankruptcy proceedings, AUSAs serve as legal representatives for other governmental agencies.

25.17.1.3  (09-01-2004)
The Role of Insolvency

1.       Introduction. Bankruptcy law is the prevailing authority when a taxpayer files bankruptcy. Bankruptcy laws are separate from tax laws, and coordination is necessary to comply with both. Insolvency, a part of the Compliance function for the Small Business/Self Employed Operating Division of the IRS, is responsible for administering that coordination.

2.       Insolvency Responsibilities. Insolvency handles all bankruptcy cases and is primarily responsible for the IRS bankruptcy program.

A.      Insolvency must ensure appropriate actions are taken to suspend collection upon the filing of a bankruptcy, ready accounts for proof of claim filing, and monitor cases throughout the life of the bankruptcy.

B.      Insolvency is charged with protection of the government's interests while the debtor's accounts are under the jurisdiction of the bankruptcy court.

C.      Insolvency's staff must be knowledgeable about the Bankruptcy Code and understand the impact the Code has on the collection of taxes.

3.       Cessation of Collection Actions. Generally, filing bankruptcy gives a debtor immediate relief from all demands for payment and collection enforcement actions. IRS employees, upon learning of the bankruptcy, must cease all demands and enforcement actions directed against the taxpayer/debtor and take prompt and appropriate corrective actions. Failure to do so may result in the Service's being sued for damages and attorney fees, although punitive damages cannot be awarded.

4.       Coordination With Other Functions. It is not only the role of Insolvency to process bankruptcy cases involving the IRS, but to coordinate the activities of other functions on all bankruptcy cases as well. Insolvency employees assist other Service employees when important bankruptcy-related case issues arise and elevate the more complicated and significant issues to Counsel.

5.       Balancing the Interests of the Debtor and the Government. Insolvency follows established procedures to ensure debtors are afforded the protections guaranteed them under the Bankruptcy Code. Insolvency employees are charged with processing bankruptcy cases fairly and efficiently, in a manner that balances the interests of the debtor and the government, while attempting to collect the proper amount of tax.

6.       Redacted SSNs. Beginning December 1, 2003, to protect taxpayer privacy, documents submitted to the court by Insolvency cannot provide full Social Security numbers (SSNs). Only redacted SSNs, giving the last four numbers of an SSN, are allowed. Employer Identification Numbers (EINs) are still provided in full.

7.       Negotiations – Avoiding Litigation. Disputes between the debtor and the Service in a bankruptcy case can result in difficult tasks for Insolvency. To avoid unnecessary litigation, Insolvency resolves as many of these disputes as possible through negotiation without resorting to the referral process. Expertise and tact must be exercised by Insolvency employees handling these matters ensuring debtors are treated according to the provisions of the Bankruptcy Code and government resources are conserved.

8.       Deadlines/Referrals. Insolvency employees must analyze pending litigation issues and meet strict deadlines. When necessary, they prepare referrals to Counsel so the government can prepare a timely and effective case position. In bankruptcy matters involving high volume Chapter 13 cases, Insolvency has to work quickly to meet the short timeframes between petition dates and confirmation hearings.

9.       First Meeting of Creditors. Insolvency employees and revenue officers (ROs) may attend the first meeting of creditors (341 Meeting or 341 Hearing) to question the debtor. They can obtain information on assets, unpaid trust fund taxes, unfiled tax returns and other noncompliance issues.

10.   Expert Witness. Insolvency employees testify in bankruptcy court as expert witnesses on behalf of the Service. This duty requires intensive preparation. The employee must understand the issues in dispute and capably provide expert testimony to protect the government's interests.

11.   Overall Responsibilities. Overall, Insolvency's responsibilities extend to a commitment of:

A.      prevention and correction of violations of the Bankruptcy Code

B.      timely case freezes and resolution of prepetition issues

C.      quality preparation and timely filing of proofs of claim

D.      entering into meaningful negotiations to avoid litigation

E.      timely reviews and objections to plans

F.      monitoring debtor tax compliance, including trust fund taxes and the pyramiding of business taxes

G.     overall protection of the government's interests

Note:

IRM 25.17.3.2, Insolvency's Responsibilities and Authority,

provides additional information on Insolvency's role within the Service.

25.17.1.3.1  (09-01-2004)
Coordination between Insolvency Units

1.       Responsibility for Bankruptcy Case. When a debtor files bankruptcy in an area other than where the delinquent accounts are located, the Insolvency office where the bankruptcy is pending has the responsibility for filing all IRS claims and monitoring the bankruptcy proceedings.

2.       Coordination of Efforts. When Insolvency identifies tax accounts assigned to its local area, but discovers the taxpayer has a bankruptcy pending elsewhere, the Insolvency unit having the tax accounts must make prompt contact with the other Insolvency unit. The two Insolvency units must coordinate actions in the case, such as resolving outstanding levies, identifying all accounts, and performing lien research.

3.       Change of Venue. A bankruptcy case may be transferred from the jurisdiction of one court to the jurisdiction of another court. This movement may require the reassignment of the case from one Insolvency office to another. The Insolvency managers of the two offices involved must coordinate the transfer of AIS information and any paper or electronic files.

25.17.1.3.2  (09-01-2004)
Internal Revenue Manual 25.17.1 - 14, Special Topics, Bankruptcy

1.       The Bankruptcy IRM. Internal Revenue Manual (IRM) 25.17.1 - 14, Special Topics, Bankruptcy, contains policy, procedures, information, instructions, guidance, and references concerning bankruptcy proceedings. It provides processing actions Insolvency employees must take on the bankruptcy cases assigned to Insolvency.

Note:

Due to the rarity of a Chapter 9 bankruptcy, Adjustment of a Municipal Debt, only minimal information is provided in IRM 25.17 on governmental bankruptcy filing.

2.       Users. Most IRS employees outside of Insolvency will be able to find basic information on bankruptcies in IRM 25.17 subsections 1 through 4. Insolvency employees should refer to all sections in IRM 25.17.1 - 14.

3.       Sections in the Bankruptcy IRM. The subsections of IRM 25.17 listed below apply to all Service employees having contact with taxpayers who have filed bankruptcy or whose cases have bankruptcy-related issues.

a.       Overview of Bankruptcy

b.       The Bankruptcy Code

c.       Debtors' Delinquent Accounts

d.       Common Bankruptcy Issues

e.       Opening a Bankruptcy Case

f.         Proof of Claim

g.       Bankruptcy Processing of Chapter 7 Cases

h.       Reserved

i.         Bankruptcy Processing of Chapter 9 Cases

j.         Payments in Bankruptcy

k.       Bankruptcy Processing of Chapter 11 Cases

l.         Bankruptcy Processing of Chapter 12 Cases

m.     Bankruptcy Processing of Chapter 13 Cases

n.       Closing a Bankruptcy Case

4.       Counsel Advice. While all bankruptcies are filed under the Bankruptcy Code, the interpretation and application of that law may vary from one judicial district to another. As a result, IRM 25.17.1 - 14 provides general guidelines related to bankruptcy. It does not eliminate the need for employees to seek guidance from Counsel when necessary, to research other sources, or to become familiar with local rules, agreements and standing orders.

Note:

Advice from local Counsel should be restricted to case-specific issues. Questions concerning IRM procedures and policy decisions surrounding case processing must be directed to Policy, Technical and Insolvency, in SBSE Headquarters.

25.17.1.4  (09-01-2004)
Coordination with Other Government Agencies

1.       Other Government Agencies. Frequently, governmental departments and agencies, other than the Department of Treasury, have an interest in a pending bankruptcy proceeding. Their interest may result from:

A.      a contractual relationship with the debtor;

B.      a determination the debtor received excessive profits which should be repaid;

C.      the debtor defrauding the government in some way; or

D.      any activity causing a department or agency to owe money to, or have a claim against, a debtor.

2.       Service Cooperation. The Service has a responsibility to cooperate and assist in collecting debts due the United States which arise out of the activities of any other department or agency. However, after the debtor files for protection of the bankruptcy court, the collection of those debts may be prohibited by the automatic stay. In these and similar situations, it will sometimes be necessary to deal with other departments or agencies of the government.

3.       Refund Setoffs – Other Agencies. A debtor might owe no federal taxes and be due a federal tax refund. A department or agency might seek a set off of an amount to cover an indebtedness through the tax refund due the debtor. Setoffs are prohibited once a bankruptcy is filed, because of the automatic stay imposed by the bankruptcy.

4.       Counsel Guidance. When coordination with other government agencies or departments (except Treasury) becomes necessary in a pending or actual bankruptcy proceeding, any problems and/or recommendations should be presented to Counsel. IRM 25.17.4.3.4, Offsets to Other Federal and State Agencies, and IRM 25.17.4.3.5, Federal Payment Levy Program (FPLP) provide additional information.

25.17.1.5  (09-01-2004)
Disclosure and Bankruptcy

1.       Introduction. During the pendency of a bankruptcy proceeding, which can range from a few days to several years, IRS employees can have numerous contacts on the case. These may include oral, written, and electronic communications, as well as making personal appearances at 341 meetings of creditors and giving testimony in bankruptcy court.

2.       Damages/Penalties for Unauthorized Inspection or Disclosure. Service employees must not inspect or disclose confidential tax information without authorization. They must be aware of disclosure laws and what is permitted to be disclosed and to whom it may be disclosed. Unauthorized inspection or disclosure of returns or return information may result in civil damages against the United States (I.R.C. § 7431) and/or criminal penalties against the individual who inspected or disclosed the information. I.R.C. §§ 7213 and 7213A.

3.       Statutory Authority. I.R.C. § 6103 contains specific provisions forming the statutory framework for disclosures authorized in the bankruptcy context.

4.       Tax Administration. Significant differences exist in the disclosure rules depending upon whether or not a proceeding pertains to tax administration, as defined in I.R.C. § 6103(b)(4).

5.       General Rule. A bankruptcy case should be considered a proceeding pertaining to tax administration if the bankruptcy court's jurisdiction is properly invoked in any manner to determine a tax matter, and the federal government and the debtor (taxpayer) are properly before the court.

Example:

The debtor's listing the IRS as a creditor in the petition or in an attached schedule of liabilities, or the IRS's taking formal action, such as filing a motion to compel filing of a tax return, are examples of proceedings pertaining to tax administration. Another example is the IRS's filing a proof of claim for taxes owed, even though the debtor failed to list the IRS as a creditor in the debtor's schedules filed with the bankruptcy court.

6.       Certain Disclosures Allowed. Under the rules of I.R.C. § 6103(h), if a bankruptcy case pertains to tax administration, certain disclosures of the debtor's tax information are permitted to the court, to the Department of Justice, to case trustees (including the standing Chapter 13 trustee), or to any other party to the proceeding. Such disclosures generally do not require the debtor's consent.

Caution:

Disclosures under I.R.C. § 6103(h) should be limited to information relevant to the tax matter at issue.

7.       Non-Tax Administration. If a bankruptcy case does not involve tax administration, the debtor's tax information usually can be disclosed only:

A.      with the debtor's consent;

B.      to a Chapter 7 or 11 case trustee; or

C.      in a criminal proceeding pursuant to I.R.C. § 6103(i).