Overview
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Bankruptcy Section 6658
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Golden Parachute
Definition of "pending"
Chapter 9 Cases
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Common Issues
IRS Case Processing
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25.17.10  Payments in Bankruptcy

• 25.17.10.1   Applying Payments in Bankruptcy
• 25.17.10.2   Chapter 11 Excess Interest
• 25.17.10.3   Non-Pecuniary Loss Penalty Payments
• 25.17.10.4   Payment– Unassessed Liability/No Open Modules
• 25.17.10.5   Proper Application of Payments
• 25.17.10.6   Balancing Payments
• 25.17.10.7   Timeframes for Processing of Payments

25.17.10.1  (09-01-2004)
Applying Payments in Bankruptcy

1.       AIS Processing. Automated Insolvency System (AIS) processing is available for most bankruptcy payments. The AIS User's Guide provides instructions for automatic posting of payments received through bankruptcy proceedings. Payment posting vouchers and the accompanying payments are routed, per local guidelines, to the appropriate Campus for posting.

Note:

To resolve payment posting problems, Insolvency employees must familiarize themselves with all aspects of AIS, including the AIS User's Guide, AIS Alerts on the Intranet, and AIS enhancements.

2.       Bankruptcy – Involuntary Payments. Payments received through the bankruptcy are considered involuntary payments. Absent court orders or confirmed plan designations to the contrary, bankruptcy payments are applied to give optimum benefit to the government as follows:

a.       first to liabilities listed as secured,

b.       then to unsecured priority, and

c.       lastly, to the claim's unsecured general class.

3.       Dischargeable Liabilities. Payments should be applied to dischargeable liabilities in the same manner as above.

Note:

If a dischargeable liability has been adjusted at the time the payment is received, Insolvency should apply the portion of the payment that would have gone to the discharged liability to non-discharged liability on the proof of claim, or according to local guidelines.

4.       Court Designation. If a confirmed plan or a court order defines payment designation, the payment will be manually applied as directed.

5.       Counsel Guidance. When complex or unusual concerns arise, Counsel should be consulted.

25.17.10.1.1  (09-01-2004)
Payments on Unfiled Returns

1.       Trustee Payments on Unfiled Returns or Unassessed Deficiencies. During a bankruptcy proceeding, the Service may file an unassessed (or estimated) proof of claim to protect the government's interests. The trustee sends payments to the IRS on the proposed liability based on the Service's claim:

A.      when the debtor has failed to file a tax return; or

B.      when an SFR assessment or an assessment for a tax deficiency has been proposed.

2.       Payment Retention — Exception Allowed for Bankruptcy. Because of the bankruptcy, the Service is allowed to retain trustee payments based on the IRS ’s unassessed claims even though the case has unmatched payments (e.g., unresolved credits) if:

A.      our claim has been estimated, and the debtor has not filed an original return; or

B.      Examination does not pursue the assessment of a proposed deficiency.

3.       Deposited to URF or XSF. Such payment(s) will be deposited by the Service and be credited to either the Unidentified Remittance File (URF) or to the Excess Collections File (XSF). The determining factor is the age of the payment.

4.       URF Guidelines. If the IRS RECEIVED DATE of the credit is less than one year from the date Insolvency prepares the form for processing the credit, the payment goes to URF accompanied by Form 2424, Account Adjustment Voucher.

·         this two-part form authorizing the credit to be moved to the Unidentified Remittance File (URF) must be used when a credit is less than one year old

·         Form 2424 must be prepared indicating the credit side to the URF account

·         a separate form must be completed for each credit being moved

·         verification (IDRS or CFOL prints) must be attached to prove the current status of the credit and to show the date of payment. See IRM 3.17.10.3.2.

Note:

Annotation on the form should read : " This credit is a bankruptcy payment and should not be refunded or applied. " Also, the form must indicate: " NO FOLLOW-UP ACTION WITH TAXPAYER IS REQUIRED" so the Service will not attempt to contact the debtor.

·         Accounting will add the credit to the URF

·         when the payment reaches one year of age, it will automatically roll over to the XSF

5.       XSF Guidelines. If the IRS RECEIVED DATE of the credit is one year or more from the date Insolvency prepares the form for processing the credit, the payment is forwarded to XSF using Form 8758, Excess Collections File Addition.

·         Form 8758 must be completed to move the credit to the Excess Collections File

·         a separate form is required for each credit being transferred

·         verification (IDRS or CFOL prints) must be attached to prove the existence of the credit to be transferred to XSF and to show the date of payment – IRM 21.2.4.4.15.1, Excess Collection File

Note:

The form should be annotated : " This credit is a bankruptcy payment and should not be refunded or applied. " The form must also state, "NO FOLLOW-UP ACTION WITH TAXPAYER IS REQUIRED" so the Service will not try to contact the taxpayer.

6.       Credit Resolution. When an unresolved credit appears on a tax module for a bankruptcy account, Insolvency employees must exhaust all efforts to resolve the credit prior to the transfer of the credit to either URF or XSF.

Note:

If a payment has been transferred to the Excess Collections File, and a return is subsequently filed by the debtor, the payment can usually be retrieved from the XSF and applied to the account.

25.17.10.1.2  (09-01-2004)
Surplus Payments from Trustee

1.       Trustee Surplus Payments. If, due to post-discharge trustee collection action, the trustee remits a payment that is more than the unpaid balance of the claim, the surplus (or excess) payment, or the entire check, if appropriate, should be returned promptly to the trustee. It is a matter of local discretion if Insolvency should:

A.      return the check to the trustee; or

B.      return the check and request that payment be reissued in the correct amount; or

C.      process a request for a refund of the surplus.

25.17.10.1.3  (09-01-2004)
Designated Payment Code

1.       Payment Codes. Designated Payment Code, DPC-03, should be used for most bankruptcy payments. When a confirmed plan provides for designation to trust fund taxes, DPC-11 must be used. Document 6209, ADP and IDRS Information, provides information on designated payment codes.

25.17.10.1.4  (09-01-2004)
Taxes Owed by Bankruptcy Estate

1.       " Admin" Expenses. Taxes paid by a trustee or a debtor-in-possession, as an administrative ( "admin" ) expense, are credited only against the taxes incurred by the bankruptcy estate.

25.17.10.2  (09-01-2004)
Chapter 11 Excess Interest

1.       Excess Interest. If the interest rate of the plan exceeds the usual rate of interest charged by the government (as prescribed in I.R.C. § 6621), excess interest may result with a credit balance account as an outcome. These credits must not be refunded to the debtor or transferred to any other modules. To resolve the excess interest payment, Insolvency must input TC 340, restricted interest, in the same amount as the excess interest payment.

25.17.10.3  (09-01-2004)
Non-Pecuniary Loss Penalty Payments

1.       Punitive Penalty Rule. A non-pecuniary loss penalty is a punitive penalty, or "fine," such as a failure to file or a failure to pay penalty. The priority of payments made in a Chapter 7 case is set forth in 11 U.S.C. § 726. Because general unsecured claims are paid ahead of any claims for non-pecuniary loss penalties,payments should not be applied to non-pecuniary loss penalties until all other general unsecured claims are paid.

25.17.10.4  (09-01-2004)
Payment– Unassessed Liability/No Open Modules

1.       Establishing Modules for Pending Assessments. Insolvency sometimes receives payments on a bankruptcy case when the Service's proof of claim reflects a liability not yet assessed, and no modules or filing requirements are open on IDRS. Dummy modules must be established on IDRS to hold the payments until the assessments have posted.

Example:

A tax module is set up on IDRS in preparation for a pending assessment of a Trust Fund Recovery Penalty (a pecuniary loss penalty assessment), or for a secondary (debtor) spousal situation, the spouse having now filed a separate return after filing jointly for prior year(s).

2.       Established Modules with Pending Assessments. Assessments proposed on partially paid or fully paid modules may lead Insolvency to file an unassessed claim. Trustee payments may result in a full pay or overpayment of the original assessment putting a module into Status 12. In those cases when trustee payments can full pay an existing balance due, or the module is already in full paid status, a TC 570 must be input each time a payment is posted to IDRS.

3.       Prevention of Unwarranted Refunds. To avoid systemic refunds when trustee payments are received on unassessed claims:

·         local guidelines should be followed in establishing the module for payment posting purposes

·         TC 520 with appropriate action code should be entered on all tax modules for which unassessed claims are filed

·         the module should be established on IDRS prior to receipt of the first payment to allow AIS automatic posting of the payment and prevent the need for manual application

·         a request for the input of TC 570 must accompany every posting voucher for unassessed claim to prevent the systemic refund of the payment

25.17.10.5  (09-01-2004)
Proper Application of Payments

1.       General Guidelines.

A.      Insolvency must apply payments appropriately and in accordance with the terms and conditions of a plan or court order. Payments received must be applied to only the tax periods covered under the bankruptcy.

B.      Payments received from the bankruptcy for prepetition taxes must not be applied to any part of a tax period for which a proof of claim has not been filed, or any component of a tax liability that is not allowed, or not payable, under the particular provisions of the bankruptcy chapter (for example, postpetition penalty).

25.17.10.6  (09-01-2004)
Balancing Payments

1.       Resolve Discrepancies. Payments must balance exactly with the posting vouchers. Discrepancies discovered after payments have been received by Insolvency should be handled and resolved by Insolvency.

2.       Insolvency Responsibility. Prior to forwarding bankruptcy payments for deposit, Insolvency employees must exercise caution and skill in preparing checks for final processing. When they leave Insolvency, all payments must be ready for immediate processing and depositing by the Service.

25.17.10.7  (09-01-2004)
Timeframes for Processing of Payments

1.       Processing of Payments. Insolvency payments must be processed timely and efficiently under strict timeframes.

A.      Bankruptcy Trustee Checks. Any check covering 100 debtors or more must be received at the designated campus by the fourth workday of receipt of check from the trustee. See IRM 3.8.45.26.4.4, Applying Timeliness Criteria to Bankruptcy Trustee Checks.