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Part 5. Collecting Process

Chapter 5. Insolvencies, Decedents Estates and Estate Taxes

Section 1. Insolvencies, Decedents Estates, and Estate Taxes

5.5.1  Insolvencies, Decedents Estates, and Estate Taxes

5.5.1.1  (06-23-2005)
Purpose and Scope

  1. Use this handbook to collect accounts resulting from estate taxes, decedent liabilities, and insolvencies (other than those under bankruptcy law).

  2. The purpose of this handbook is to establish procedures and to provide information to assist in collection efforts.

  3. It contains instructions for employees throughout the collection organization who are responsible for taking needed actions at various points in the collection process. It covers instructions for:

    1. Compliance Services Collection Operations (CSCO)

    2. Automated Collection System (ACS)

    3. Technical Services Advisory (Advisory)

    4. Insolvency

    5. Field Collections

  4. Use the Legal Reference Guide and confer with Technical Services Advisory and/or Counsel when working decedent or insolvent taxpayers. Procedures may vary and require local modification based on specific legal requirements.

  5. This is the introductory section to the handbook. It contains general background information and procedures equally applicable to decedent cases, estate tax cases, and several common types of insolvencies. Other sections within this handbook provide detailed specific procedures and describe their applicability.

    1. IRM 5.5.2—Working Non-Bankruptcy Insolvency Cases

    2. IRM 5.5.3—Working Decedent Cases

    3. IRM 5.5.4—Proof of Claim Procedures in Decedent and Non-Bankruptcy Insolvency Cases

    4. IRM 5.5.5—Estate Tax Extensions

    5. IRM 5.5.6—Estate Tax Installments

    6. IRM 5.5.7—Collecting Delinquent Estate Tax Accounts

    7. IRM 5.5.8—Estate Tax Liens

5.5.1.2  (06-23-2005)
Decedent and Estate Tax Collections

  1. Working accounts on deceased taxpayers is one of the more complex and challenging tasks expected from Collection employees. Many procedures for decedent cases are different from those for estate taxes because the nature of the liabilities differ.

  2. The following table describes some basic differences in the two:

    Type of Case Debtor is Origin of Liability Collect From
    Decedent taxpayer who died taxes accrued before death that remain unpaid surviving equity in taxpayer’s assets as defined by local property laws
    Estate Tax the estate tax on assets comprising the gross estate required to be reported on Form 706 the estate assets

5.5.1.3  (06-23-2005)
Insolvency and Liquidation Proceedings

  1. Federal law shielding financially troubled individuals and businesses was significantly changed by passage of the Bankruptcy Code in 1978.

  2. The Bankruptcy Code (Title 11 of the United States Code) greatly expanded and liberalized protections afforded debtors by the United States. Bankruptcies increased dramatically and other types of financial restructuring or liquidations involving the Service occur less frequently. The most common are:

    1. Receiverships

    2. Bulk Sales

    3. Corporate Dissolutions

    4. Assignments for the Benefit of Creditors

    5. Securities Investor Protection Act Proceedings

5.5.1.4  (06-23-2005)
Jurisdiction and Initial Processing

  1. Since property rights are determined under state law, jurisdiction over administration of most insolvency, decedent, and estate cases lies with state courts.

  2. When the Service is informed of an insolvency or decedent proceeding, Advisory or Insolvency will

    1. Research internal systems to determine if there are unfiled tax returns or if there are assessed taxes due

    2. Check status of the proceeding with the court

    3. Determine if filing a proof of claim or other actions to collect are appropriate

5.5.1.4.1  (06-23-2005)
Asset vs. No Asset Determination

  1. A "No Asset" proceeding is one where the known expenses of administration exceed the value of the estate assets.

    1. If a collection employee has an active account on the taxpayer, inform them that a proof of claim will not be filed on the case and that field actions should be continued to resolve the case

    2. Record the "no asset" determination and close the Advisory or Insolvency file

  2. "Asset" cases

    1. Enter all relevant information on the Integrated Collection System (ICS), or the Automated Insolvency System (AIS). Use ICS or AIS as appropriate to control and monitor actions on the case.

    2. Secure any unfiled balance due tax returns prior to the bar date.

    3. Issue Form 4490, Proof Of Claim (POC) showing all outstanding assessed taxes and any estimated unassessed amounts.

    4. IRC § 6503(b) suspends the period for collection in any judicial proceeding when all or substantially all of the assets of a taxpayer are under the control of a court. If this condition is present, input Transaction Code (TC) 520, Closing Code (CC) 80 in the case of a probate, and TC 520 CC 81 in the case of any other non-bankruptcy insolvency.

    Reminder:

    Area Advisory or Insolvency may establish a minimum dollar criteria to aid in determination of a "no asset" case. Base the criteria on state exemptions, typical expenses of administration, and area experience in processing decedent cases. Place an Area Counsel advisory opinion supporting the local minimum dollar criteria in Advisory or Insolvency Support files.

5.5.1.5  (06-23-2005)
Administrative Expenses

  1. It is the responsibility of a legally appointed or designated fiduciary to control, maintain, and distribute entrusted property in a manner defined by law. Consistent with local workload management criteria, monitor taxes that accrue during a proceeding to ensure that timely claims are filed. The following types of liabilities may accrue during the administration of a proceeding.

    1. Taxes from the operation of a business

    2. Excise taxes

    3. Income taxes

  2. When Advisory or Insolvency learns that a fiduciary is appointed by the court to operate a decedent/insolvent business or to oversee the administration of an estate, send a letter to the fiduciary advising of the responsibility for filing and paying federal taxes.

  3. Fiduciary trust fund accounts monitored by Advisory or Insolvency are excepted from the FTD Alert program. To monitor a decedent case for trust fund compliance, input Transaction Code (TC) 136 to suppress Federal Tax Deposit (FTD) Alert issuance. When the case is closed, or the fiduciary is dismissed, input TC 137.

5.5.1.5.1  (06-23-2005)
Claiming Taxes as an Administrative Expense

  1. Use Form 2373, Statement of Internal Revenue Taxes Due as an Expense of Administration of an Estate, to claim administrative taxes in a court proceeding.

  2. Form 2373 may be modified, with Counsel concurrence, to meet local requirements.

5.5.1.6  (06-23-2005)
Fiduciary Duties and Liability under 31 U.S.C. § 3713

  1. A fiduciary is a person entrusted with the property of another. It is the responsibility of a legally appointed or designated fiduciary to control, maintain, and distribute that property in a manner defined by law. A fiduciary who fails to pay Service claims may be held personally liable under 31 U.S.C. § 3713.

  2. Advise the fiduciary, as soon as possible, of the potential personal liability either by service of Form 4490 Proof of Claim for Internal Revenue Taxes or Form 10492, Notice of Federal Taxes Due.

  3. If estate assets are distributed without proper payment of Service claims, refer the case to Counsel when the liability meets Law Enforcement Manual (LEM) 5.5 guidelines.

  4. The Statute of Limitations for suit against a fiduciary under 31 U.S.C. § 3713 is normally ten years from the date the tax was assessed.

  5. See IRM 5.17.13.2 for a complete discussion of 31 U.S.C. § 3713 as it applies to an insolvent person.

Exhibit 5.5.1-1  (06-23-2005)
31 U.S.C. § 3713. Priority of Government Claims

  (a) (1) A claim of the United States Government shall be paid first when—
      (A) a person who is indebted to the Government is insolvent and—
        (I) the debtor without enough property to pay all debts makes a voluntary assignment of property;
        (Ii) property of the debtor, if absent, is attached; or
        (Iii) an act of bankruptcy is committed; or
      (B) the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor.
    (2) This subsection does not apply to a case under title 11.
  (b) A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.

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