5.9.4  Common Bankruptcy Issues

5.9.4.1  (01-14-2011)
Property of the Estate

  1. The Bankruptcy Estate. The filing of the bankruptcy petition creates the bankruptcy estate. The estate consists of all of the debtor’s interests in any property at the time the case is filed (11 USC § 541(a)(1)). It also encompasses the interest of the debtor and the non-debtor spouse in certain community property states. (See 11 USC § 541(a)(2) and IRM 5.9.3.5.1.1,Community Property;IRM 5.9.10.8.1, Property of the Estate After Confirmation; IRM 5.9.6.15,Bankruptcy Estate Income Taxes – IRC § 1398; and IRM 5.9.8.13,Internal Revenue Code § 1398 Issues .)

  2. After-Acquired Property. In a Chapter 12 or 13 bankruptcy, property acquired after the petition date but before the case is closed, dismissed, or converted to another chapter, including wages and community property, becomes property of the estate (11 USC § 1207 and 1306). In general, some property, especially wages or other income used to fund the plan, may continue to be property of the estate after confirmation. IRM 5.9.10.8.1 gives additional information about the post-confirmation estate in a Chapter 13 bankruptcy.

  3. BAPCPA Individual Chapter 11. As with Chapter 12 and 13 cases, property of the estate for individual Chapter 11 cases filed on or after October 17, 2005, includes wages and other property acquired postpetition but before the case is closed or converted (11 USC § 1115).

    Note:

    This change has significant tax implications. Interim guidance on how to address the tax consequences of these changes are found in Notice 2006-83, 2006-40 IRB 596. The changes are also discussed in further detail in IRM 4.27.1.4, Bankruptcy Estate and Filing Requirements, IRM 4.27.5.5, Individual Chapter 11 Debtors Required Filings per § 1398 Post BAPCPA,IRM 5.17.10.11, Individuals in Chapter 11, and Pub 908, Bankruptcy Tax Guide.

  4. Counsel Guidance. Complex issues surround what constitutes the property of a bankruptcy estate. Counsel should be contacted for guidance when case-specific issues arise.

  5. Exempt, Excluded, and Abandoned Property. Property may be exempted or excluded from the estate or abandoned by the trustee. IRM 5.9.17.4 provides a full discussion of these property issues as they affect possible postpetition collection.

5.9.4.2  (01-14-2011)
ASED/CSED

  1. Automatic Statute Computations. Master file computes appropriate statute extensions for assessment and collection in most instances when a TC 521 posts and reverses the bankruptcy freeze code.

    Note:

    The statutory period for assessment is not directly affected by bankruptcy for cases filed after October 22, 1994, the effective date of the Bankruptcy Reform Act (BRA), unless the Tax Court petition period is suspended by the automatic stay. (See IRM 5.9.4.2.1, BRA 94 and BAPCPA's Effects on Assessments.

    )

  2. Assessment Statute Expiration Date (ASED) Suspension Timeframes. For bankruptcy cases filed before the enactment of BRA 94, the running of the statutory period for assessment (ASED) is suspended during the period the assessment is prohibited (while the automatic stay is in effect) and for 60 days thereafter (IRC § 6503(h)(1)). To compute a new ASED, 60 days are added to the unexpired time (number of days) remaining on the original statute as of the petition date. Then that amount of time is added to the date of discharge or dismissal (or the date the stay was lifted) to establish the new ASED. (For ASEDs on Exam cases, Examination should be consulted.)

  3. Collection Statute Expiration Date (CSED) Suspension Timeframes. The running of the statutory period for collection (CSED) is suspended for the period collection is prohibited by the reason of the bankruptcy case. Collection is so prohibited when:

    • The Automatic stay prohibits collections, or

    • In the Chapter 11 context, post confirmation during the period in which the confirmed plan provides for payment of the tax debt, and the plan is not in substantial default.

    Computation of a new CSED is similar to an ASED computation. Six months are added to the unexpired time (number of days) remaining on the original statute as of the petition date and that total is added to the discharge or dismissal date (or the date the stay was lifted) to establish the new CSED. IRC § 6503(h)(2)

    Note:

    The IRS will never receive less than the original statute plus 60 days for an ASED extension, or the original statute plus six months for a CSED extension.

  4. CSED Recomputation – Manual Input of TC 550. For non master file (NMF) accounts, a manual input of TC 550 is necessary. The input of a TC 550 must be timely (for example, when the court grants a discharge or dismisses a case). The presence of an unreversed TC 520 in the module will not prevent TC 550 from posting. If a TC 550 is input to a module with an unreversed TC 520 with a bankruptcy closing code, automatic computation of the CSED when the TC 521 posts will not occur.

  5. CSED - Taxpayer Identification Number (TIN) Indicators. The CSED for a tax module is displayed on IDRS. This information is used by Collection employees to determine the time remaining on a collection statute (i.e., if collection actions may be taken on a balance due account).

    1. Individual Tax Return. If a debtor filed an income tax return in any status other than " married filing joint," the CSED is extended for the period the stay is in effect plus six months regardless of the debtor's marital status or if the bankruptcy was a individual or joint filing.

    2. Joint Return - Spouses Filed Joint Bankruptcy. If the tax module is for an IMF joint assessment and the husband and wife have filed a joint bankruptcy, the collection statute is extended against the husband and the wife.

    3. Joint Return - Both Spouses Filed Individual Bankruptcies. If the spouses filed a joint return, but filed individual bankruptcies, the CSED is extended individually for each debtor with each spouse's extension being dependent upon the duration of the stay in his or her own bankruptcy case. In this situation the MFT 30 module usually must be mirrored to two MFT 31 modules, taxpayers residing in community property states being possible exceptions.

    4. Joint Return - Only One Spouse in Bankruptcy. If only one spouse files bankruptcy, and the joint (prepetition) tax return was filed under the non-debtor spouse's Social Security Number (SSN), then Service personnel handling the account(s) must know to whose SSN the CSED extension and freeze code apply. CSED Indicator Codes make this identification possible. An Individual master file (IMF) CSED TIN indicator is input as part of the transaction data of the TC 520. MFT 31 mirroring is usually required when the bankruptcy is discharged or dismissed.

    5. CSED Indicator Codes. The TC 520, closing code, and CSED TIN indicator, can identify which taxpayer spouse is in bankruptcy and to whom the CSED extension applies. The CSED TIN indicator is input by the Insolvency Interface Program (IIP) during initial processing. The indicator codes can also be input manually (i.e., as part of the manual TC 550 extensions in bankruptcy). The applicable IMF CSED TIN indicator codes are:
      P — the CSED applies to the Primary TIN;
      S — the CSED applies to the Secondary TIN; and
      B — the CSED applies to Both TINs.

  6. CSED Protection - MFT 31 for Non-Debtor Spouse. To protect the collection statute, Insolvency must be aware of CSED problems that may develop on the non-debtor spouse account. (See IRM 5.9.3.5.1.1,Community Property, and IRM 5.9.17.6, Joint Account and Non-Debtor Spouse.) When considering collection from a non-debtor spouse, MFT 31 mirroring prior to case closure may be appropriate; for example, if a CSED is imminent or when both spouses have filed individual bankruptcy petitions but filed joint income tax returns. IRM 5.9.17.22.3 provides procedures for the MFT 31 mirroring process. Protection of the CSED on a non-debtor spouse is unnecessary if:

    1. plan payments are sufficient to satisfy the claim and pay the total outstanding liability to a level below the tolerance amount for an MFT 31 transfer.

    2. the liability will be dischargeable against the debtor spouse and outstanding liabilities against the non-debtor spouse do not exceed the tolerance amounts set forth in IRM 5.9.17.23, Mirrored and Non Master File Modules.

    Caution:

    In community property states Counsel advice should be sought before taking collection action against a non-debtor spouse.


    When a bankruptcy specialist or advisor determines that it is necessary to mirror an account to protect the collection statute (CSED) of the non-debtor spouse, the case can be transferred to the CIO to complete MFT 31 mirroring. This can occur at any time during the case progression; however, the caseworker must ensure protection of the bar date before transferring the case to the CIO. When transferring the case to the CIO to request mirroring, the field employee must state in the case history that the case is being transferred to the CIO to complete MFT 31 mirroring and the specific modules that are to be mirrored. All actions regarding mirroring of the account, or the determination that mirroring is necessary in the case should be documented per IRM 5.9.5.4(2).

  7. Other Investigation (OI) Potential. If, at the time a bankruptcy petition is filed, a case is assigned to an RO, an OI may be initiated to ensure continuity of case actions. OIs may be useful in Chapter 7 cases (for example, investigating exempt, excluded, and abandoned property and lien equities).

5.9.4.2.1  (01-14-2011)
BRA 94 and BAPCPA's Effect on Assessments

  1. BRA 94. The Bankruptcy Reform Act of 1994 (BRA 94) brought about significant changes affecting the IRS, including:

    1. Sovereign Immunity. BRA 94 waived the government's sovereign immunity against judgments in connection with enumerated provisions (preferences, violations of stay, etc.). However, sovereign immunity remains in effect on the awarding of punitive damages, and attorney fees are capped.

    2. Assessments Allowed. Before BRA 94, the Bankruptcy Code prohibited assessment of a tax liability unless the court granted relief from the automatic stay. After October 22, 1994, in most cases, the automatic stay for assessment of any tax, including original tax returns, adjustments, Trust Fund Recovery Penalty (TFRP), and agreed audit deficiencies, agreed SFR deficiencies, and agreed AUR deficiencies no longer applied (11 USC § 362(b)(9)).

      Note:

      Deficiencies in which the statutory period for petitioning the tax court has expired prior to the bankruptcy petition can also be assessed even though the assessment may post to IDRS after the petition date.

  2. Impact on ASEDs. BRA 94 has had an impact on ASED computations.

    1. Most Taxes Can Now Be Assessed. For debtors who filed bankruptcy on or after October 22, 1994, the automatic stay does not prohibit the IRS from assessing any tax where the Service would not be required to issue the taxpayer a statutory notice of deficiency. These include 1) the taxpayer's self-assessments arising from filed returns; 2) agreed audit, AUR, or SFR deficiencies; 3) Trust Fund Recovery Penalty (TFRP) assessments; and 4) audit, AUR, or SFR deficiencies where the statutory period for petitioning the Tax Court has expired prior to the filing of bankruptcy.

    2. Unagreed Prepetition Audit Deficiencies. For debtors who filed bankruptcy on or after October 22, 1994, 11 USC § 362(a)(8) and IRC § 6213(f) stay the debtor from filing a Tax Court petition for the period of the automatic stay plus 60 days thereafter. Accordingly, for debtors with an outstanding notice of deficiency, the ASED is suspended as a result of the bankruptcy petition

  3. Computation of the ASED in Bankruptcy Situations. Due to IRC § 362(a)(8) and IRC § 6213(f), bankruptcy suspends the statute of limitations on assessment in cases where a statutory notice of deficiency has been issued and the stay prohibits the commencement or continuation of a Tax Court proceeding involving that tax liability. Rev. Rul. 2003-80, 2003-29 IRB 80 provides published guidance explaining the effects of bankruptcy on the limitations period for assessment.

  4. BAPCPA. For cases filed on or after October 17, 2005, BAPCPA limits the stay on Tax Court proceedings regarding an individual debtor’s tax liability only with respect to a taxable period ending before the order for relief (the stay applies to both prepetition and postpetition corporate liabilities so long as it is a liability the bankruptcy court may determine) (11 USC § 362(a)(8)). Therefore, the indirect ASED stay with respect to deficiency liabilities resulting from IRC § 6213(a) will no longer apply with respect to an individual debtor’s postpetition liabilities.

  5. Consent to Extend ASED. Under BRA 94 the Service may obtain a valid consent to extend the statute of limitations on assessment from entities in bankruptcy. A TC 560, input by Examination, indicates an extension of the ASED.

5.9.4.3  (01-14-2011)
Examination and Insolvency

  1. Examination Contacts to Insolvency. If a debtor is in bankruptcy and an examination is open on a prepetition period, an Examination employee will:

    1. contact the responsible Field Insolvency caseworker or CIO liaison; but

    2. continue with established examination bankruptcy procedures; and

    3. advise Insolvency of any proposed Exam-initiated deficiencies or adjustments that might result in a refund or a credit to the taxpayer. This should be done no less than 30 days before the bar date by sending Insolvency a memorandum, or a locally developed form (along with a copy of the transmittal letter to the Examination report), or a copy of the Revenue Agent Report (RAR).

      Note:

      Insolvency will not perform a periodic follow-up with Examination. Responsibility to notify Insolvency rests entirely with Exam.

  2. Exam's "HOLD" File. Examination establishes a "HOLD" file of cases for which a statutory notice has been issued, and assessment is stayed because a Tax Court petition cannot be filed under 11 USC § 362(a)(8). Periodically Examination transmits a list of these cases to Insolvency.

    1. Timeframe for Insolvency to Contact Exam. Within five workdays of receipt of the exam list, Insolvency will advise Examination which assessments (if any) can be made. Insolvency's response will show the date the stay was lifted, if applicable.

    2. Determining the -L Freeze. Insolvency must run IIP Process D to detect the -L freeze, which indicates accounts selected for an audit and which may require interoffice coordination.

    3. Access to the Automated Insolvency System (AIS) (read only capabilities) can be granted to the examination function.

  3. Insolvency Referrals to Exam. When Insolvency receives tax returns from debtors, and evidence exists that information provided by the debtor understates income or overstates deductions meeting the dollar criterion in IRM 4.27.3.2.1.1(7), a referral can be made to the Examination Technical function. Procedures for preparing and forwarding referrals to Exam are provided in IRM 4.27.3.2.1.1, Returns Eligible for Review.

  4. Abusive Tax Avoidance Transactions (ATAT). During the initial case review process Insolvency caseworkers will determine if a TC 420 (-L freeze) is present with ATAT project codes. CIO cases will be reassigned to the designated Field Insolvency specialist or advisor if any ATAT code is identified. The Field Insolvency caseworker must review the following to identify inconsistencies:

    • Bankruptcy schedules

    • Statement of Financial Affairs

    • Tax returns

    • Financial statements

    The Field Insolvency caseworker should contact the Exam ATAT Coordinator to determine if further investigation is needed. In cooperation with Area Counsel and Exam and Collection ATAT Coordinators, Insolvency will decide if a bankruptcy fraud referral should be pursued.

  5. Employee Plans. Insolvency will advise the Employee Plan (EP) function of the TEGE division when a large dollar or significant case Chapter 11 bankruptcy is filed so EP can research any impact the bankruptcy might have on the EP program. (See IRM 5.9.8.4(15),Notice to TEGE.)

  6. Insolvency Follow–Up/Monitoring. Because confirmations take place quickly in some bankruptcies (notably in Chapter 13), monitoring methods must be established by Field Insolvency for cases involving examination issues. If research indicates one or more tax periods are being examined, and the assigned Exam function has not contacted the Insolvency group, Insolvency should contact that Exam unit to gather current information on the status of the audit.

  7. Reminders - Assessment of Taxes. The Service may, notwithstanding the automatic stay,:

    • assess an agreed tax deficiency (26 USC § 6213(d)).

    • assess a tax shown on a return filed by the taxpayer (26 USC § 6201(a)(1)).

    • assess taxes which are not subject to the deficiency procedures (e.g., the Trust Fund Recovery Penalty, whether the taxpayer agrees or not) (26 USC § 6671).

      Note:

      Unless the period for petitioning the Tax Court is suspended, the automatic stay no longer provides an extension of the ASED; therefore, the Service must take timely action to protect the statute.

    • assess an otherwise assessable tax deficiency on an individual debtor's postpetition period for bankruptcies filed on or after October 17, 2005 (11 USC § 362(a)(8)).

  8. Unagreed Deficiency Assessments. Postpetition assessments of unagreed deficiencies on prepetition periods for which the statutory response time to file a Tax Court petition has not expired are violations of IRC 6213 and must be reversed within two days of identification. Such an assessment would not be valid because the debtor cannot petition the Tax Court while the automatic stay is in effect, and the time to file the petition is therefore tolled. When an Insolvency caseworker determines that such an assessment has posted, the caseworker must contact the Exam or AUR bankruptcy coordinator by phone or secure E-mail to request a reversal of the TC 300/290 assessment. Exam or AUR will input the reversal upon Insolvency notification to meet the two business day requirement. If contact with the bankruptcy coordinator cannot be made to ensure the reversal will be initiated within two business days, the Insolvency caseworker must input the reversal on-line or send an expedited request to Centralized Case Processing (CCP) to have the assessment reversed. If the reversal of the assessment is input by Insolvency or CCP, the Insolvency caseworker must advise the applicable bankruptcy coordinator by phone or secure E-mail of the reversal as soon as possible so the assessment file can be suspensed until closure of the bankruptcy.

    Note:

    These procedures facilitate reassessment of the deficiency after the case is closed by the bankruptcy court.

  9. Documentation. Insolvency must accurately document all contacts with Examination functions in the AIS history at the time of contact. IRM 5.9.5.4,AIS Documentation, provides guidance on required AIS documentation.

5.9.4.3.1  (05-13-2008)
Examination and MFT 31 Mirrors

  1. Mirroring Procedures. Procedures are in place for creating MFT 31 mirror modules when Exam must make an assessment on a non-debtor spouse while a bankruptcy is pending.

  2. Petitions to Tax Court. When one spouse is in bankruptcy during an examination of a joint prepetition tax year, and the IRS issues a statutory notice of deficiency, the time for filing the debtor's Tax Court petition is suspended, and the assessment statute is suspended until the debtor is granted or denied a discharge or dismissed from bankruptcy. However, the time to file a Tax Court petition and the assessment statute for the deficiency is not extended on the spouse who did not file bankruptcy. If the non-debtor spouse does not timely file a Tax Court petition, the deficiency against the non-debtor spouse must be assessed to protect the ASED.

  3. Exam's Request for Mirroring. If Examination determines the deficiency assessment must be made on the non-bankrupt spouse because of the assessment statute, the Exam function will contact the CIO. Because Exam does not have the ability to establish MFT 31 modules, Centralized Insolvency will mirror the module so the assessment can be made.

  4. Exam's Required Actions. Exam will:

    1. contact Insolvency with their determination the non-bankruptcy spouse must be assessed the deficiency;

    2. input the TC 421 to reverse the MFT 30 –L freeze so mirroring of the MFT 30 module can be done;

    3. monitor for the TC 421 to post on MFT 30 module and contact Insolvency; and

    4. monitor for the creation of the MFT 31 mirrored modules and re-input the TC 420 on the MFT 30 module.

  5. Insolvency's Required Actions. Insolvency will:

    1. maintain the bankruptcy freeze (-V or –W for closing code 81). The mirroring can be accomplished without the reversal of the bankruptcy freeze and will remain unreversed to ensure the automatic stay is not violated;

    2. input the required transaction codes to mirror the module (see IRM 5.9.17.22.1,MFT 31 Mirror Modules ); and

    3. input TC 521 on the MFT 30 module after the TC 420 is re-input to ensure the module remains on the system. (See IRM 5.9.13.9(2), Examination Adjustments.)

    Caution:

    Only Insolvency can reverse the bankruptcy freeze code on the modules when necessary.

5.9.4.3.2  (01-14-2011)
MFT 31 Mirroring Requested by Appeals and Other Organizations

  1. Mirroring Procedures. In certain situations, Insolvency may receive a request from Appeals, OIC, AUR, or another organization to complete MFT 31 mirroring on a non-debtor spouse while a bankruptcy is pending.

  2. Collection Due Process (CDP) Cases. When a husband and wife jointly request a CDP hearing and only one of the spouses has filed a petition with the bankruptcy court, the CDP hearing as to the debtor spouse should be suspended. Based on certain circumstances, Appeals may decide to move forward with the CDP hearing with respect to the non-debtor spouse. If the non-debtor spouse has a joint liability with the debtor, MFT31 mirroring is needed to reflect the separate activity on each spouse's account, i.e., non-debtor spouse's CDP hearing and the debtor's bankruptcy proceeding. Mirroring the account on IDRS accommodates Appeals' decision to conduct the non-debtor spouse's hearing without waiting for the resolution of the debtor's bankruptcy.

    Note:

    A CDP hearing for the non-debtor spouse should generally be postponed during bankruptcy cases in community property states because in most cases the levy sources will be community assets that are property of the estate.

  3. Mirroring Requests. Appeals may contact Insolvency to request MFT 31 Mirroring of a joint tax period when an individual's Chapter 11 or Chapter 13 bankruptcy plan has been confirmed. The request for mirroring of the account should be documented in the AIS history.

  4. Insolvency's Required Actions. When the bankruptcy specialist or advisor becomes aware that a Chapter 11 or Chapter 13 plan has been confirmed, and a request for MFT 31 mirroring has been noted in the AIS history, the field Insolvency employee should transfer the case to the CIO to mirror the joint tax period(s). The last history prior to the transfer to the CIO should clearly state that the case is being transferred to the CIO for MFT 31 mirroring and the specific period(s) to be mirrored. The CIO will follow mirroring procedures in IRM 5.9.17.22.1, MFT 31 Mirror Modules.

5.9.4.4  (01-14-2011)
Credits, Refunds, and Offsets

  1. Authority of Right to Offset. The IRS has a right to offset credits owed to a taxpayer against debts the taxpayer owes to the Service. This right is codified in IRC § 6402 and related Treasury Regulations. The Bankruptcy Code preserves the Service's non-bankruptcy rights to setoff in 11 USC § 553.

  2. Mutuality of Debts. Although 11 USC § 553 expressly preserves only the right to setoff when both the credit and the debt occur prepetition, nothing in the Bankruptcy Code abrogates the Service's non-bankruptcy rights to setoff. Thus, setoff may also be available when the credit or the debt occurs postpetition as long as the debts are mutual. ( IRM 5.9.4.4.2. Postpetition Payments and Credits.) Although the Service has a right to setoff mutual debts, for bankruptcies filed before October 17, 2005, the automatic stay prohibits the actual making of the setoff until the stay is lifted. BAPCPA created an exception to the stay for offsets of prepetition income tax refunds against prepetition income tax claims as explained in paragraph (3) below. Insolvency caseworkers should consult Area Counsel for advice for a specific jurisdiction on the applicability of the automatic stay for setoffs not covered by BAPCPA.

  3. BAPCPA Provision. BAPCPA allows prepetition income tax refunds to be offset against prepetition income tax liabilities without a lift stay for bankruptcies filed on or after October 17, 2005. The exception does not apply if an action is pending to determine the amount or legality of a tax liability. (11 USC § 362(b)(26)) However, the IRS may hold any prepetition income tax refund until the validity of the liability is resolved.

  4. Violations of the Automatic Stay. After a bankruptcy is filed, accounts should be examined and research completed promptly to determine if credits are present that need to be resolved, if refunds should be retained or turned over to the debtor or trustee, and if any illegal offsets have occurred. This should be done during the initial review of accounts in Insolvency. (See IRM 5.9.13.4, Case Reviews.)

    1. Timeframe to Correct. If a violation of the Bankruptcy Code has inadvertently occurred, corrective actions must be initiated within two workdays.

    2. Erroneous No Liability Case. An offset may be discovered in an apparent "no liability" case where a tax refund was applied to full pay an existing balance due tax account after a bankruptcy petition was filed. If the bankruptcy freeze code was not input timely, the account could erroneously appear to be one of " no liability" when it is reviewed later in Insolvency. An offset action of this type may be a violation of the automatic stay.

      Note:

      Whenever such an offset is discovered, immediate steps to correct the violation must be taken by the Service, including expedited refund issuance and filing or amending a claim, if appropriate.

  5. Refunds Not Offset but Retained by the Service. The Service may retain ("freeze" under controlling case law) refunds to protect its right of setoff. These refunds may be retained whether they arise prepetition or postpetition. Service policy emphasizes making prompt determinations. Counsel advice may needed when a refund will be frozen for a substantial length of time.

  6. Timeframe. When Insolvency discovers refunds are being retained, the Insolvency caseworker will begin the refund credit resolution process within 20 calendar days. Refunds must not be held solely in anticipation of a future dismissal or discharge that will lift the stay and allow for the Service to offset a credit generated during the pendency of the bankruptcy.

  7. Refund Determination. Insolvency must make a refund determination within 20 calendar days of identification of the credit, either to:

    1. Issue Refund. Issue the refund to the trustee or debtor, as required by local rules/agreement, order, plan or practice; or

    2. Refer to Counsel. An expedited referral should be made to Counsel (if necessary) to file a motion to lift the automatic stay to effectuate a refund offset; or

    3. Retain Refund. Retain the refund to protect the Service's right of offset, but only with concurrence of Counsel.

      Note:

      When reviewing the credit balance module, the presence of a -L freeze or a -R freeze indicates that the return is being reviewed by Exam. The Insolvency caseworker should contact Exam to determine if a manual refund should be requested or if the credit should remain on the account, pending completion of the examination of the tax return. If the refund is to be held, pending completion of the examination, the AIS history should be noted accordingly. The 5792 screen on AIS should be updated with "Hold" in the Issue to field on the Refund Screen on AIS. Exam is responsible for notifying Insolvency of any deficiencies or adjustments that result in a refund or credit. IRM 5.9.4.3(1)(c). Contact with CSCO maybe needed in situations where the refund hold shows a TC 570 with a Julian date of 999 or ASFR shows a TC 150 for .00 with document code 10, and a Julian date of 887.

  8. Guidelines for Refund Determination. SBSE Counsel has issued tolerance criteria for referrals of issues to Associate Area Counsel offices. (See IRM 5.9.4.13.4) These criteria may be adjusted by local Counsel depending on staffing and case loads. If a referral for offset is not appropriate, general refund guidelines are set forth in IRM 5.9.4.4.1(2), Table - Credits, Refunds, Offsets.

    1. Stay Lifted to Allow Refund Offset. It is Service policy not to offset a refund unless the automatic stay has been lifted for periods protected by the automatic stay.

      Reminder:

      For bankruptcies filed on or after October 17, 2005, prepetition income tax refunds can generally be offset to prepetition income tax liabilities without requesting a lift stay.

    2. Secured Status. Generally, the refund entitles the Service to a secured status on the proof of claim – to the extent of the outstanding tax liabilities. Any refund excess will be refunded to the debtor or trustee, per local guidelines or Counsel advice.

    3. Clarify Claim Status. Also, Insolvency must amend or withdraw a claim or issue a credit letter to the trustee, per local procedures, after the offset is completed to clarify the Service's claim for the court.

  9. Chapter 13. After a Chapter 13 confirmation, the Centralized Insolvency Operation must make a prompt decision either to retain a refund, forward it to the debtor or the trustee, or, if the refund arose postpetition, offset it against other postpetition liabilities.

  10. Contacts to Insolvency. If an IRS employee (outside of Insolvency), receives a written inquiry regarding a refund, credit, or offset issue on a debtor whose bankruptcy case is still active (i.e., unreversed TC 520 with a bankruptcy closing code), the employee must promptly contact the CIO liaison for resolution. If the inquiry is received by phone, after disclosure verification, the caller can be directed to call the CIO toll free at 1-800-913-9358. (See the "exception" below.) Insolvency actions will depend upon the bankruptcy chapter, the petition date, when the credit became available, and standing orders or local rules covering a specific bankruptcy court. If appropriate, the CIO liaison will direct the initiating employee or the debtor to a Field Insolvency caseworker to handle the issue.

    Exception:

    If IDRS shows the refund in question is being systemically refunded to the taxpayer (TC 846 is present), the non-Insolvency IRS employee can provide that information to the correspondent or caller, after disclosure verification, along with the date the refund can be expected to be mailed or electronically transferred to the taxpayer's financial account. When an unreversed TC 846 is present, the CIO need not be contacted.

  11. Refund Considerations/Problems: Insolvency must consider issues surrounding potential refunds for accounts under bankruptcy protections such as the following :

    • Improper FMS/TOP offset potential exists

    • Offset for domestic support obligations allowed under BAPCPA 2005 for cases filed on or after October 17, 2005

    • Inability to generate a systemic refund (the manual refund issuance process takes longer)

    • Court order or plan dictating how refund disposition is to be handled

    • Potential or actual violation of the automatic stay

    • Potential for duplicate refunds

    • Change of venue (i.e., case relocated to another court after bankruptcy petition filed)

    • Mailing address problems

    • Mandated redirection of the refund to an entity other than the debtor

    • Debtor and non-debtor spousal issues on a joint return/joint refund situation

  12. Preparation of Manual Refunds. The Manual Refund screen on AIS shows IDRS overpayment information on cases in AIS and has options to generate the Form 5792, Request for IDRS Generated Refund , to be completed by the Field Insolvency specialist or the CIO caseworker. Form 3210, Document Transmittal, can also be generated from AIS to transmit Forms 5792 for processing. IRM 5.9.16.4,Manual Refunds, details steps to be taken by both Field Insolvency and the CIO in processing refund requests.

5.9.4.4.1  (01-14-2011)
Addressing Credits, Refunds, and Offsets

  1. Prepetition Credits. A "prepetition credit" is a credit available on a tax module when the taxable period ends prior to the petition date. Although the prepetition credit may be available and is valid as a credit to the debtor's account (e.g., tax refund), transferring the funds to effect a setoff may be a violation of the automatic stay (unless allowed by local standing orders or local rules).

    Note:

    BAPCPA generally allows prepetition income tax refunds to be offset to prepetition income tax liabilities for cases filed on or after October 17, 2005.

  2. TABLE — Credits, Refunds, Offsets (Post-BAPCPA). Unless any standing orders, local rules, or agreements allow for different treatment, prepetition credits and refunds may be resolved using the following table for cases filed on or after October 17, 2005:

    IF the bankruptcy is filed on or after October 17, 2005, and ... THEN...
    the credit is a prepetition income tax refund and the debtor owes a prepetition income tax liability, the Service can offset the credit to a prepetition liability if such a liability exists. Any remaining credit must be refunded to the debtor or trustee, per local guidelines.
    the prepetition credit is not an income tax refund or if the prepetition liability is not for income tax, the setoff cannot be completed without court approval while the stay is in effect unless there is a standing order or local rule that allows the setoff.
    1) The credit must first be applied to dischargeable tax, penalty, and interest due as of the date of petition.
    2) Secondly, the credit must be applied to any non-dischargeable tax, penalty, or interest due.
    3) Finally any balance must be refunded to the trustee or the debtor, per local guidelines.

    Note:

    If the Service seeks relief from the stay to allow setoff, the court denies the relief and orders turnover of the refund, and the Service does not appeal, the refund should be paid to the debtor or trustee as appropriate.

    a Chapter 7 trustee requests turnover of a prepetition income tax refund credit for the estate, after applying any credits against any prepetition liability, any balance of the refund is refunded to the trustee.

    Note:

    See IRM 5.9.6.1.3, Chapter 7 Tax Refunds to Trustees, for procedures for turnover of refunds to Chapter 7 trustees.

    a claim is required, a prepetition income tax refund is available, Insolvency may apply the refund to the liability according to the offset scheme described above so the proof of claim, when filed, will reflect the remaining outstanding liability after the refund has been offset. If there is no outstanding liability remaining, the claim should be amended to $.00 or withdrawn (as required by any local rules or standing orders) . Absent any local rules or orders, any excess funds that are available after the refund has been offset should refunded to the taxpayer.
    Chapter 12 and Chapter 13 plans have been confirmed or the credit is not an income tax refund, local guidelines and the tolerance set in IRM 5.9.4.14.4 should be followed to seek a refund offset. (See IRM 5.9.4.4(7),Refund Determination). If the lifting of the stay is not requested and the plan is not in default, Insolvency will generally request a prompt refund be issued. If the refund is to be retained, Counsel must concur.
    Exception: In some jurisdictions standing orders or local rules permit a setoff.
    no tax debt is currently showing on IDRS, but an offset has occurred in violation of the automatic stay, IRM 5.9.4.4(4), Violations of the Automatic Stay, provides guidance. IRM 5.9.4.4(4)(b), Erroneous No Liability Case, deserve special attention.
    Corrective actions must be initiated within two business days of discovery of such an offset.
    If appropriate, an expedited manual refund should be requested to go to the trustee or debtor.
    The Insolvency case worker or CIO unit initiating the refund request must ensure the case is monitored to guard against issuance of duplicate refunds.

    Note:

    For additional information, see IRM 5.9.4.4.3, Offsets to Other Agencies and IRM 5.9.4.4.4,Federal Payment Levy Program (FPLP).

  3. TABLE - Credits, Refunds, Offsets (Pre- BAPCPA). Unless any standing orders, local rules or agreements allow for different treatment, prepetition credits and refunds may be resolved using the following table for cases filed prior to October 17, 2005.

    IF the bankruptcy is filed prior to October 17, 2005... THEN...
    a Chapter 7 trustee requests turnover of a prepetition income tax refund credit for the estate, and no standing orders or local rules are in place allowing offset, and a prepetition liability exists, a referral for a lift of stay must be considered to offset the liability based on IRM 5.9.4.14.4 criteria. Any balance of the refund is sent to the trustee.
    a Chapter 7 trustee requests turnover of a prepetition income tax refund credit for the estate, and the court allows the offset to a prepetition liability, after applying the credit against the prepetition liability, any balance of the refund is sent to the trustee.
    a Chapter 7 trustee requests turnover of a prepetition income tax refund credit for the estate, and the court does not allow the offset or no prepetition liability exists, and there is a final court order requiring turnover of the refund, a manual refund must be prepared to issue the refund credit to go to the trustee.

    Note:

    see IRM 5.9.6.1.3, Chapter 7 Tax Refunds to Trustees, for procedures for turnover of refunds to Chapter 7 trustees.

    a claim is required, a prepetition income tax refund is available, the proof of claim should reflect that the liabilities are secured to the extent of the credit. (See IRM 5.9.4.4(7), Refund Determination.). Absent any local rules or orders, any excess funds that are available after the refund retainage should refunded to the taxpayer. If there are any local rules or orders in the court administering the debtor's bankruptcy case, the caseworker must dispose of the refund per the local rules or orders.
    Reminder: Prior to a Chapter 11 or 13 confirmation, a refund may be retained to preserve the IRS's future setoff rights; but, the Service cannot make a setoff while the stay is in effect without permission of the court. Notice of retention of a refund should be given on a promptly filed claim or amendment.
    Chapter 12 and Chapter 13 plans have been confirmed or the credit is not an income tax refund local guidelines and the tolerance set in IRM 5.9.4.14.4 should be followed to seek a refund offset. (See IRM 5.9.4.4(7),Refund Determination). If the lifting of the stay is not requested and the plan is not in default, Insolvency will generally request a prompt refund be issued. If the refund is to be retained, Counsel must concur.
    Exception: In some jurisdictions standing orders or local rules permit a setoff.
    no tax debt is currently showing on IDRS, but an offset has occurred in violation of the automatic stay, IRM 5.9.4.4(4), Violations of the Automatic Stay, provides guidance. IRM 5.9.4.4(4)(b), Erroneous No Liability Case, deserve special attention.
    Corrective actions must be initiated within two business days of discovery of such an offset.
    If appropriate, an expedited manual refund should be requested to go to the trustee or debtor.
    The Insolvency case worker or CIO unit initiating the refund request must ensure the case is monitored to guard against issuance of duplicate refunds.

    Note:

    For additional information, see IRM 5.9.4.4.3, Offsets to Other Agencies and IRM 5.9.4.4.4,Federal Payment Levy Program (FPLP).

  4. Language for Claiming Setoff Amounts. IRM 5.9.13.21(3), Language for Insertion on Claim, provides wording to include on the proof of claim when the Service is claiming a right of setoff.

5.9.4.4.2  (01-14-2011)
Postpetition Payments and Credits

  1. Postpetition Credits and Postpetition Debts. Generally, postpetition credits (e.g., tax refunds) owed to the taxpayer can be offset directly against postpetition tax periods for taxes owed by the taxpayer as explained in IRM 5.9.4.4 above.

  2. Postpetition Credits and Prepetition Debts. Since 11 USC § 553 does not create an independent right to setoff but rather preserves the Service's non-bankruptcy rights, the Service holds it can set off postpetition credits against prepetition debts and vice versa as long as the debts are mutual (i.e., both the credit and the debt are owed to/by the taxpayer). However, most courts have held the Service does not have a right to set off postpetition credits against prepetition liabilities.

    Caution:

    Insolvency should consult Counsel to determine the action to be taken, especially in Chapter 13 cases. Some standing orders and local rules/agreements allow these offsets while the taxpayer is in bankruptcy.

  3. Non-Mutual Debts - Chapters 7 and 11 Individuals. In a Chapter 7 or 11 individual case, the bankruptcy estate generally is a separate taxable entity. A credit owed to a debtor in these chapters cannot be set off against a tax owed by the estate due to the lack of mutuality.

  4. Chapter 7 Discharge/Payments/Offsets. If payments are received from taxpayers for taxes that have been discharged under Chapter 7, or refunds have been offset to dischargeable periods, corrective actions must be initiated within two workdays of the date the Service becomes aware of the violation of the Bankruptcy Code. (See IRM 5.9.6.6, Automatic Stay, and IRM 5.9.17.8, Discharge Injunction.) Paragraph (5) below discusses an exception to this general rule.

    Caution:

    The Service is prohibited by the discharge injunction imposed by 11 USC § 524 from applying payments to taxes that have been discharged. Sanctions can be imposed against the Service if this provision is disregarded.

  5. Voluntary Payments – Guidelines. At times an individual debtor may make a voluntary postpetition payment. Acceptance of such payments does not violate the automatic stay as long as the payments are truly voluntary. Voluntary payments by an individual Chapter 7 debtor can be accepted and applied to non-dischargeable periods. However, the payments cannot be made from property of the estate. (See IRM 5.9.4.17(6), Payments Received on a Pre-Existing Installment Agreement.)

  6. Table - Postpetition Payments and Credits. The table below provides additional information on postpetition payments and credits.

    IF... THEN...
    the automatic stay is in effect, but standing orders or local rules/agreement allow the offset, application of a credit to prepetition tax period(s) can be made pursuant to such rules or orders. In Chapter 7, application should be made to non-dischargeable period(s) with any remaining balance being refunded to the debtor or trustee.
    the automatic stay is in effect and no standing orders or local rules apply, the credit can generally be applied to postpetition tax period(s) with any remaining balance being refunded to the debtor or trustee. Counsel may be consulted, if necessary.
    the automatic stay is in effect, no postpetition liabilities exist, an offset to a prepetition period might be deemed a violation of the stay and the IRM criteria are met for referral to Counsel, Field Insolvency should consider retaining the refund and sending a referral to lift the stay to allow an offset with any remaining balance being refunded to the debtor or trustee.
    Note: Referrals for offset are not made on Chapter 7 No Asset accounts.
    the automatic stay is not in effect, the credit should first be applied to non-dischargeable prepetition tax, penalty, and interest, then to postpetition tax periods, and finally any excess must be refunded to the debtor.
    the Chapter 7 trustee of an individual debtor requests the credit and no postpetition tax liability exists, Telephone contact should be made with the trustee to advise him/her that the credit is postpetition and not property of the estate. After 20 calendar days without further explanation or complaint by the trustee, the credit can be refunded to the debtor.
    the credit module begins prepetition and ends postpetition,
    Example: Tax period 30/200112 has a credit of $500 and debtor filed bankruptcy on 04/20/2001; the credit module of 30/200112 begins 1/1/2001 (prepetition) and ends 12/31/2001 (postpetition)
    in all cases but individual debtors in Chapter 7, the credit should be treated as a postpetition credit.

    Note:

    In Chapter 7 if the trustee of an individual debtor requests the refund, and the Service has determined it will not file a motion for lift of the stay or a motion has been filed and not granted, follow procedures outlined in IRM 5.9.6.1.3, Chapter 7 Tax Refunds to Trustees.

5.9.4.4.3  (01-14-2011)
Offsets to Other Agencies

  1. Offset Situations. Certain federal and state agencies provide the IRS information about debts owed to them. By statute the Service must offset any credits not needed for federal tax liabilities to these agencies unless the taxpayer is in bankruptcy. However, if the creditor agency is aware of a credit due the debtor, the government can request a lift of stay to have the credit applied to the debt owed it. But because of current disclosure provisions, the IRS cannot advise a creditor agency of a pending credit refund to the debtor in an active bankruptcy.

  2. Treasury Offset Program (TOP) Offsets. Treasury's Financial Management Service (FMS) holds the responsibility for administering tax refund offsets to outstanding child support or state and federal agency debts. These offsets are referred to as TOP offsets. A TOP offset is generated on the module as a TC 898 with an offset trace number (OTN), an offset amount, and a debtor-TIN field which is present if the offset is for a secondary spouse.

  3. Mechanics of TOP Offsets. TOP offsets occur after the IRS has certified a refund to FMS for payment (TC 840/846 on account), but before FMS direct deposits or mails the refund check. A TOP offset reduces the amount of the IRS refund by the amount of the TC 898 offset. TOP offsets can occur against either or both SSNs on a Filing Status 02 (married taxpayers filing a joint return), so one or two TC 898s may be input for each TC 840/846 refund issued, one with and one without a debtor TIN.

    Note:

    IRM 21.4.6, Refund Offset, provides additional information on the program. Document 6209, IRS Processing Codes and Information, serves as a source for additional transactions and reason codes.

  4. Guidelines for Debtor Assistance. The FMS database relies on timely notifications from governmental agencies to keep accounts information accurate, reflecting eligibility for offsets. When an offset to another federal/state agency does occur, the FMS database may not reflect current information from that agency, thereby resulting in violations of the automatic stay. If the debtor contacts Insolvency for help, Insolvency is required to take the appropriate steps listed in IRM 5.9.4.4.3.2, Referral of Taxpayer to FMS, to assist the debtor.

    Note:

    Often, the correct response from Insolvency is to refer/direct the taxpayer promptly to the agency (if known) who has the refund, or, if not, to FMS.

5.9.4.4.3.1  (01-14-2011)
Offset Bypass Indicators

  1. Bankruptcy TOP Bypass Indicator. All manual and systemic refunds are assigned a TOP Offset Bypass Indicator (BPI) which tells FMS if the refund is eligible for offset by TOP. For bankruptcies commencing on or after October 17, 2005, BAPCPA allows offsets for domestic support obligations which were not permissible prior to the implementation of this bankruptcy act. This change in law has necessitated a coding modification for processing manual refunds for modules under bankruptcy protection. Where before BAPCPA only BPI 03 was used for bankruptcy cases, now BPI 07 is also used, as well as sometimes BPI 08 or 09.

  2. BPI 03. For cases with a bankruptcy petition date prior to October 17, 2005, when CC RFUND is input on an MFT not eligible for offset, the indicator will show (03) BANKRUPTCY. A TC 520 on the account with a date prior to October 17, 2005, will generate a BPI 03 on refunds that are issued systemically. If a BPI 03 was not input previously, manual refunds issued from accounts with a petition date prior to October 17, 2005, with a (–W) or (–V) freeze require input of a BPI 03 to indicate no refund offset(s) may be made. An annotation in the "Remarks" section of Form 5792 must state, "INPUT BPI 03"

  3. BPI 07. BAPCPA allows offsets of income tax refunds to delinquent domestic support obligations on bankruptcies filed on or after October 17, 2005. BPI 07 alerts FMS the taxpayer is in bankruptcy, but offsets to domestic support obligations are allowed because those offsets do not violate the automatic stay. The Service has the right to offset a refund against taxes, if allowed, before FMS has an opportunity to claim part or all of the remaining refund for offset against domestic support obligations. FMS is responsible for forwarding to the debtor or to the trustee any funds not offset. Requests for refunds to debtors or trustees for cases filed on or after October 17, 2005, must contain the annotation, "INPUT BPI 07."

  4. BPI 08 and 09. The Injured Spouse Unit will inform Insolvency when a bypass indicator should be placed on a Form 5792 being initiated by Insolvency. Bypass indicator 08 represents a primary spouse who has filed a injured spouse claim, and BPI 09 represents the secondary spouse as the injured spouse. When the Injured Spouse Unit advises Insolvency of the need to change the BPI to 08 or 09, the Insolvency employee must annotate the AIS history in a manner that highlights the requirement to use the 08 or 09 indicator code.

  5. AIS Generated Forms 5792. The Form 5792 screen is accessed by selecting the "Manual Refund" tab on the AIS home screen for Case Files. This screen includes a drop down menu for the BPI code. "Petition before 10/17/05" for BPI 03 or "Petition after 10/17/05" for BPI 07 will be selected systemically depending upon the date of the bankruptcy petition. If the Injured Spouse Unit has advised Insolvency that the correct BPI should be 08 or 09 rather than BPI 03 or BPI 07, the Insolvency caseworker must select "Injured Spouse (Primary)" for BPI 08 or "Injured Spouse (Secondary)" for BPI 09 as appropriate.

  6. BPI Postings. The BPI will be posted/displayed along with the TC 840/846 on all output screens such as TXMOD, IMFOL, BMFOL, and on IDRS transcripts. The BPI will also show with the pending transaction.

  7. Debt Indicators. Debt indicators which may signal a refund offset are found on line 13 of command code INOLES. IRM Exhibit 2.3.47-8, Command Code INOLES IMF Specific Screen, explains the significance of each letter code used as a debt indicator. This information allows the caseworker to determine if a refund may potentially be offset rather than fully refunded to the debtor or trustee.

5.9.4.4.3.2  (01-01-2006)
Referral of Taxpayer to FMS

  1. Appropriate Referral of Taxpayer. Complaints involving TOP offsets require the agency receiving the refund to handle any subsequent illegal refund offset complaint, including the issuance of the refund. The Service should not be involved in the refund process.

  2. Agency for Taxpayer Contact. If a taxpayer contacts Insolvency and requests help in retrieving a tax refund from a state or other federal agency, Insolvency is to refer the taxpayer immediately to "the offending agency" (i.e., the agency who received the refund) for the required assistance.

    1. Taxpayer to Contact Agency. If the taxpayer knows the name of the agency, Insolvency should advise the taxpayer to contact that agency.

      Note:

      IDRS does not provide information on the specific agency.

    2. FMS Help Desk. If the taxpayer does not know the name of the agency, Insolvency will tell the taxpayer to call the FMS Help Desk 1–800–304–3107 which can provide assistance to the taxpayer on the TOP offset issue.

    3. TOP Notice to Taxpayer. When a taxpayer's refund is offset for child support or a federal agency debt, FMS issues a TOP offset notice to the taxpayer. The notice includes the name, address, and phone number of the agency and the telephone number of the FMS Help Desk. It will be helpful for debtors to have this information at hand when they call the FMS Help Desk.

  3. Complaint to Proper Agency. The majority of complaints involving TOP offsets require the agency receiving the offset to make the refund, and the IRS is generally not involved. Any resulting legal dispute is between that agency and the debtor, and not the IRS.

    Reminder:

    Offsets for domestic support obligations are allowed for cases filed on or after October 17, 2005 (11 USC § 362(b)(2)(F)). Insolvency should advise a debtor of this new provision of the Bankruptcy Code before directing the debtor to call FMS.

5.9.4.4.3.3  (01-14-2011)
IRS's Offset to Taxes

  1. When IRS Has Violated the Stay. When the Service has made an illegal offset (applying a debtor's refund against a tax debt) in violation of the automatic stay, the IRS is considered the offending agency. The responsibility for correcting the violation rests with Insolvency.

  2. No Liability Error. On a preliminary case review, the debtor may appear to owe no federal taxes. However, the "no tax" determination may be inaccurate if the IRS made an offset to full pay an IRS balance due account in violation of the automatic stay. When an illegal offset has occurred to a balance due account, a debt is still due the Service. The refund may have erroneously paid the account, partially or in full, due to the illegal offset. Therefore, the IDRS account balance (either showing zero or a minimal balance remaining) will not be accurate. The Service must initiate corrective actions within two work days of discovery of the illegal offset.

  3. Centralized Insolvency Operation Actions. If an offset meets the criteria for referral to Counsel and the case resides in the CIO inventory, the CIO caseworker must transfer the affected case to Field Insolvency to consider referral actions. The reason for the transfer must be annotated in the AIS history. When the case has been reassigned to Field Insolvency, AIS sends an E-mail via the Microsoft Exchange to the Field Insolvency caseworker on Outlook to notify him/her that the case has been reassigned. Employees must monitor their incoming E-mails for receipt of these cases that are awaiting their action..

  4. Field Insolvency Referrals. The Field Insolvency caseworker, following the criteria set by Associate Area Counsel, must determine if the offset warrants referral for a lift stay, negotiations for adequate protection, or refund to the debtor or trustee.

    IF... THEN...
    the case meets criteria for referral to Counsel, the Field Insolvency specialist makes the referral, documents the AIS referral and history screens, and sets a follow up date to review the case for Counsel action.
    the case does not meet local criteria for referral to Counsel and the case belongs in the Field inventory (wasn't transferred from the CIO), the specialist updates the AIS history with the reason no referral has been made and prepares a manual refund to the debtor or trustee. The specialist will prepare or amend a proof of claim as necessary.
    the case does not meet local criteria for referral to Counsel and the case was transferred from the CIO for referral consideration and no proof of claim filings or amendments are required, the specialist updates the AIS history with the reason no referral has been made and transfers the case back to the CIO for preparation of a manual refund to the debtor or trustee.
    the case does not meet local criteria for referral to Counsel and the case was transferred from the CIO for referral consideration and a proof of claim should be filed or amended, the Field specialist updates the AIS history with the reason no referral has been made and prepares a manual refund to the debtor or trustee. The specialist will prepare or amend a proof of claim as necessary before transferring the case back to the CIO.
    Counsel does not file a motion for a lift of stay or the motion is denied by the Court and the case was transferred to the Field by the CIO, the Field specialist updates the AIS history with the lift of stay information and transfers the case back to the CIO for preparation of a manual refund to the debtor or trustee.
    Counsel does not file a motion for a lift of stay or the motion is denied by the Court and the case belongs in the Field's inventory (was not transferred from the CIO), the Field specialist updates the AIS history with the lift of stay information and prepares a manual refund to the debtor or trustee.

5.9.4.4.4  (01-14-2011)
Federal Payment Levy Program (FPLP)

  1. Collection of Federal Payments Due to Taxpayer. The Federal Payment Levy Program (FPLP) is an automated levy program the IRS has implemented with the Department of the Treasury, Financial Management Service (FMS). Outside of bankruptcy, the FPLP collects funds due the taxpayer from federal payments (e.g., federal contracts, federal pensions, and Social Security payments). It applies these funds towards federal taxes the taxpayer owes. (See IRM 5.11.7, Automated Levy Program.)

    Note:

    This program is exempt from third party contact notice.

  2. Authorization. The law passed under the Taxpayer Relief Act of 1997 (Public Law 105–34) § 1024 authorizes the IRS to levy up to fifteen percent of specified payments continuously (IRC § 6331(h)). The FPLP was developed to implement this law.

    Note:

    The American Jobs Creation Act of 2004 increased the amount that can be seized for payments due to a vendor of goods or services sold or leased to the federal government to 100 percent.

  3. Bankruptcy Prohibition. During regular collection activity of the Service (non-bankruptcy), the FPLP allows systemic continuous levies on certain federal disbursements using a paperless process. However, the Service is prohibited from using this levy program against persons in bankruptcy unless the automatic stay has been lifted. Paragraph (7) below outlines Insolvency actions regarding this program as it impacts accounts in bankruptcy.

  4. FPLP Indicators. Modules selected for the FPLP remain in their original master file status codes. (NMF is not included.) Command codes TXMOD, ENMOD, IMFOL and BMFOL can be used for research.

    1. MF (I/BMFOL) displays the indicator FMS LEVY>1 on the entity screens if at least one module has been selected in the FPLP.

    2. IDRS (ENMOD and TXMOD) displays the indicator FMS>1 on the entity (ENMOD) screens if at least one module has been selected in the FPLP.

    3. Each tax module (TXMOD, IMFOLT/BMFOLT) also displays the following:

    • FMS LEVY/CD>1 Currently not included in the FPLP; however, at one time the module was included for FPLP

    • FMS LEVY/CD>3 Currently included in FPLP (TC 971 AC 060)

    • FMS LEVY/CD> (other alpha/numeric code) Current or pending block from FPLP

  5. Action Codes. Tax liabilities sent to FMS for levy under the FPLP can be identified by 97X action codes (ac) listed below:

    • TC 971 ac 060 — module selected for FPLP

    • TC 972 ac 060 — reversal of module selected for FPLP (computer generated only)

    • TC 971 ac 061 — block or release of module from FPLP

      Note:

      When a module is "blocked," a Federal Payment Levy cannot occur.

    • TC 972 ac 061 — reversal of block on module

    • TC 971 ac 062— module matched or levied under FPLP with identifying DLN

    • TC 971 ac 662 — Levied under FPLP may also denote that a FPLP levy was issued on an account.

  6. Selected/Match/Levy Indicators. If a module is selected for the FPLP, a TC 971 ac 060 posts. Once FMS matches a federal disbursement with a delinquent module, a TC 971 ac 062 posts. TC 971 ac 062 also indicates a levy has been issued.

    Note:

    Cases assigned to CI with transaction codes 910, 916, and 918 are subject to FPLP levies.

  7. Insolvency Actions. The actions an Insolvency caseworker must take to recognize and resolve FPLP cases are listed below.

    1. When an Insolvency caseworker identifies a tax module that has been selected for the FPLP (the tax module displays a TC 971 ac 060), a TC 520 must be input timely. For cases sent to FMS but not matched, the input of the TC 520 should reverse the module in time to prevent a levy action (TC 972 ac 060).

      Reminder:

      When Insolvency becomes aware of a match/levy made in violation of the automatic stay, corrective actions must be initiated by the Service within two workdays after discovery.

    2. These cases are identified during a normal review of cases in Insolvency.

    3. On FPLP match/levy modules (tax module shows TC 971 ac 062 or TC 971 ac 662), Insolvency must notify the FPLP Coordinator expeditiously.

    4. Insolvency employees must use Form 4844 and indicate "FPLP LEVY RELEASE" so the Coordinator can have the module(s) removed from the FPLP. This will facilitate a prompt release of a levy if necessary.

      Note:

      An FPLP levy release can only be released electronically by an FPLP Coordinator.

    5. The official signing Form 4844 in Insolvency must have delegation authority to approve levy releases.

    6. The request for an FPLP levy release may be faxed, hand-carried, or sent by secure E-mail to the FPLP coordinator. Unless E-mail is not available for a protracted period of time, all requests for an FPLP levy release originating at the CIO must be sent by secure E-mail. E-mailed levy release requests should be sent with a request for a "read receipt" to satisfy the receipt verification requirement in item (7) below.

    7. Insolvency must verify and document the FPLP Coordinator received Forms 4844 on all cases.

    8. Copies of Forms 4844 and any attachments must be retained in Insolvency until the levy release has been confirmed.

    9. If a levy payment is received by the Service as a result of a FPLP levy action while the automatic stay is in effect, Insolvency must request a manual refund, following procedures for returning or refunding levy proceeds.

      Note:

      FMS is the levy source for all levies issued through the FPLP - not the federal payment agencies.

5.9.4.5  (01-01-2006)
Sale of Property

  1. Motion to Sell. This subsection of IRM 5.9.4 contains the procedures to follow when motions are received for the sale of property of the estate. Also see IRM 5.9.6.12, Subordination of Federal Tax Lien, and IRM 5.9.6.13,Sale of Property by the Trustee.

5.9.4.5.1  (05-13-2008)
Sale of Property Considerations

  1. Receipt of Notice. A debtor may file a motion for court approval to sell property. A notice must be sent to creditors who have a right to object to the sale.

  2. Document Review. Insolvency should provide quality customer service and protect the government's interests by a timely review of the schedules and proposed sale documents to ensure the sale is an arms-length transaction for fair value and the proceeds of the sale are distributed in order of lien priorities.

  3. Lien on Property. If the Service filed an NFTL prior to the bankruptcy petition, and the debtor seeks to sell personal property free of the tax lien, the debtor may be required to obtain consent for the sale from lienholders, including the IRS. In such cases Insolvency should consider giving conditional consent under IRC § 7425(c)(2) based upon immediate payment to the IRS of the lien equity in the property being sold. Insolvency should refer the case to Counsel if it is determined conditional consent is warranted. If the debtor seeks to sell real property free of the federal tax lien, Insolvency should contact Counsel to determine if IRC 6323(f)(4) affects that specific case.

  4. Sale Proceeds. If the debtor sells exempt property, the proceeds of the sale will normally go to the debtor rather than into the estate. However, if the Service filed an NFTL prior to the petition date, and the debtor sells exempt personal property, the IRS is entitled to the sale proceeds. If the debtor sells exempt real property, Insolvency must contact Counsel to determine if IRC 6323(f)(4) affects that specific case.

  5. Sale of Property with Partial Exemption. Trustees or debtors may move to sell assets for which the debtor has claimed a partial exemption under 11 USC § 522. In those situations the trustee or the debtor will seek permission to pay a portion of the proceeds of the sale to the debtor as part of the motion to sell the property. If the Service has filed a valid prepetition Notice of Federal Tax Lien or if the Service has filed an allowable priority claim (11 USC § 522(c)(1) and (2)), the Service should object to the trustee's motion to sell and request the exempt amount (or the portion in which the Service may claim an interest) be distributed directly to the IRS instead of to the debtor. Assuming the IRM 5.9.4.13.4 criteria for referral are met, these cases should be referred to Counsel for the filing of this objection.

  6. Certificate of Discharge. The order approving the sale may provide the property be sold free and clear of liens, with liens to attach to the sale proceeds. Usually this order is sufficient to clear the title, but the IRS may be requested to provide a Certificate of Discharge of the property from the lien. The federal tax lien will then no longer attach to the specific piece of property being sold. The certificate can be provided unless a legitimate reason exists not to do so. Insolvency should request the following:

    1. Statement of facts concerning the sale

    2. Legal description of the property

    3. Copy of the court order approving the sale

    4. Any other pertinent information

  7. Lien Discharge. After review a discharge may be provided in the same manner as in a non-bankruptcy situation. The discharge will be prepared by an employee assigned to handle Certificates of Discharge in Technical Services Advisory or Insolvency.

  8. Tax Consequences. The tax impact of any sale should be evaluated. If the sale will result in a significant capital gains tax, this may be an administrative expense payable in a Chapter 11 case on the effective date of the confirmed plan. In individual Chapter 11 cases, this takes on additional importance because the bankruptcy estate is a separate, taxable entity. If the bankruptcy estate cannot pay the tax on the effective date, the case will likely convert to Chapter 7. The argument can be made that without abandonment, the sale will significantly diminish the estate because of the capital gains tax.

    Note:

    In such cases, consideration should be given to objecting to the sale without the property's first being abandoned to the individual debtor prior to the sale.

5.9.4.5.2  (01-14-2011)
Escrow Payoff Requests during a Chapter 13 Proceeding

  1. Sale or Refinance of Real Property. Provisions for the sale or refinancing of real property may or may not be incorporated into a debtor's confirmed Chapter 13 plan, and the property may or may not be property of the estate..

  2. Trustee Involvement. In some jurisdictions trustees instruct the IRS to issue a written communication, often a Form 10492, Notice of Federal Taxes Due, to the escrow company so the Service will be paid directly from the escrow funds. Other trustees make the demand to the escrow company directly so all funds flow through them for disbursement to the creditors. In either case, Insolvency must advise the trustee of the amount necessary to satisfy the Service's secured claim so a release of the lien can be filed or a certificate of discharge provided.

  3. Insufficient Proceeds. If proceeds from a sale are insufficient to satisfy the lien, the lien generally should not be released. Instead a certificate of discharge can be provided to discharge the specific property sold from the lien. Insolvency caseworkers should consult Counsel with questions about the propriety of releasing a lien or providing a certificate of discharge.

  4. Form 10492 Preparation. To prepare an accurate Form 10492, the Insolvency caseworker must have copies of the IRS's claim and the Chapter 13 plan including amendments or modifications as well as the order confirming the plan. The preparation of Form 10492 varies depending upon the facts of a particular case, but most fall into one of the following scenarios:

    1. The IRS has an allowed secured claim, and the Service's claim is oversecured. (See IRM 5.9.13.19.2(6), Oversecured.) The confirmed plan makes no provision for payment of the secured claim with postpetition interest under 11 USC § 506(b). Form 10492 should include postpetition interest computed at the IRC rate against the total amount of the secured claim, less any postpetition plan payments received from the trustee and allocated to the secured claim.

    2. The plan contains a provision for payment of the IRS's secured claim at a specific interest rate. Form 10492 should compute postpetition interest on the amount provided for in the plan at the interest rate set forth in the confirmed plan. For cases filed prior to October 17, 2005, command code COMPA should not be used to compute postpetition interest unless the plan specifies the IRC rate of interest will be used. For cases filed on or after October 17, 2005, COMPA is the correct command code to use. Postpetition payments from the trustee allocated to the secured claim must be deducted.

    3. The plan provides for payment of the IRS's secured claim for less than is shown on the IRS's proof of claim. The Insolvency caseworker should consult with Counsel to determine if the Service is bound by the terms of the confirmed plan or if the Service may insist upon payment of the amount shown on its secured proof of claim.

    4. The demand for lien payoff from the escrow agent or title company is made before the Chapter 13 plan has been confirmed. This may occur when a sale or refinance of real property is pending at the time the bankruptcy is filed. Insolvency should instruct the debtor to:
      • refer to the Chapter 13 trustee or local rules for instructions;
      • ask his/her attorney about filing a motion to sell the property free and clear of the tax lien with the IRS's lien to attach to the proceeds of the sale; or
      • ask his/her attorney about filing a motion for relief from the stay to allow the IRS to issue Form 10492 to be paid prior to confirmation of the plan.

    5. The debtor has accrued postpetition taxes, and an NFTL has been recorded for those postpetition liabilities. The Insolvency caseworker must review the plan and order for confirmation. If the subject property revested to the debtor and the confirmation order permits the debtor to sell or refinance property without court approval, the IRS may be allowed to issue Form 10492 for the full amount of the postpetition liability including accruals. If the plan specifically provides the subject property will be sold or refinanced to fund the plan, the IRS may be prohibited from making an escrow demand for the postpetition taxes unless sufficient equity exists to pay all of the debtor's prepetition claims and postpetition tax debts. Counsel should be consulted in those cases. Insolvency may consider issuance of a Certificate of Discharge or Subordination under IRC § 6325 for the NFTL related to the postpetition taxes.

      Caution:

      Insolvency should not file a § 1305 claim in these cases without first consulting Counsel.

5.9.4.6  (01-14-2011)
Preferences

  1. Definition. 11 USC § 547 allows a bankruptcy trustee to avoid and recover certain prepetition transfers to creditors that benefit some creditors at the expense of other creditors.

  2. Trustee Authority. Generally the trustee or debtor-in-possession in Chapter 11 cases has the authority under the Bankruptcy Code to avoid preferences. The trustee can recover a preferential payment for the benefit of the estate.

  3. Preference Criteria. To qualify as a preference, a tax payment must be:

    1. made on or within 90 days before the date of the bankruptcy filing;

    2. made while the debtor was insolvent;

    3. an amount more than the IRS would have received in a Chapter 7 bankruptcy proceeding; and

    4. a payment on account of an antecedent debt, in other words, a late payment of tax.

    Note:

    Qualifications for preferences for other types of creditors under 11 USC § 547 generally mirror those for tax payments delineated above.

  4. Ordinary Course of Business Exception. Debts incurred and paid by the debtor in the ordinary course of business or financial affairs cannot be avoided as preferences.

  5. Trust Fund Payments. Prepetition voluntary payments of trust fund taxes cannot be avoided as preferential transfers, because they are not considered to be transfers of property of the debtor. Rather, the funds are held in trust for the United States.

  6. Adversary Proceedings. A preference action must be brought as an adversary proceeding in the bankruptcy case. Such actions must be referred to Counsel.

5.9.4.7  (01-01-2006)
Bankruptcy Court Tax Determinations

  1. 11 USC § 505(a). As a general rule, 11 USC § 505(a) permits the bankruptcy court to determine the amount or the legality of any tax, addition to tax, or tax penalty. This applies to tax liabilities of the debtor or of the estate whether or not previously assessed, paid, or contested.

  2. Prior Court Ruling. The bankruptcy court may not re-examine a tax liability ruled on by a court of competent jurisdiction before the filing of the bankruptcy petition.

  3. Criteria for Court Determination. The bankruptcy court can determine the right of the estate to a tax refund if the taxing authority does not rule on the trustee's refund claim within 120 calendar days (11 USC § 505(a)(2)(B)).

    Note:

    The regular six-month determination period on a refund claim under IRC § 6532(a) is reduced to 120 days in an effort to close the bankruptcy estate as soon as possible.

5.9.4.8  (05-13-2008)
Prompt Determination Requests from Trustee

  1. Bankruptcy Court Authority. The bankruptcy court has the authority to determine the amount of any administrative taxes due upon the completion of the IRS examination per 11 USC § 505(b).

  2. Prompt Determination Requests. A trustee in a bankruptcy proceeding may ask the IRS to make a " prompt determination" of any unpaid liability of the estate for any tax incurred during the administration of the case. The trustee can request this by submitting a tax return and requesting a prompt determination of that return (11 USC § 505(b)(2)).

  3. Area of Responsibility. Insolvency will review requests for prompt determinations for completeness (see IRM 5.9.4.8.1(3) below) and return the request to the originator should the request package be incomplete. Insolvency will forward all requests to Examination for prompt determination via Form 3210. If no signed Form 3210 acknowledgment is returned from Exam, Insolvency will contact Exam to verify receipt.

  4. Critical Timeframes. The government has 60 calendar days from the date the request is received in Insolvency to notify the trustee the return has been selected for examination. The government has a total of 180 calendar days from the date of the request to complete the examination and to notify the trustee of any additional tax due. (A longer period may be granted with court permission.) Failure to notify the trustee within 60 days or to complete the examination within 180 days will discharge the estate, the trustee, the debtor, and any successor to the debtor from any liability for the tax. The discharge will occur upon payment of the tax shown on the return unless the return is fraudulent or contains a material misrepresentation.

  5. Court's Mailing Matrix - IRS Address. Pursuant to 11 USC § 505(b)(1)(A), the clerk of each bankruptcy court is required to keep a list where government offices may designate an address for serving prompt determination requests. Each Insolvency office should ensure the local bankruptcy clerk lists the following national Insolvency address for serving prompt determination requests:
    Internal Revenue Service
    Post Office Box 21126
    Philadelphia, PA 19114-0326

    Note:

    Effective January 2, 2011, requests with remittance may be mailed to:
    Internal Revenue Service
    Post Office Box 7317
    Philadelphia, PA 19101-7317

    Note:

    Effective January 2, 2011, requests without remittance may be mailed to:
    Internal Revenue Service
    Post Office Box 7346
    Philadelphia, PA 19101-7346

5.9.4.8.1  (01-14-2011)
Processing Prompt Determination Requests

  1. Trustee Requests for a Tax Determination. Revenue Procedure 2006-24, 2006-22 IRB 943, establishes the steps for trustees to submit returns for a prompt determination. All requests by a trustee for a prompt tax determination of any unpaid tax liability of the estate under 11 USC § 505(b)(2) are to be submitted by a signed written request in duplicate. The request must be filed with Insolvency at the national Insolvency address.

  2. Copy of Return. Filed with the request for prompt determination must be an exact copy of a valid return for the completed taxable period filed by the trustee or debtor-in-possession. To be valid the return must be signed under penalties of perjury. If the section of the return form that requires it be signed under penalties of perjury is modified in any way, such as by striking out, deleting, or changing the language of that requirement, that return form will not qualify as a valid return.

  3. Elements of a Request. Before forwarding the prompt determination request to Examination, Insolvency must review the request package to ensure it is acceptable for Exam processing per Rev. Proc. 2006-24. A prompt determination request must include a signed written request submitted in duplicate with:

    1. a statement that the request is for prompt determination of a tax liability, specifying the type of return and the tax period for which the request is being filed;

    2. the name and location of the office where the original return was filed;

    3. the name of the debtor;

    4. the debtor’s TIN;

    5. the type of bankruptcy estate;

    6. the bankruptcy case number; and

    7. the location of the bankruptcy court.

      Note:

      If any item of information listed above is missing from the request, the request will be determined to be incomplete.

  4. Complete/Incomplete Package. Insolvency must determine that the documents with mandatory information specified in Revenue Procedure 2006-24 are received and are complete. If documents required from the trustee or debtor-in-possession are missing or incomplete, all of the documents received will be returned to the fiduciary by Field Insolvency with an explanation identifying the missing papers or information. Insolvency will request the package be resubmitted with the correct documentation. The CIO will transfer incomplete packages to Field Insolvency via Form 3210 with the 505(b) checklist. Field Insolvency will notify the trustee that the request is incomplete. New timeframes start on the date a complete package is received by Insolvency.

    Note:

    Insolvency must check the copy of the tax return submitted with the prompt determination request to ensure it contains a TIN in the proper space. If a TIN is lacking, the package must be returned to the submitter for correction.

  5. Verification and Transmittal to Examination. Insolvency is responsible for the immediate transmittal of all documents in a complete prompt determination request to Examination. The copy of the return should be prominently marked at the top: "COPY ONLY – FURNISHED PER REV. PROC. 2006-24." Insolvency must verify the return sent to them is a copy. If an original return is received, Insolvency must duplicate it, furnish a copy (so marked) to the appropriate Exam function, and immediately forward the original for normal processing to the designated Campus.

  6. Shipping Instructions. After prompt determination request packages have been confirmed as complete, with one exception, they are to be forwarded by overnight courier to the appropriate PSP Examination function. The exception pertains to corporations that fall under the scope of the Large Business and International (LB&I) division. Those requests must be shipped overnight to:
    Internal Revenue Service
    Arka Monterey Park Building
    1973 North Rulon White Blvd.
    M/S 4912 Attn: L. Hill
    Ogden, Utah 84404-5402

    To determine if a corporation's account is handled by LB&I, the Insolvency caseworker must access cc INOLES on IDRS. If the business operating division on INOLES is identified as " LB," then the prompt determination package must be sent to the above address.

  7. Timeframes. Transmittal to the appropriate Examination function must be done within three workdays of the date the copy of the return is received by Insolvency. The transmittal must be done within this time frame because within 60 calendar days from the date the request is received in Insolvency, Examination has to review the copy of the return and advise the fiduciary if the return is to be selected for examination.

  8. AIS Histories. Some of the prompt determination requests are for cases not on AIS. Establishing a case on AIS for the sole purpose of monitoring a prompt determination request is not necessary. However, if a case has been established on AIS, the history documentation must annotate the receipt of a prompt determination request and subsequent actions taken.

5.9.4.8.2  (01-01-2006)
Immediate Assessment

  1. Tax Determination by Court. Under 11 USC § 505(c) and IRC § 6871(b)(2), after the bankruptcy court determines a tax liability, the government may generally assess the tax against the estate, the debtor, or the successor of the debtor, notwithstanding applicable deficiency procedures. Once the tax is determined by the court, generally no bar to assessment exists. The ASED, if previously suspended in part by the bankruptcy case, may begin to run thereafter.

    Note:

    Immediate assessments can be made for deficiencies incurred by the debtor’s estate pursuant to IRC § 6871(b)(1).

5.9.4.9  (01-14-2011)
Prompt Refund Request from Trustee

  1. Revenue Procedure 2010-27. The trustee or debtor in possession representing the bankruptcy estate of a debtor may request a prompt refund determination from the Service under 11 USC § 505(a). Revenue Procedure 2010-27 was issued on July 15, 2010 to update the procedures for requesting the tax refund. The revenue procedure clarifies that the procedure does not apply to applications for a tentative carryback or refund adjustment under IRC § 6411. The bankruptcy court may not determine any right of the bankruptcy estate to a tax refund before the earlier of:

    • 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed.

    • a determination by such governmental unit of such refund.


    This revenue procedure applies to all cases except Chapter 9, Municipal Debt Adjustment cases and Chapter 15, Ancillary and Cross-Border cases.

  2. Prompt Refund Requests. A trustee or debtor in possession may request a tax refund from the Service if the credit or refund of an overpayment was not claimed on a return previously filed by the debtor. The trustee may do so by filing the appropriate amended return or form. If:

    1. a Form 1040 or 1040A was filed by an individual debtor, the trustee can request the credit or refund on a Form 1040X, Amended U.S. Individual Income Tax Return.

    2. a Form 1120 has been filed by a corporate debtor, a claim for refund can be made by the trustee on Form 1120X, Amended U.S. Corporation Income Tax Return.

    3. any other form than From 1040, 1040A or 1120 was filed by the debtor, a claim for credit or refund should be requested on the appropriate amended income tax return.

    4. in the case of an overpayment other than income tax for which the debtor has filed a return, the claim for credit should be made on Form 843, Claim for Refund and Request for Abatement.

      Note:

      If the return was filed by the debtor, an exact copy of the return (or returns) that is the subject of the claim should also be submitted, together with a statement of the name and location of the office where the return was filed.

    5. With regard to an overpayment of taxes of the bankruptcy estate incurred during the administration of the bankruptcy case, a properly executed tax return shall, at the election of the trustee, constitute a claim for credit or refund of the overpayment.

  3. Area of Responsibility. Insolvency will review request for prompt refunds for completeness. See IRM 5.9.4.9.1, Processing Prompt Refund Requests, for additional information. Incomplete requests should be returned to the originator. Complete requests will be forwarded to Examination via Form 3210. If no signed Form 3210 acknowledgment is returned from Exam, Insolvency will contact Exam to verify receipt.

  4. Critical Timeframes. The Service will complete the examination and notify the trustee of the decision rendered within 120 days from the date of the filing of the appropriate amended return, Form 843, or original return filed by the trustee on an expedited basis.

  5. IRS Address. The forms or returns described in Rev. Proc. 2010-27 must be mailed to:
    Internal Revenue Service
    Centralized Insolvency Operation
    Post Office Box 21126
    Philadelphia, PA 19114-0326

    Note:

    Effective January 2, 2011, the returns may be mailed to:
    Internal Revenue Service
    Centralized Insolvency Operation
    Post Office Box 7346
    Philadelphia, PA 19101-7346


    The return or form must be marked "Request for Prompt Refund" and be accompanied by a written statement explaining that the request is being submitted pursuant to Section 505(a) of the Bankruptcy Code.

5.9.4.9.1  (01-14-2011)
Processing Prompt Refund Requests

  1. Trustee Requests for a Prompt Refund. Revenue Procedure 2010-27, establishes the steps for trustees to submit a request for a tax refund from the Service. All requests by a trustee or debtor in possession for a refund under § 505(a)(2)(B) of the USBC must be filed with Insolvency at the addresses shown in IRM 5.9.4.9(5).

  2. Copy of Return. If the request for a prompt refund is made using Form 843, and the debtor previously filed a tax return, an exact copy of the return (or returns) that is subject of the claim for refund should also be submitted with the request. To be valid, the return must be signed under penalties of perjury. If the section of the return form that requires it be signed under penalties of perjury is modified in any way, such as by striking out, deleting, or changing the language of that requirement, the return form will not qualify as a valid return.

  3. Elements of a Request. Before forwarding the prompt refund request to Examination, Insolvency must review the request package to ensure it is acceptable for Exam processing per Rev. Proc. 2010-27. The return or form must be marked "Request for Prompt Refund." The request must:

    1. specify the name and location of the office where the original return was filed, if the debtor has filed a return and the trustee has submitted a Form 843.

    2. contain a statement referencing Bankruptcy Code § 505(a) and/or Rev. Proc. 2010-27.

    3. be for a Chapter 7, 12, or 13 bankruptcy case (Chapter 9 and 15 cases are not eligible).

    4. include a copy of the return(s) that is the subject of the claim for refund, if the debtor has filed a return and the trustee has submitted a Form 843.

    Note:

    If any item of information listed above is missing from the request, the request will be determined to be incomplete.

  4. Complete/Incomplete Package. Insolvency must determine that the documents with mandatory information specified in revenue Procedure 2010-27 are received and are complete. If documents required from the trustee or debtor in possession are missing or incomplete, all of the documents received will be returned to the trustee by Field Insolvency with an explanation identifying the missing papers or information. Insolvency will request the package be resubmitted with the correct documentation. The CIO will transfer incomplete packages to Field Insolvency via Form 3210 with the 505(a) checklist. Field Insolvency will notify the trustee that the request is incomplete. New timeframes start on the date a complete package is received by Insolvency.

  5. Verification and Transmittal. The CIO is responsible for the immediate transmittal of all documents in a complete prompt refund request to Examination. The copy of the return should be prominently marked at the top: "COPY ONLY - FURNISHED PER REV. PROC. 2010-27" . The CIO must verify that any return sent to them is a copy. If an original return is received, it must be duplicated and a copy furnished (so marked) to the appropriate Exam function. The original return should be forwarded for normal processing to the designated Campus.

  6. Shipping Instructions. After prompt refund request packages have been confirmed as complete, with one exception, they are to be forwarded by overnight courier to the appropriate PSP Examination function. The exception pertains to corporations that fall under the scope of the Large Business and International (LB&I) division. Those requests must be shipped overnight to:
    Internal Revenue Service
    1973 North Rulon White Blvd.
    M/S 4912 Attn: L. Hill
    Ogden, Utah 84404-5402
    To determine if a corporations account is handled by LB&I, the Insolvency caseworker must access cc INOLES on IDRS. If the business operating division on INOLES is identified as "LB" , then, the request must be sent to the above address.

  7. Timeframes. Transmittal to the appropriate Examination function must be done within three workdays of the date the complete package is received by Insolvency. The transmittal must be done within this timeframe because within 120 calendar days from the date the request is received in the CIO, Examination has to review the copy of the return, make a refund determination, and advise the fiduciary of their determination.

  8. AIS Histories. Some of the prompt refund requests are for cases not on AIS. Establishing a case on AIS for the sole purpose of monitoring a prompt refund request is not necessary. If the case is not on AIS, the caseworker should:

    • Review IDRS to determine if a balance due or unfiled returns are present.

    • If there is a balance due and/or unfiled returns, secure information via Pacer to establish a case on AIS.

    • Using the guidelines in IRM 5.9.12.3(2), Adding New Cases Manually, the caseworker should add the case to AIS.


    If the case is on AIS, or has been added from the refund request, the AIS history should address the actions taken on the case:

    • If the request is for a complete package, the history should state, "Request for Prompt Refund received MM-DD-YYYY. Package complete. Forwarded to Exam."

    • If the request is incomplete, the history should state, "Request for Prompt Refund received MM-DD-YYYY. Package incomplete and list any specific item that is incorrect or missing. Forwarded to Field Insolvency for trustee contact."


    Upon receipt, Field Insolvency must document receipt of the package, information included in the response to the trustee, and the date the response was sent to the trustee.

5.9.4.10  (01-14-2011)
Offers in Compromise and Bankruptcy

  1. Introduction. The Bankruptcy Code provides a means for balancing the interests of the taxpayer and the Service, as does the administrative offer in compromise (OIC). An administrative offer in compromise is one submitted in accordance with the guidelines and procedures set forth in Rev. Proc. 2003 - 71 and IRM 5.8,Offer in Compromise. Administrative and legal problems would be created if a tax liability were simultaneously the subject of a court-supervised bankruptcy case and the administrative offer in compromise process.

  2. Service Policy. When a taxpayer has filed for bankruptcy protection, IRS's policy is not to consider administrative offers in compromise from a taxpayer in bankruptcy. Instead Insolvency considers payment proposals, usually in the form of plans filed by the debtor in the bankruptcy case, under guidelines set forth in IRM 5.9.8.14.2, IRM 5.9.9.6, or IRM 5.9.10.5.5 depending upon the type of bankruptcy case filed.

  3. Rule. The rule to follow on OICs by the Service:

    1. Administrative offers in compromise are returned to the debtor as "not processable" if the taxpayer is a debtor in a bankruptcy case for which a discharge has not yet been entered.

    2. However, even though administrative offers in compromise are not considered when a taxpayer is in bankruptcy, in appropriate cases, the Service may work with the debtor within the bankruptcy case to achieve a result that is in the best interests of both the debtor and the Service. (See IRM 5.9.8.14.2(7), Deficient Plans - Exceptions, and IRM 5.9.10.5.5(4),Deficient Plans - Exceptions.)

  4. Specific Bankruptcy Chapters. Listed below is the Service's policy for specific bankruptcy chapters which clarify the IRS's position on the processing and consideration of OICs in bankruptcy-related situations.

    1. Chapter 7. Only after a discharge or a dismissal has taken place, can an administrative OIC be considered by the Service in a Chapter 7 proceeding. Because a Chapter 7 discharge is usually issued quickly, the taxpayer is not harmed by the delay. Furthermore, once the discharge is entered, the Service will be able to determine which taxes are discharged and will be able to make a determination of " Doubt as to Collectibility" under its administrative offer in compromise procedures. (See IRM 5.8.10.2.3(2),Acceptance of Offer in Compromise after Bankruptcy.)

    2. Chapter 11. In Chapter 11 cases involving individual debtors, as in Chapter 13 cases, the Service will not consider any OICs prior to discharge. When the Chapter 11 debtor is not an individual, an administrative OIC can be considered in unusual circumstances after plan confirmation, but only with respect to tax liabilities which are the subject of a defaulted plan if the default cannot be cured or the plan modified. Such an administrative OIC is only appropriate if unanticipated changes in circumstances cause an inability to meet the terms of the plan. The decision for consideration of an OIC must be made on a case by case basis. The Service can decline to consider an administrative OIC after a Chapter 11 default if the particular facts of the case show an administrative OIC would be inappropriate.

      Note:

      Before the Service can consider processing an administrative OIC in a Chapter 11 bankruptcy case involving a non-individual, the Service must have made a determination the debtor's plan has actually defaulted and cannot be cured. Additionally, the bankruptcy court can no longer have jurisdiction over any tax liabilities which are the subject of the OIC submitted. The Service's decision to consider an administrative OIC submitted by a debtor does not indicate the Service has accepted the offer.

    3. Chapter 12. Administrative OICs in Chapter 12 generally will not be considered. However, in unusual instances, changed circumstances may justify consideration of an administrative OIC in defaulted Chapter 12 plan cases, just as in defaulted Chapter 11 plans, especially since Chapter 12 bankruptcies tend to involve struggling small businesses.

    4. Chapter 13. An administrative OIC will not be considered prior to discharge during the pendency of a Chapter 13 plan.

      Note:

      This policy does not result in harm to the debtor because the debtor is not precluded from resolving his or her tax liabilities in the context of the bankruptcy proceeding.

  5. Consideration of an Administrative OIC. The Service's decision to consider an administrative offer in compromise from debtors who have taken advantage of the relief offered under the Bankruptcy Code is limited to the situations described above. The Service's decision to accept an administrative offer in compromise falls within the discretion of the Service.

  6. Prepetition OIC Down Payments. When a debtor has submitted an OIC with a down payment prepetition, and (s)he files bankruptcy while the OIC is pending, the IRS may generally retain the down payment. A down payment made within 90 days before the filing of a bankruptcy may qualify as a preferential transfer and be avoidable under 11 USC § 547(c). However, the trustee has the burden of proving this payment is a preference. The IRS may retain this OIC down payment until the trustee persuades the Service the payment is a preference and not subject to the exceptions under 11 USC § 547(c). Some payments, namely those to pay off trust fund taxes, are not avoidable as preferences, because the debtor has no property interest in the funds.

  7. Postpetition OIC Down Payments. When a debtor submits an OIC with a down payment postpetition, the down payment should be treated in the following manner according to the bankruptcy chapter under which the debtor has filed for bankruptcy protection:

    1. Chapter 7. The Service can keep the down payment submitted with the OIC, without violating the automatic stay, if the payment is made from postpetition earnings and is applied to non-dischargeable taxes. Postpetition earnings are not property of the estate, and the Service may retain down payments made with such earnings even if the OIC is deemed unprocessable. In this situation, Insolvency should document the AIS history screen with pertinent information relating to such payments, including any contacts made with the debtor on this matter, and confer with Counsel should legal advice be required.

    2. Chapter 11. The Service cannot retain OIC down payments submitted by a Chapter 11 debtor postpetition. In general, property of the estate in Chapter 11 may include property listed under 11 USC § 541 that is obtained postpetition. For Chapter 11 debtors who are individuals, property of the estate includes postpetition earnings. The Service may not retain OIC down payments made with property of the estate.

    3. Chapter 12 and 13. The Service cannot retain OIC down payments submitted by a Chapter 12 or 13 debtor postpetition. In Chapter 12 and 13, property of the estate includes property under 11 USC § 541 that is acquired postpetition and earnings obtained postpetition. The Service may not retain OIC down payments made with property of the estate.

5.9.4.10.1  (01-14-2011)
Accepted but Not Completed Administrative OICs

  1. The Service's Claim and Incomplete Administrative OICs. When a taxpayer with an accepted but not completed administrative offer in compromise files for bankruptcy, the Service has a claim for the full amount of the underlying tax liability because the OIC has not yet been satisfied. Section V(i) of Form 656, Offer in Compromise, provides the tax being compromised remains a tax liability until the taxpayer meets all the terms and conditions of the offer.

  2. Tax Claim. If the taxpayer files for bankruptcy before the terms and conditions of an administrative offer in compromise are completed, any claim the IRS files in a bankruptcy proceeding will be a tax claim. The Service's policy on treatment of an accepted administrative OIC for specific bankruptcy chapters when payments have not yet been completed is discussed below.

  3. Chapter 7 Asset Case. The Service should file a proof of claim for the full amount of the unpaid tax liabilities.

    1. In Chapter 7 cases no mechanism exists for the debtor to assume an executory contract, such as an OIC.

    2. However, if once the bankruptcy case is concluded and the taxpayer promptly resumes payments under the offer, or the amount of the offer was paid in full as a result of distributions in the bankruptcy case, the Service should honor the offer of the postpetition debtor.

      Note:

      The five-year compliance provisions of the OIC still apply.

  4. Chapters 9, 11, 12. Generally, the same guidelines are followed as for a Chapter 13 (below). Counsel can provide specific legal guidance.

  5. Chapter 13. When a taxpayer with an accepted but not yet completed administrative offer in compromise files a Chapter 13 petition, the Service should file a protective claim for the full underlying tax liability to protect the Service's interests.

    1. The proof of claim should cover the full amount of the unpaid underlying tax liability, because the Service is entitled to collect the full amount of the unpaid underlying tax liabilities if the OIC is breached (non-performance of contract).

    2. However, the debtor can choose to assume the OIC as an executory contract in a Chapter 13 plan. This means the debtor agrees, as part of the Chapter 13 confirmation process, to honor the OIC and fulfill its terms during the bankruptcy case.

    3. If the debtor assumes the OIC, the offer should not be treated as breached, and the plan should provide for the full amount due under the OIC. As noted above, the proof of claim will list the full underlying tax liabilities.

      Note:

      The bankruptcy plan should clearly state if the payments will be made outside the plan or through the bankruptcy trustee. An OIC assumed in the plan as an executory contract is an unusual plan provision and it must be addressed in the *****SUMMARY***** history prior to transfer to the CIO.

    4. If the payments are made outside the bankruptcy plan, the debtor will continue making payments directly to MOIC.

    5. When the payments are made through the bankruptcy plan, the trustee will mail the payments to the CIO.

    6. To ensure that the payments received through the bankruptcy plan are applied correctly, the caseworker must contact MOIC for the terms of the accepted OIC. The CPM must be established according to the terms of the accepted OIC. Payments are generally applied to the oldest liability first, even if the oldest liability is an unsecured general liability. All periods must be classified as "unsecured priority" on the CPM screen so payments can be systemically downloaded. The classification on the proof of claim should not be changed to match the CPM screen.

    7. Once the debtor chooses to assume an OIC, the debtor has agreed to pay in full the remaining obligation under the OIC. Accordingly, the Service must honor the OIC by accepting its payment as satisfying the obligation.

    8. The Monitoring Offers in Compromise (MOIC) group assigned the case prior to the bankruptcy filing will continue monitoring the debtor's compliance with the terms of the accepted OIC.

    9. The debtor will have a choice (1) to assume the OIC in the plan or (2) to be liable for the underlying tax liability, whichever is in the debtor's best interest.

    10. The proof of claim should contain an annotation to reflect it is being filed as a "Protective Claim" in the event the debtor does not assume the OIC as an executory contract in the plan.

    11. If the debtor assumes an OIC in a Chapter 13 plan, but the case is subsequently converted to a Chapter 7, the Service may claim the full underlying tax liability as listed on the proof of claim.

      Caution:

      If the debtor does not assume the OIC or does not provide for payment of the unpaid underlying liability in the plan, the Service should object to the plan.

  6. Future Compliance Provisions. In a case under any bankruptcy chapter, if the debtor has made all payments under the OIC but is still subject to the future provisions of the offer, a proof of claim should not be filed.

    1. Chapter 13 . If the debtor later fails to pay postpetition taxes and is still in a Chapter 13 bankruptcy, the Service can use the normal remedies available to it to collect liabilities that become payable during the bankruptcy plan. Generally, the Service files a claim under 11 USC §1305 for the liabilities or seeks conversion or dismissal of the bankruptcy case.

    2. Chapters 11 and 12. In a Chapter 11 or a 12 bankruptcy, if the case is still pending, the Service can seek conversion or dismissal of the case for failing to pay postpetition taxes.

      Note:

      If a debtor whose bankruptcy commenced on or after October 17, 2005, fails to file returns due, the Service may request the court to convert or dismiss the case under 11 USC § 521(j).

    3. Chapter 7. In Chapter 7, the Service can terminate the defaulted OIC after the automatic stay is lifted and collect non-dischargeable liabilities administratively.

  7. Re-Input of Status 71. If a postpetition taxpayer wishes to continue to make payments after bankruptcy, to comply with the terms of a previously accepted OIC, Insolvency should request status 71 (OIC status) be re-input on IDRS when closing the bankruptcy.

  8. Service Coordination. Close coordination and cooperation among Insolvency, field Collection, MOIC, and Counsel is integral to the prompt and efficient handling of administrative OICs in bankruptcy. IRM 5.8.10.2, Bankruptcy, provides additional information on administrative OICs. Monitoring of OICs is addressed further in IRM 5.19.7.3.11.4, Bankruptcy Filed After Acceptance of an Offer. Counsel should be consulted for assistance and legal advice on case-specific issues.

  9. Communication. A contact list should be established between Field and Centralized Insolvency units and other IRS offices who work on bankruptcy-related cases, including OIC groups and Campuses, to facilitate communication among these units. The list should be updated periodically to remain an effective communications tool for employees who work administrative OICs and bankruptcies. SERP provides a list of OIC campus contact phone numbers under the "Who/Where" tab. This information can also be accessed at http://serp.enterprise.irs.gov/databases/who-where.dr/coic_backend.htm.

5.9.4.11  (01-01-2006)
Bankruptcy Fraud

  1. Bankruptcy Tax Crimes Program. The IRS created the Bankruptcy Tax Crimes Program to pursue alleged bankruptcy fraud (and related tax offenses) commonly encountered by Collection employees. Both Field and Centralized Insolvency employees are charged with identifying cases of potential bankruptcy fraud, but Field Insolvency is responsible for preparing and submitting evidence for fraud referrals.

  2. Detection of Potential Bankruptcy Fraud. During the pendency of a bankruptcy case, Insolvency caseworkers may obtain or develop information indicating a federal criminal offense may have been committed. The evidence may implicate the debtor, the trustee, a third party, or a representative in the proceeding.

  3. Third Party Contacts and Insolvency. If a Field Insolvency specialist or advisor submits a fraud referral to Criminal Investigation, third party contact provisions under IRC § 7602(c) apply until the actual referral is made to CI.

  4. Development of Referral. The information Insolvency gathers may indicate offenses over which the Service has jurisdiction under Title 26 Internal Revenue Code, for example, filing false tax returns, and Title 18 tax-related violations. Also, Insolvency caseworkers may discover "pure" Title 18 violations, over which the Service does not have responsibility.

    Note:

    Title 18 violations may include: Title 18 USC § 152, Concealment of Assets, False Oaths and Claims, Bribery, and Title 18 USC § 157, Bankruptcy Fraud.

  5. Bankruptcy Fraud Information. Information relating to bankruptcy fraud procedures is found in Document 9762 (9–96), Desk Guide Bankruptcy Crime Referrals.

5.9.4.11.1  (01-01-2006)
Fraud Referrals

  1. Insolvency Fraud Referrals. Fraud referrals involving a bankruptcy case are to be routed to either:

    1. Criminal Investigation (CI), or

    2. the Disclosure Office handling the jurisdictional area of the bankruptcy court where the case is filed.

  2. Criminal Investigation (CI) Referrals. Fraud referrals for tax-related violations based on Title 26 and related statutes are routed to CI by the bankruptcy fraud technical advisor as outlined in paragraph (5) below.

    1. If a potential referral relates to bankruptcy tax offenses (for example, income tax evasion in conjunction with concealment of assets from the bankruptcy trustee), the matter should continue to be developed for referral to CI.

    2. Likewise, if a referral relates to a concealment of assets from the bankruptcy trustee and indications of a money laundering violation are present, it is handled by CI.

  3. Disclosure Referrals. Fraud technical advisors (see paragraph (5) below) should direct referrals to the local Disclosure Office when non-tax criminal activity is suspected that does not meet CI referral criteria, including activities relating to "pure" bankruptcy fraud under 18 USC § 157 and Concealment of Assets, False Oaths and Bribery under 18 USC § 152.

  4. Disclosure's Responses to Fraud Referrals. If the Disclosure Officer determines the referral from Insolvency merits further review, the information will be forwarded to the appropriate agency for additional investigation. Instructions on the nature of information needed in the non-tax referral to Disclosure can be found in IRM 11.3.28.8,Disclosure of Return Information...Concerning Nontax Criminal Violations.

  5. Working Fraud Referrals. Field Insolvency caseworkers should process a bankruptcy fraud referral as follows.

    1. The Insolvency caseworker originating a bankruptcy fraud referral forwards the referral to the fraud technical advisor. (See IRM 5.9.4.11.2 below.)

    2. If assistance is needed to prepare a quality referral, the fraud technical advisor can advise the employee.

    3. If the fraud technical advisor needs guidance with the referral, (s)he may contact Counsel for assistance.

    4. The fraud technical advisor routes the completed referral either to CI or the local Disclosure Office as appropriate.

5.9.4.11.2  (01-01-2006)
Fraud Technical Advisor

  1. Bankruptcy Fraud. When evidence of bankruptcy fraud is found through processing at the Centralized Insolvency Operation, the case and corroborating documentation should be transferred to the Field Insolvency group handling that court's jurisdiction. When evidence of fraud is detected by Field Insolvency, the case remains with the Field specialist. Field Insolvency should consult the Area fraud technical advisor for assistance in preparing a referral for any case of potential fraud identified by its office or any other office in the IRS.

  2. Fraud Coordinator Responsibilities. The fraud technical advisor ensures referrals are complete prior to sending them forward. For assistance in perfecting the referral, the fraud technical advisor may contact Counsel. Once a fraud referral package has been completed, the fraud advisor transmits it to the appropriate office.

  3. Quality Referrals. Each Field Insolvency office should have a list of criteria for the selection of cases for referral consistent with local procedures. Insolvency groups should work closely with Counsel to develop referrals with a high probability of acceptance for prosecution.

5.9.4.11.3  (01-01-2006)
Fraud Indicators

  1. Fraud Awareness. Service employees, in both Insolvency and field Collection, who have information concerning a debtor's assets must be able to identify major indicators of bankruptcy fraud.

  2. Bankruptcy Fraud Indicators. Listed below are common indicators of bankruptcy fraud.

    1. Absence of or evasiveness by knowledgeable officers for testimony purposes at the bankruptcy court's 341 meeting of creditors.

    2. Concealment of assets.

    3. Conduct contrary to industry practice.

    4. Discrepancies between pre- and post-bankruptcy filing financial information provided to the IRS (e.g., to revenue officers).

    5. Failure to keep usual business records.

    6. Fire, theft, or loss prior to or after the bankruptcy.

    7. Frequent amendments to schedules, statements of financial affairs, and/or monthly operating reports.

    8. Frequent cash transactions.

    9. Inability to contact principals at debtor’s stated business location.

    10. Incomplete or missing books or records.

    11. Inconsistencies between recent financial statements, tax returns, and debtor’s schedules and statement of financial affairs.

    12. Inflated salaries, bonuses, or cash withdrawals by officers, directors, shareholders, or other insiders.

    13. Payoff of loans to directors, officers, shareholders, relatives, or other insiders shortly before bankruptcy.

    14. Recent departure of officers, directors, or partners.

    15. Serial bankruptcy cases.

    16. Sudden depletion of inventory postpetition.

    17. Transfer of property to insiders, shareholders, and/or relatives shortly before bankruptcy.

    18. Unanswered questions, or incomplete information on debtor’s schedules and statement of financial affairs.

    19. Unusual depletion of assets shortly before the bankruptcy filing.

    20. Engaging in illegal activities.

    21. Indications that valuable assets belonging to the taxpayer are being acquired or held in the names of others.

    22. Making false, misleading, or inconsistent statements.

    23. Personal living standard and assets inconsistent with income.

    24. Self-serving statements with no documentary proof.

    25. Submitting a false document or affidavit.

    26. Trying to conceal a pertinent fact or record.

5.9.4.12  (01-01-2006)
Criminal Investigation (CI) Controls on Tax Accounts

  1. CI Controls. In the course of a bankruptcy proceeding, a debtor may contact Insolvency requesting assistance from the Service (for example, asking about a delayed income tax refund). Insolvency, through case research or during a cursory review, may identify Criminal Investigation (CI) controls on the debtor's accounts (e.g., TC 914 or TC 916).

  2. Confidentiality. No indication or confirmation of CI involvement can be given to a debtor or debtor's representative attempting to obtain more specific information on a tax account or tax issue even if the debtor or representative is being persistent. If a debtor or debtor's attorney asks if a criminal investigation is open on the debtor's case, the Insolvency caseworker must contact Counsel and CI immediately to determine the proper response. Insolvency must take no actions that might jeopardize an ongoing criminal investigation.

  3. Prompt CI Contact. Insolvency must promptly contact CI at the Campus on all inquiries involving account(s) with CI controls. Campus CI can provide contact information for the CI Special Agent (SA) who requested the controls.

    1. When CI controls are identified on accounts, even if the freeze is only on one of several tax modules, Insolvency must contact CI immediately to advise CI of the bankruptcy filing and Insolvency's plans to file a proof of claim (if applicable).

    2. A meeting should be scheduled with the Special Agent in Charge (SAC), the Insolvency specialist and manager, and SBSE and Criminal Tax Counsel to discuss coordinating the civil and criminal cases.

  4. Counsel Advice. If Insolvency requires legal advice on any case in which CI advises withholding collection (such as not filing a proof of claim), prompt contact with Counsel should follow according to local management direction. If any issues arise between Insolvency and CI, Insolvency should seek Counsel's advice. (See IRM 5.9.13.16, Criminal Investigation Involvement.)

5.9.4.13  (01-01-2006)
Failure to Pay Tax Penalty and Failure to Pay Estimated Income Tax Penalty

  1. Provisions of IRC § 6658. IRC § 6658 provides no addition to tax shall be made for failure to make timely payment of tax during the pendency of a bankruptcy case, except for taxes which arise from the failure to pay or deposit a tax withheld or collected from others and required to be paid over to the United States (for example, trust fund taxes).

    1. In the case of a prepetition tax for which a return becomes due during the proceeding (the due date of the return is after the petition date), no failure to pay penalty will be asserted during the pendency of the bankruptcy.

    2. In the case of a tax for a prepetition delinquent return which was recently filed, or if the prepetition tax was assessed before the start of the proceeding, the penalty will be asserted up to the petition date.

    3. In the case of an additional liability for a prepetition tax year, the penalty will be asserted from the date of assessment to the petition date.

    4. In all of the instances listed above, no penalty will be asserted while the bankruptcy case is active. The penalty is suspended from the petition date. The penalty resumes from the date the case is dismissed or closed on non-dischargeable liabilities.

  2. If Incurred by Trustee or DIP. A failure to pay penalty will continue to accrue on tax incurred by the trustee or debtor-in-possession unless the failure occurred pursuant to an order of the court finding probable lack of funds in the estate to pay administrative expenses.

  3. IDRS. In most cases, IDRS will properly restrict failure to pay penalties unless a manual restriction has been placed on the account with a TC 270 and TC 271. For 941 taxes IDRS will also suppress FTP penalties for the entire module because it cannot differentiate just the withheld portion.

  4. IRC References. The penalties described above are found in IRC § 6651 (failure to pay penalty), IRC § 6654, (estimated tax penalty - individual), and IRC § 6655 (estimated tax penalties - corporations).

5.9.4.14  (01-14-2011)
Referrals – Representing IRS in Bankruptcy Court

  1. Court Appearances. Some cases require IRS representation in bankruptcy court, either to respond to actions or to initiate actions. Field Insolvency is responsible for all referrals to Counsel based on IRM 5.9.4.13.4. Centralized Insolvency will transfer cases to the appropriate Field Insolvency office when a referral is needed. All such cases will be referred to one of the offices as listed in IRM 5.9.4.14.1 below.

    Note:

    All referrals must provide the debtor's TIN(s) in full (not redacted).

  2. A Quality Referral. A quality referral by Insolvency contains the specifics of why representation in court is necessary. All helpful information must be provided to the Service's legal representative. Such information and data must be attached to the referral to ensure the government's interests are protected. (If all data are not available at time of initial referral, the remainder should be sent as soon as possible for association with the referral.) (See IRM 34.3.1.1.7, Referral to the Department of Justice in Bankruptcy Code Cases.)

  3. Pattern Referral to Local Counsel. To standardize referrals Collection Policy, SBSE Division Counsel, and AIQ have worked with Field Insolvency offices to produce pattern forms to be used by Field Insolvency to refer cases to local Counsel. The pattern forms, one for Chapters 11 and 12 and another for Chapters 7 and 13, can be accessed through the AIQ-Insolvency website at http://sbse.web.irs.gov/collection/AIQ/Resources/default.htm. If the local Area Counsel office has developed a form to be used in a specific jurisdiction, the caseworker should follow local procedures and guidelines.

  4. AIS Referral Screen. All referrals to Counsel must be entered on the AIS referral screen with a follow-up date seven days prior to any court established deadline. If the referral is not in response to a specific court action with a defined deadline, the follow-up date should be set 30 days from the date of referral.

  5. Managerial Intervention. If no response has been received from Counsel by the referral follow-up date, the assigned caseworker must contact Counsel to learn the progress of the referral. If the issue(s) surrounding the referral has not been resolved, the caseworker must ask Counsel for a date by when a response from Counsel can be expected. If Counsel's response is not received by the date specified, the caseworker should elevate the referral to the group manager to contact Counsel.

  6. Reassignment to CIO. All referral and follow-up actions must be resolved prior to case reassignment to Centralized Insolvency for cases transferred to Field Insolvency for referral to Counsel.

5.9.4.14.1  (01-14-2011)
Direct Referrals

  1. Direct Referral Program. To transition the workload uniformly from Counsel directly to the United States Attorney in compliance with bankruptcy program changes, a Direct Referral Program was implemented. Under this plan certain bankruptcy work for non-Special Assistant United States Attorneys (SAUSAs) is referred directly from Insolvency to the US Attorney's Office (USA) or the Tax Division of the Department of Justice (DOJ). IRM 5.9.4.14.2 concerns referrals made to SAUSAs in Associate Area Counsel (SB/SE) and IRM 5.9.1.2.1 discusses the role of Associate Area Counsel.

    Note:

    The direct referral delegation order, Delegation Order 25-9 (08-01-05), limits direct referral to bankruptcy cases. Other types of litigation, such a Receiverships, FDIC Cases, Corporation Dissolutions, etc. can not be referred under the Direct Referral Program to the AUSA or DOJ.

  2. Authorizing Language. All referrals to either of these offices are made by letter and must contain the following authorizing language:

    "This matter is being referred directly by our office because it concerns routine issues. In the event that an issue concerning the interpretation or implementation of a BAPCPA provision arises, we request that you seek the views of our local Area Counsel.

    You are hereby authorized under the provisions of IRC § 7401 to take whatever action you deem necessary to aid the Internal Revenue Service in collection of the above captioned debtor’s outstanding federal tax liabilities. Specifically, we suggest and request that your office… "
    "…move to dismiss or convert this case… "
    or
    "…object to confirmation of the debtor’s proposed plan (or plan of reorganization)..."
    or
    " …defend the claims filed by the Internal Revenue Service against the debtor’s objections..."
    or
    "…defend the claims filed by the Internal Revenue Service against the debtor’s motion to determine the dischargeability of tax…"

  3. Direct Referral Authorization. The authorization to commence direct referrals to DOJ or USA on cases where the IRS’s proof of claim is less than $1 million, includes the following:

    1. Motions on behalf of the IRS, objections to plans based on the debtor's failure to file tax returns and responses to the debtors' objections to unassessed (estimated) claims filed by the IRS in cases where the debtor failed to file an income tax return.

    2. Motions to dismiss or convert cases, except those involving organizations that claim an exemption from taxation under IRC § 501.

    3. Motions relating to the debtor's failure to make timely payments under a plan and/or accrual of post-confirmation liabilities.

    4. Responses to objections to IRS claims where the debtor disputes whether the tax was paid or return was filed.

    5. Responses to debtor's motion to determine dischargeability of a tax except where 1) the debtor has filed consecutive bankruptcies; 2) the debtor defaulted on an offer in compromise; or 3) the denial of discharge would be premised on 11 USC § 523(a)(1)(C) (such as fraudulent returns or evasion of tax).

    Note:

    If a case presents a new issue never addressed by the courts (particularly involving BAPCPA), Insolvency must consult local Counsel to determine whether the case is suitable for a direct referral.

  4. Business Reason. Before referring a case directly to DOJ or the USA, the specialist or advisor must consider if the desired result of the referral is based on a business reason that will benefit the Service and possibly the debtor. If the contemplated direct referral serves no definable business purpose, the referral should not be made. Never should a direct referral be made as simply a punitive action against a debtor.

    Example:

    If a debtor files all delinquent returns, except one, before the first meeting of creditors and files the last return before the confirmation of the plan, there may be no business purpose to seek dismissal based on an untimely unfiled return. The Service's goal is to bring the debtor into filing compliance before confirmation of the plan so an accurate claim may be filed and to take appropriate action at the confirmation hearing if the taxpayer has not yet complied with his filing obligations. Even though the debtor has not met the letter of BAPCPA, the Service is able to meet its goal.

  5. "Mixed" Issues Are Not Direct Referrals. Many referral cases involve " mixed" referral issues (for example, a referral is made because of unfiled returns, but the plan also has feasibility problems). These " mixed" issues cases are not considered to be Direct Referral cases. They should be referred to IRS Counsel as had been the practice prior to the Direct Referrals Program.

  6. All Other Referrals. All other referrals not falling into the above categories should be referred directly to local Counsel, following IRM 5.9.4.13.4 criteria and using the pattern referral form found on the AIQ website or by following local referral procedures and guidelines established in agreement with Area Counsel. When in doubt about whether the direct referral criteria apply, specialists should consult Counsel.

5.9.4.14.2  (01-01-2006)
Referrals to SAUSAs

  1. SAUSAs. Some attorneys in Counsel have been designated as Special Assistant United States Attorneys (SAUSAs). When locally assigned SAUSAs are in place, Counsel may request referrals be made to them instead of directly to DOJ or USA. Local procedures must be coordinated with Counsel. (See IRM 34.11.1, The SAUSA Program.)

5.9.4.14.3  (01-14-2011)
Referrals on Significant Bankruptcy Case Issues

  1. Significant Case Circumstances. Insolvency must make expedited referrals to Counsel on cases with significant case issues. These referrals must be made to Counsel regardless of chapter and regardless of whether or not IDRS shows balance due accounts.

  2. Referral Criteria. Once such a referral is made, Counsel assumes responsibility for coordinating the various IRS functions to ensure timely processing. When one or more of the following circumstances are present in a case, it should be referred to Counsel. (See Chief Counsel Notice CC 2005-004.)

    1. All cases for which a criminal tax prosecution is being considered or is pending.

    2. All cases involving taxpayers with assets of $50 million or more. The referral must state if indications suggest, through audit or otherwise, more than nominal tax may be due. CFOL command BRTVU gives specific BMF return information. Line codes are edited from Forms 941, 943, 940, and 1120.

    3. All cases in which the outstanding assessed liability exceeds $10 million.

    4. All cases for which the potential deficiency to the tax liability exceeds $1 million — (income, excise and other) — taking into account all open tax years.

    5. Cases raising difficult or significant post-confirmation tax issues in the disclosure statement, the Chapter 11 plan, or in related documents, such as the Liquidating Trust Agreement.

    6. All cases with potential tax liabilities for which significant publicity may be generated. The economic impact of the bankruptcy to the geographical area or the taxpayer's industry should be considered.

    7. All cases in which technical advice or ruling requests are pending, including requests for change of method of accounting, if the outcome of the request has a significant tax impact on the taxpayer or on the taxpayer's industry.

    8. All Coordinated Industry Cases (CIC) under examination.

    9. All taxpayers for which an Industry Specialization Program issue is present.

    10. Presently or previously consolidated subsidiaries that file for bankruptcy for which the parent and/or sibling entities fall within the above criteria.

    11. Parent corporations filing for bankruptcy in which consolidated subsidiaries fall within the above criteria.

    12. Pre-packaged bankruptcies - a bankruptcy which includes a plan of reorganization the creditors negotiated and accepted prior to the filing of the bankruptcy petition.

    13. Cases which do not fall within the above criteria but for which referral may be deemed to be in the best interests of the government.

    Note:

    Insolvency must identify these cases as early as possible in the bankruptcy process so a timely referral can be made to Counsel.

5.9.4.14.4  ≡ ≡ ≡ ≡ ≡ ≡
≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Example:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  7. ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  8. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

5.9.4.15  (05-13-2008)
Unfiled Prepetition Returns

  1. BAPCPA Requirements. BAPCPA codifies debtors' duties to be in compliance with federal tax laws. To this end Insolvency has implemented programming changes to aid the bankruptcy courts and trustees to identify non-compliant taxpayers who file bankruptcy on or after October 17, 2005. IRM 5.9.13.18.2,Addressing Unfiled Returns, provides in-depth procedures for securing and processing delinquent tax returns from debtors.

  2. Valid Tax Return. For what constitutes a valid tax return in bankruptcy proceedings, IRM 5.9.2.9.1.2,A Valid Tax Return, can be referenced.

5.9.4.16  (01-01-2006)
Unfiled Postpetition Returns

  1. Individuals. No Bankruptcy Code provision specifically prescribes a requirement for individuals to file postpetition tax returns for bankruptcies filed prior to October 17, 2005. However, BAPCPA added 11 USC § 521(i) providing if a debtor, in a Chapter 7, 11 or 13 bankruptcy case filed on or after October 17, 2005, fails to file tax returns that become due after the commencement of the case, the Service may request the court to convert or dismiss the case.

  2. Chapter 11. Debtors in Chapter 11 bankruptcies filed on or after October 17, 2005, can face conversion to Chapter 7 or dismissal if they fail to file tax returns due after the date of the order for relief or fail to pay taxes owed after the petition date in a timely manner (11 USC § 1112 (b)(4)(I)).

  3. Motions to Convert or Dismiss. Since the courts or the trustees may be unaware of a debtor's noncompliance with tax laws, the government's interest may best be served by Field Insolvency referring the case to Counsel to request the filing of a motion to convert or dismiss bankruptcies commenced on or after October 17, 2005.

5.9.4.17  (01-01-2006)
Innocent Spouse Claims and Bankruptcy

  1. Claims for Innocent Spouse Relief and Bankruptcy. Innocent spouse claims are formally known as claims for "Relief from Joint and Several Liability on Joint Return " under IRC § 6015. For the remainder of this IRM, the more familiar term "innocent spouse claim" will be used. An innocent spouse claim for relief may be pending when a bankruptcy petition is filed or may be raised after a bankruptcy petition has been filed. Instances arise when the joint Master File Tax (MFT) 30 modules appear with a bankruptcy freeze, and one spouse files an innocent spouse claim. In some cases, especially where the spouse requesting innocent spouse relief is the debtor, a determination must be made whether the requesting spouse is entitled to relief under IRC § 6015 during the pendency of the bankruptcy case.

    Note:

    The automatic stay does not prohibit the Service from issuing a final notice of determination granting or denying (in full or in part) innocent spouse relief. If, however, the Service issues a final notice of determination denying relief (in full or in part) while the automatic stay is in effect, the debtor is prohibited from petitioning the Tax Court while the automatic stay is in effect, and the period for petitioning the Tax Court is not tolled. The debtor must move to lift the automatic stay before petitioning the Tax Court. (See Drake v. Commissioner, 123 T.C. 320 (2004).)

  2. Protecting the Taxpayer's Rights. The presence of a bankruptcy freeze does not nullify a taxpayer's rights under the Bankruptcy Code or the innocent spouse provisions in the IRC.

    Caution:

    The mirroring of joint MFT 30 modules to MFT 31 requires close coordination between Insolvency and the Cincinnati Centralized Innocent Spouse Operation (CCISO) to ensure taxpayers' rights are not violated.

  3. Offsets. Consistent with the IRS’s policy not to take collection action when an innocent spouse claim is pending, the Service generally will not make setoffs while an innocent spouse claim is pending. (See IRM 25.15.3.4.5(1).) However, in cases when both innocent spouse claims and bankruptcies are pending, specific bankruptcy procedures should be followed as an exception to this general policy. In such cases, the Service will claim secured status on its proof of claim based upon any setoff rights it may have.

  4. Mirroring of Joint MFT 30 modules. If the Service determines either spouse is relieved (fully or partially) of the joint liability on the MFT 30 module (due to the granting of the innocent spouse claim), MFT 31 mirror modules must be created in order to adjust the tax modules for each spouse appropriately.

    Note:

    NMF Exception. If a problem arises with the TIN (e.g., TIN invalid), then Examining Support will request transfer to non master file (NMF) and not to MFT 31.

  5. Debtor's Filing of Innocent Spouse Claim. The innocent spouse determination may become final before the disposition of the bankruptcy case requiring the affected modules to be adjusted to reflect the determination. When MFT 30 modules require mirroring, all actions should be coordinated between functions to protect the debtors. CCISO will:

    1. contact Insolvency with their determination of the innocent spouse claim;

    2. maintain the bankruptcy freeze –V or –W for closing code 81;

    3. input the necessary actions to create the MFT 31 mirror modules;

    4. do the adjustment for the innocent spouse claim determination; and

    5. reverse their freeze on the MFT 30 and 31 modules.

  6. Proof of Claim Preparation. A proof of claim is prepared and filed (if applicable) in the regular manner while an innocent spouse claim is pending, disregarding the future outcome of the claim. If the innocent spouse claim determination is for a debtor spouse and the debtor spouse meets the criteria for (full or partial) relief, the Service’s proof of claim must be amended or withdrawn, as appropriate if a POC has been filed. Insolvency caseworkers must verify the MFT 30 and MFT 31 modules have been adjusted to reflect any relief granted by CCISO.

  7. Reversal of TC 520 to Allow Processing of Claims. Only Insolvency will reverse the bankruptcy freeze codes when applicable and take the following actions:

    IF... THEN...
    the debtor spouse filed the innocent spouse claim and is granted full relief after a proof of claim has already been filed, when the spouse's module has been adjusted to zero by CCISO, Insolvency must withdraw the POC or file an amended claim for $0 depending upon local practice and:
    • input TC 521 with the petition date and closing code of the bankruptcy for the debtor spouse as long as debt indicators are not present
    • input TC 522 for the non-debtor spouse
    the debtor spouse filed the innocent spouse claim and is granted partial relief after a proof of claim has already been filed, when partial adjustment by CCISO has posted on the bankrupt spouse, Insolvency will:
    • Amend the proof of claim or send a credit letter to the trustee based on local practice
    • Reverse the TC 520 when case can be closed
    • Input the TC 522 on the non-debtor spouse when there is no potential of violating the bankruptcy code regarding joint assets
    the debtor spouse filed the innocent spouse claim and is granted full relief, and a proof of claim has not been filed, when the debtor spouse's module has been adjusted to zero by CCISO, Insolvency must:
    • input TC 521 with the petition date and closing code of the bankruptcy for the debtor spouse as long as debt indicators are not present
    • input TC 522 for the non-debtor spouse
    the debtor spouse filed the innocent spouse claim and is granted partial relief, and a proof of claim has not been filed, when partial adjustment by CCISO has posted on the bankrupt spouse. Insolvency will:
    • reverse the TC 520 when case can be closed
    • input the TC 522 on the non-bankrupt spouse when there is no potential of violating the bankruptcy code regarding joint assets
    the non-debtor spouse filed the innocent spouse claim and full or partial relief has been granted, once the module is mirrored to MFT 31s for both spouses, Insolvency will:
    • input TC 522 to the non-debtor spouse’s MFT 31 after receiving notification CCISO has completed its actions. (This prevents the CSED from being extended for the non-debtor spouse.)
    • ensure no potential violation of the automatic stay exists
    • reverse the TC 520 on the bankrupt spouse’s MFT 31 and MFT 30 when the bankruptcy case can be closed to prevent violation of the automatic stay

    Note:

    CCISO is responsible for reversing their L- freeze on the MFT 30 and both MFT 31 modules.

  8. Monitoring. Coordination between functions is essential. CCISO should contact Insolvency when its actions have been completed.

  9. Complete Documentation. CIO technicians must document the AIS history with all actions taken to complete the process on the MFT 30 and MFT 31 modules.

  10. Joint and Several Liability. In January, 2005, a master file enhancement to mirror MFT 30 to MFT 31s for both spouses became effective. The MFT 30 module liability is cleared by the generation of TC 604. The liability is then mirrored to both spouses' MFT 31 modules and adjusted appropriately for the innocent spouse determination. Any remaining liabilities on the MFT 31 mirrored modules are linked systemically on master file. Payment made by one spouse is systemically credited to the other spouse’s MFT 31 until one is satisfied. Prior to MFT 31 mirroring, innocent spouse claims(s) were processed via the split/transfer process and may have had a joint MFT 30 module where both taxpayers still owe jointly and severally for a portion of the surviving liability.

5.9.4.18  (01-14-2011)
Installment Agreements and Bankruptcy

  1. Status 60. IRC § 6159(a) allows the Service to enter into installment agreements to facilitate the payment of a tax. When the Service accepts an installment agreement from a taxpayer, IDRS status code 60 is entered on IDRS to reflect the agreement's validity.

    Note:

    Status Code 60 accounts established with Agreement Locator Number XX08 are not considered installment agreements but continuous wage levies. See IRM 5.9.12.5.1(8), Stat 60 Notices, for additional information.

  2. Form 900, Tax Collection Waiver. Pursuant to IRC § 6502(a), as amended by the IRS Restructuring and Reform Act of 1998 (RRA 98), the Service can no longer obtain waivers of the statute of limitations (Form 900) for collection except in two situations: one being in conjunction with a valid installment agreement, and, the other, a release of a levy.

  3. Bankruptcy Does Not Terminate a Valid Installment Agreement. After an installment agreement becomes effective, the Internal Revenue Code limits the conditions terminating such an agreement; a bankruptcy petition is not one of them. (See IRC § 6159(b) and Treas. Reg. § 301.6159-1(c) and (c)(2)(i).)

    Note:

    A termination of an installment agreement while a taxpayer is in bankruptcy could be viewed as an act to collect the underlying tax liabilities, and hence, a violation of the bankruptcy automatic stay (11 USC § 362).

  4. Change to Status 72. If a taxpayer files a bankruptcy petition after entering into an installment agreement, transaction code (TC) 520 bankruptcy freeze is input. This action causes the account status to change from 60 to 72.

  5. Termination of Installment Agreement – Appeal Rights. If an installment agreement appears to be in default, before an installment agreement can be terminated:

    1. a notice and explanation of the reasons for termination must be given in writing to the taxpayer 30 days in advance;

    2. the Service must provide for an independent administrative review of the proposed termination (Treas Reg. § 301.6159-1; and IRM 5.14.11); and

    3. the taxpayer has the right to appeal the termination of the installment agreement to the Office of Appeals should the Service still decide to terminate the installment agreement. (See IRC § 7122(d)(2) and IRM 5.14.11.9.)

  6. Payments on a Pre-Existing Installment Agreement. Individual debtors sometimes make voluntary postpetition payments (either by check or automatic debits from bank accounts or wages) for liabilities pursuant to an installment agreement that was entered into before bankruptcy.

    1. Chapter 7 Individual . Voluntary postpetition payment(s) made by an individual Chapter 7 debtor, either by check or automatic debits from bank accounts or wages for the above-stated purpose, can be accepted by the Service. Such payment(s) will be applied to non-dischargeable period(s). Acceptance of such payments is not considered to be a violation of the automatic stay as long as the payments are truly voluntary (i.e., no harassment or coercion by the IRS). (See IRM 5.9.4.4.2(5), Voluntary Payments – Guidelines.)

      Caution:

      Payments cannot be from property of the estate. However, since installment payments are typically made from current income, which is not property of the estate in individual Chapter 7 cases, it can be presumed, in most cases, the payments are not from property of the estate.

    2. Chapter 13 and BAPCPA Individual Chapter 11 Cases. Property of a Chapter 13 estate or of an individual Chapter 11 estate which commenced on or after October 17, 2005, generally includes all property acquired postpetition, including postpetition wages. Therefore payments should be made through the plan. So payments based on a prepetition installment agreement should not be accepted from a debtor who has filed a Chapter 13 bankruptcy or who has filed an individual Chapter 11 bankruptcy on or after October 17, 2005.

      Note:

      Insolvency must ensure no future installment agreement payments will be received by contacting the debtor or representative and also the payment source (e.g., employer), as appropriate. The Chapter 13 trustee should be advised of the suspension of such an agreement if the debtors schedules claim payments as a current expense. Applicable documentation must be added to the AIS history.

    3. If payments of this type are received in Chapters 11 (for cases filed prior to October 17, 2005) and 12, consultation with Counsel may be necessary.

  7. Re-input of Status 60. At the end of a bankruptcy, the IDRS status code should be returned to its pre-bankruptcy status of "60" when criteria for reinstatement are met.

  8. Criteria for Reinstatement. To be eligible for reinstatement of an installment agreement, the debtor must be in full compliance and must meet all criteria for reinstatement of the installment agreement (See IRM 5.14.11.5,Considerations after Default or Termination, Including Reinstatement.) Most types of installment agreements (e.g., direct debit, payroll deduction, credit card payments, or check or money order) can be reinstated without paying a reinstatement fee, but Insolvency can only directly input or request input of installment agreements where the payments are remitted directly by the debtor through check or money order. For all other types of installment agreements, the debtor should call Accounts Management for reinstatement.

  9. The Mechanics of Reinstatement. Using "IADIS" print-outs generated by IIP, Insolvency caseworkers must annotate terms of installment agreements in the AIS history and flag status 60 cases meeting reinstatement criteria at the beginning of the bankruptcy process. Documentation must include the type of agreement (direct debit, payroll deduction, etc.), the date of monthly payment, and the monthly payment amount.

    1. Centralized Insolvency. At the closure of a bankruptcy case with a previous IA where the debtor made direct payments and meets criteria for reinstatement, the caseworker should reinput the terms of the installment agreement on IDRS using CC IAGRE. (See IRM Exhibit 5.19.1-7, IDRS Input of Installment Agreements, cc IAREV and IRM Exhibit 2.4.30-1, Command Code IAGRE Input Request).

    2. Field Insolvency. Caseworkers should complete Form 4844 stating the terms of the direct payment agreement with the statement, "Re-establish the installment agreement while the TC 521/522 is pending, and waive the user fee. The installment agreement was suspended because of bankruptcy." Reinstatement requests should be sent to Centralized Case Processing for input.

      Note:

      Continuous levy plans (Agreement Locator Number 08) are excluded from reinstatement.

  10. Protection of the Taxpayer's Rights. The Service protects taxpayers' rights while the debtor is under the protection of the bankruptcy court (11 USC § 362). Therefore, an installment agreement should be regarded as suspended – not terminated – during the pendency of a bankruptcy proceeding. Even if the debtor incurs additional liabilities or does not remain in compliance, an installment agreement should not be terminated while the automatic stay is in effect, because a termination could be viewed as a violation of the automatic stay.

  11. Documentation. Proper documentation in the case history must reflect pertinent information relating to a valid installment agreement and the bankruptcy process. AIS histories may become a part of the bankruptcy court litigation process. IRM 5.9.5.4,AIS Documentation, provides guidance on required AIS documentation.

5.9.4.19  (03-01-2007)
Foreign Bank and Financial Account Reports (FBAR)

  1. Reporting Requirement. Each US person who has a financial interest in, or signature or other authority over, one or more foreign financial accounts that has an aggregate value greater than $10,000 at any time during a calendar year is required to report that financial interest in, or authority over, the foreign account on Schedule B of Form 1040, as well as on Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, on or before June 30 of the succeeding year. Each person who is required to report an interest in foreign financial accounts must also maintain adequate records of any accounts. Failure to maintain adequate records is an additional violation of Title 31.

  2. Violations Occurring Prior to October 23, 2004. 31 USC § 5321(a)(5) authorizes a civil monetary penalty for any person who willfully violates (or willfully causes any violation of) § 5314 not to exceed the greater of:

    1. an amount equal to the balance in the account at the time of the violation up to $100,000, or

    2. $25,000.

  3. Violations Occurring on or after October 23, 2004 (Not Willful). 31 USC § 5321(a)(5)(A) authorizes a civil monetary penalty for any person who violates (or causes any violation of) § 5314 in an amount not to exceed $10,000. The penalty is waived for reasonable cause.

  4. Violations Occurring on or after October 23, 2004 (Willful). 31 USC § 5321(a)(5) authorizes civil monetary penalty for any person who willfully violates (or willfully causes any violation of) § 5314 not to exceed the greater of:

    1. an amount equal to 50% of the balance in the account at the time of the violation; or

    2. $100,000.

      Note:

      The penalty can be for each violation.

  5. Delegated Authority. Even though the penalty imposed under 31 USC § 5321(a)(5) for failing to report these foreign financial interests (commonly called the FBAR penalty) is not a tax penalty, the IRS has been delegated to collect the penalty for the government. Delegation Order 4-35 effective January 15, 2004, authorizes bankruptcy specialists grade 9 and above to prepare and file proofs of claim for FBAR penalties and to take appropriate action to protect the government’s interest in bankruptcy, state and federal receiverships, and other state and federal insolvency actions.  

  6. Systemic Tracking. FBARs are filed with the Detroit Computing Center (DCC) and information reported on FBARs is entered in a database known as the Currency and Banking Retrieval System (CBRS). FBAR penalties can only be checked by IRS personnel with passwords to CBRS. FBAR cases are not loaded onto AIS or IDRS because FBAR cases are not tax cases.

  7. Interagency Agreement. The IRS has entered into an agreement with FMS to prepare proofs of claim in cases when a debtor with an FBAR penalty assessment has filed bankruptcy. When debtors report FBAR penalties as debts in their bankruptcy petition and schedules, clerks of bankruptcy courts send notices to FMS in Birmingham, Alabama. FMS forwards bankruptcy notices to the DCC.

  8. DCC Duties. When the DCC receives bankruptcy notices, it inputs the bankruptcy indicator on CBRS. All FBAR penalty cases are processed by and assigned to the Los Angeles Field Insolvency office. DCC provides the following account information to the FBAR Penalty bankruptcy specialist in the Los Angeles Insolvency office:

    • Debtor name

    • Debtor address

    • Debtor SSN

    • Balance(s) due for both the penalty and statutory additions

    • Assessment date

    • CSED

  9. CSED. The government has a two-year period in which to file a civil action to recover an FBAR penalty beginning on the later of the date the penalty was assessed or the date any judgment becomes final in any criminal action under 31 USC § 5322 in connection with the same transaction with respect to which the civil penalty was assessed. Currently, IRS has no procedures for soliciting a waiver of this two-year statute of limitations. Filing a bankruptcy petition does not suspend the running of the collection statute expiration date. However, if the FBAR collection statute has not expired upon the date of filing of the bankruptcy petition, 11 USC § 108(c) extends the time to file an FBAR collection suit until the later of:

    1. the end of the two year collection period, or

    2. 30 days after notice of the termination or expiration of the stay under 11 USC §§ 362, 922, 1201, or 1301, as the case may be, with respect to the claim.

    Note:

    Los Angeles Insolvency must coordinate any FBAR CSED issues closely with Counsel, since the government may have only a short period of time in which to initiate a collection suit after the termination of the bankruptcy case.

  10. Insolvency's Duties. Insolvency specialists or advisors in Territory 14 must :

    • verify the bar date has not expired

    • verify the FBAR CSED has not expired

    • prepare and distribute the proof of claim (Form B10) for FMS

  11. Creditor Name. IRS Insolvency prepares manual FBAR proofs of claim listing the creditor as the Financial Management Service at the following address:
    US Treasury
    Financial Management Services
    P.O. Box 830794
    ATTN: Debit Services Branch
    Birmingham, AL 35283-0794

    Caution:

    An FBAR penalty cannot be included on a claim naming the IRS as the creditor.

  12. Claim Calculations. FBAR claims are always classified as unsecured general and include the FBAR penalty amount and interest. Insolvency may have to coordinate with FMS or the DCC to determine the appropriate interest to report on a claim, because the interest rate on these penalties is subject to change. Also, a late payment penalty may be assessed under Title 31, and collection costs may be assessed.

  13. Claim Distribution. The FBAR bankruptcy caseworker files the FBAR proof of claim with the bankruptcy court and must provide copies of the FBAR claim to the DCC, the Insolvency Territory Manager, FMS, the debtor, and debtor's counsel. In addition all FBAR cases must be referred to the local Counsel's office along with a copy of the proof of claim.

  14. FBAR Plan Review. Associate Area Counsel is responsible for reviewing bankruptcy plans as to the treatment of the unsecured general claim for the FBAR penalty. If the IRS is a creditor for unpaid federal taxes or statutory additions to taxes under the same docket number as the FBAR penalty, the Field Insolvency specialist or advisor assigned to that case will process the non-FBAR assessments following established procedures for the chapter under which the bankruptcy has been filed.

  15. Payments on FBAR Accounts. FBAR payments received from the bankruptcy proceedings must be mailed for processing to FMS at the address given in paragraph (11) above.

  16. FBAR Case Monitoring. The DCC will:

    1. record payments if the bankruptcy indicator is on the account;

    2. process abatements;

    3. process full payment of the debt;

    4. reverse the bankruptcy indicator; and

    5. return the account to regular collection status if appropriate.

  17. Dischargeability of the FBAR Penalty. The FBAR penalty is excepted from discharge under 11 USC § 523(a)(7). Counsel should be consulted if questions arise concerning the FBAR penalty and dischargeability.

  18. For additional information on FBAR, see IRM 5.21.6, International and Insular Issues - Report of Foreign Bank and Financial Accounts.

Exhibit 5.9.4-1 
Inputting Follow-up Dates

Generally, follow-up dates on AIS should be kept to a minimum, but some actions require caseworkers to review cases at a timed interval. The table below explains how to access and update AIS for a follow-up review.

STEP ACTION
1 From the AIS Home Page, access the AIS Taxpayer Screen by selecting the "Case Files" button located on the left side of the home page. When the "Case Files" button is selected, it automatically defaults to the Taxpayer Screen.
2 Select "Letter" from the Case File Tabs.
3 On the "Letter Screen" input an appropriate follow-up date in the "Follow Up Date" field.
4 Explain the nature of the follow-up action in the "Comments" field.
5 Select the "Save" button on the navigation toolbar to add the information to the "Letter Screen."
6 Select "Exit" from the navigation toolbar to return to the AIS Home Page. To return to the Taxpayer Screen, select "Taxpayer" from the folders at the top of the Letter Screen.


More Internal Revenue Manual