Opening a Case. This section provides instructions for initial case processing in bankruptcy court proceedings both at the Field and Centralized Insolvency Operation (CIO) levels. Some procedures contained in this IRM section may be modified to coincide with a jurisdiction's local rules and court-issued standing orders.

Conversion to Oracle. Current IRM 5.9 instructions for accessing information and inputting data on the Automated Insolvency System (AIS) are based on the Informix system which is being phased out. For AIS databases that have converted to the Oracle operating system, users must consult the AIS Oracle user guide for instructions.

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

Centralized Insolvency Operation's Duties. Generally the CIO is charged with loading all new bankruptcy cases on the Automated Insolvency System (AIS) and inputting the bankruptcy freeze on the Integrated Data Retrieval System (IDRS). However, where a case is in jeopardy of an automatic stay violation and initial notification of the bankruptcy has been received by Field Insolvency, the Field specialist has an option of either loading the case on AIS him/herself or manually inputting a bankruptcy freeze on IDRS and then forwarding the petition information to the CIO to load the case on AIS.

Notice of Specific Chapters. The manner in which the Service receives notice of bankruptcy filings depends on the chapter under which the debtor filed and local rules regarding refund distribution.

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

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

Case Histories. AIS is the repository for documenting entity information and events and actions affecting case progression. Some documentation is entered systemically while other documentation is manually input. When input manually, all case related actions whether from internal or external systems, sources, and tools, such as the Integrated Data Retrieval System (IDRS), electronic court records, debtors, debtors' attorneys, the Department of Justice, or other, must be thoroughly, factually, and timely documented in the AIS history. The documentation must provide sufficient information to allow the reader an understanding of case actions past, present, and prospective.

History Documentation. Case histories must include the following information when it applies to the case under review and is appropriate for proper case handling:

Chapter 13 Plan Documentation. Chapter 13 plan reviews must include the following information in the order below:

If a plan is inadequate and the decision is made not to refer the case to Counsel because of LEM 5.9.4 criteria or local procedures, the reason for not referring must be included in the AIS history.

Chapters 11 and 12 Plan Documentation. Chapters 11 and 12 plan reviews must be documented in the AIS history. Along with stating the nature of Chapter 12 and Chapter 11 businesses (for BMF Chapter 11 filings), plan documentation must include the following information in the order below:

Confirmed Plans. When the treatment of the Service's claim is determined to be inadequate in a proposed plan and it is subsequently amended to alter the treatment of the Service's claim, the terms of the amended plan must be entered in the history upon plan confirmation.

Case Class Code "Y." To alert the CIO to conditions that might affect the final disposition of a Chapter 7 or Chapter 13 case, caseworkers both in Field Insolvency and the centralized site have been instructed to input a "Y" in the "case class code" field of the AIS entity screen. This signals the technician working the case closure to read the history summary before taking closing actions. Issues that might affect final disposition are the following:

Objective Documentation. AIS documentation must include only facts. The history must not include derogatory statements about any party in interest in the bankruptcy or any other employees or functions within the IRS.

Timeframes. Initial processing of new cases must be completed within five workdays of receipt. To ensure completion of all needed case actions within the mandated timeframe, the CIO must:

Prevention of Violations of the Automatic Stay. Correction of Collection actions that violate the automatic stay must be initiated within two workdays of the date the Service becomes aware of the violation to protect the debtor's rights and to shield the Service from a suit for damages.

Initial Processing of Established MFT 31 Modules. Instances will arise when a bankruptcy is filed, and the accounts have been mirrored prior to the filing of the bankruptcy. Initial case processing for MFT 31 is the same as MFT 30 processing. IIP will search for both spouse’s MFT 31 modules using command code INOLES XREF and match the spouse’s TIN with the MFT 31 modules.

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

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

Transaction Code TC 520. A TC 520, when used in conjunction with a bankruptcy closing code, will:

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

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

Factors Determining TC 520 Closing Codes. The required TC 520 closing code input varies, depending on factors ranging from the chapter of bankruptcy filed to the presence of standing orders and local rules, or the results of bankruptcy research performed. The effect of TC 520 on assessments depends on the date of the bankruptcy filing.

Reversing TC 520 and CSED. In most cases the CSED will be extended by master file when a TC 520 is reversed. However, if the prepetition CSED on a TC 520 module has expired or if the CSED is within six months of expiring, a manual computation of the CSED (TC 550) is required prior to inputting the TC 521. (See IRM 5.9.17.19,ASED/CSED Considerations.)

BAPCPA Stay Limitations. BAPCPA contains provisions specifically designed to discourage debtors from filing sequential bankruptcies. To this end the new bankruptcy act limits or eliminates the imposition of the automatic stay in the following situations.

Identifying Potential Stay Issues. IIP has been programmed to recognize and record previous bankruptcies for both stay issues and non-dischargeability issues. (See IRM 5.9.17.7.2,Denial of Discharge.) IIP systemically inputs coding on the AIS TIN table to advise Insolvency caseworkers of "Prior Bankruptcy Status." The codes used follow.

Field Specialists' Actions. Upon initial case review if the Prior Bankruptcy Status field on the AIS TIN screen shows an L or B, the specialist must determine if the previous bankruptcy(cies) was dismissed for not filing in good faith or if it was dismissed because of means testing. If the case was dismissed because the case was not filed in good faith, the specialist must input a follow-up date of 45 days from the petition date to check the court's electronic records to determine the status of the automatic stay.

CIO Actions. The Centralized Insolvency Operation is responsible for reviewing Chapter 7 cases assigned to it for serial filers. Exhibit 5.9.6-1 gives step instructions for conducting this review.

Court Actions. BAPCPA does not require the court to enter an order stating a stay with respect to the debtor and the debtor's property that is not property of the bankruptcy estate is terminated. Nor does BAPCPA require the court to enter an order stating the stay does not arise in regard to either the debtor's property or property of the estate. So when the court's electronic records do not address the status of the automatic stay, and the previous dismissal was not due to means testing, Insolvency should seek advice from Counsel as to whether a motion should be filed seeking an order confirming the stay did not arise or was terminated 30 days after the petition with respect to the debtor and the debtor's property that is not property of the estate.

Stay Not Imposed. IIP will input TC 520 on master file modules for all new bankruptcies regardless of any previous bankruptcies. If the court did not impose a stay on collection actions, the specialist must manually input a TC 522 on IDRS to reverse the freeze on collection actions and input a TC 520 cc84 reflecting the petition date. Closing code 84 will not suspend the CSED, but it will alert caseworkers on subsequent bankruptcies filed by the same debtor that this bankruptcy did exist. This will help identify serial filers in the future. The case will remain open on AIS until dismissal, discharge, or non-discharge.

Discharge Limitations. BAPCPA limits how often a debtor can be discharged from certain chapters in bankruptcy. (See Exhibit 5.9.5-3.) IIP, as explained in paragraph (3) above, alerts the specialist performing the initial case review with an L, an M, or a B in the Prior Bankruptcy Status field of the AIS TIN screen to review the prior bankruptcy(ies) to determine if the debtor is disqualified from discharge. If the employee determines the elapsed time between filings precludes a discharge upon case closure, (s)he must input a "Y" in the "case class " field of the AIS entity screen and document the history with the reason the debtor's liabilities cannot be discharged. Then the caseworker should consult Counsel to determine if other actions are required, such as court notification, in that jurisdiction.

Introduction. A levy served prepetition on a taxpayer who subsequently files for bankruptcy protection may lead to a hearing in bankruptcy court. Indeed, an IRS levy may provoke a bankruptcy filing. Both Insolvency and Counsel expend time and resources resolving levy disputes in and out of court. If the issuance of a levy on the assets of a taxpayer in bankruptcy is not properly resolved, the Service may be liable for damages if it receives property in violation of the automatic stay.

Levies and Insolvency. Property, whether tangible or intangible, levied upon prepetition but not transferred to the IRS prepetition is property of the bankruptcy estate and becomes subject to turnover. The IRS may have a right to adequate protection before turnover. (See paragraph (3) below.)

Right to Adequate Protection. The courts generally recognize the Service's right to adequate protection when a levy is issued prepetition. The levy provides the IRS with an interest in the levied–upon property. If the IRS is entitled to adequate protection, the IRS caseworker should immediately contact local Counsel to coordinate an adequate protection agreement, a request for adequate protection, or a request for relief from the automatic stay. Although adequate protection can be requested in other chapters, it is requested most often in Chapter 11 bankruptcies. IRM 5.9.8.3,Initial Processing, IRM 5.9.8.3.1,Adequate Protection, and IRM 5.9.8.7, Cash Collateral/Property Depreciation of the Estate , provide additional information on adequate protection.

Prepetition Levy/Postpetition Levy Payment. Payment(s) received after a bankruptcy has been filed (postpetition) based on a prepetition levy should be returned to the bankruptcy estate, through the trustee or debtor-in-possession, unless the IRS seeks prompt relief from the automatic stay.

Timeframe for Corrective Actions. Corrective actions must be initiated within two workdays of the date the Service becomes aware of the payment. Return of the payment will be expedited to either the trustee or the debtor-in-possession per local guidelines using Form 5792, Request for IDRS Generated Refund.

Third Party Contact - Levy Release. A release of a levy is considered a third party contact. When Insolvency handles a release of levy, official recordation of the contact is required unless the taxpayer or taxpayer's representative gives permission for the caseworker to contact the levy source. Form 12175 or ICS electronic recordation is the source of the third party contact list provided to the taxpayer/debtor. IRM 5.1.17.5, Recording Third Party Contacts, states multiple contacts with the same third party on different dates require the completion of a separate Form 12175 for each contact. (See IRM 5.9.3.11.1,Third Party Contacts.)

Documentation. All actions taken on a levy matter while the debtor is under the protections of the Bankruptcy Code must be timely and accurately documented. Insolvency's documentation on a case may be used in bankruptcy court.

Counsel Assistance. Insolvency should contact Counsel for assistance on complex levy issues arising during the pendency of a bankruptcy. Levy concerns must be addressed under strict timeframes to protect the debtor's rights. The Service may be held liable for damages if violations of the Bankruptcy Code occur.

Duration of a Lien. Generally a statutory federal tax lien expires 10 years from the date of the assessment to which it attaches. Certain actions, situations, or events, such as the automatic stay in bankruptcy, suspend the collection period. A Notice of Federal Tax Lien (NFTL) is generally effective for ten years after the date of assessment and expires after that time unless it is refiled. If a NFTL is not timely refiled, it will self-release and the lien will be extinguished. While the collection period may be suspended, such as in the case of bankruptcy, no suspension exists with respect to the 10-year effective period of filed NFTLs. Thus it may be necessary in some instances to refile an NFTL to maintain the Service's lien priority. (See 5.9.5.9.2 below.)

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

Effectiveness of the NFTL. Exemptions provided by state law as set forth in 11 USC § 522 are ineffective against the execution and the creation of an NFTL filed prior to bankruptcy, and such a lien is still valid against those assets after a discharge is granted.

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

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

Proof of Claim and Lien Copies. If the IRS has a secured proof of claim, a copy of the ALS or AIS generated (valid prepetition) NFTL should be attached to the claim if required or requested by the local bankruptcy court or trustee. IRM 5.9.13.5(2), Lien Attachment, provides information on attaching a lien copy to a proof of claim. (See IRM 5.9.5.9.2, Refiling of Liens, and IRM 5.9.17.18,Release of Liens, also.) Caseworkers should be sure state or local recording data have been added to the NFTL. If that information is missing, additional research may be required.

Centralized Insolvency Operations. CIO caseworkers will input most of the adjustments for cases in their inventories on-line. An exception is the request to transfer a case to non master file or make adjustments to accounts already on non master file. CIO management is responsible for ensuring requisite review procedures are in place for on-line adjustments.

Field Insolvency. With the exception of simple account adjustments, such as input of TC 52Xs, Field Insolvency will prepare adjustment requests and monitor for adjustment postings on cases assigned to its inventories. Requests for adjustments on cases assigned to CIO should be forwarded to Centralized Insolvency by fax, secure email, or overnight mail. Adjustment documents prepared by Field Insolvency caseworkers, with the exception of trust fund recovery penalty (TFRP) adjustments, can be emailed to Case Processing or hard copies may be mailed to:

Adjustment Documents. Adjustment forms and their uses are outlined in the table below.

Reassignment to CIO. Chapter 13 cases will be transferred from Field Insolvency to Centralized Insolvency the later of the date of plan confirmation or the closure of any open AIS "referral" screens. All Field cases requiring MFT 31 mirroring or transfer to non master file will be reassigned to the CIO until the mirroring or transfers are completed, at which time cases ordinarily in the Field inventory will be transferred back to the Field for subsequent actions. Before transferring a case to CIO, the Field specialist must ensure:

Reassignment to Field Insolvency. When a case is transferred to Field Insolvency, the assigned specialist generally will receive an electronic mail notification via AIS mail. The caseworkers must:

Servicewide Policy. As with any other taxpayer, a debtor in bankruptcy may be a victim of identity theft that adversely affects the debtor's tax liability. When this situation occurs, the innocent debtor must provide the IRS with documentation to establish (s)he is a victim of identity theft. The guidance in Interim Guidance Memo SBSE-05-0807-030 must be followed to verify identity theft. The information in this interim memo will be incorporated in IRM 5.1.12.

Bankruptcy Functional Responsibilities. Other operations within the Service have been advised to contact the CIO when they are advised of an identity theft issue on a case that is currently in bankruptcy. CIO technicians will handle identity theft issues for Chapter 7 No Asset cases assigned to their inventory. The CIO will direct all other identity theft issues to Field Insolvency offices. The Field Insolvency offices where the cases are assigned are responsible for proper resolution of the identity theft claims.

Insolvency Actions. When the Insolvency caseworker verifies identity theft has affected a debtor's liability, (s)he will take the following actions as appropriate to the case.

Inadequate Debtor Documentation. If the debtor fails to provide the documentation required in the Interim Guidance Memo, no abatement will be made. Local Counsel should be consulted if the debtor provides the requisite documentation, but it appears to be questionable.

AIS History. All actions taken and all documentation received by the debtor must be entered in the AIS history, whether the claim of identity theft is accepted or denied.

Insufficient Withholding. When a taxpayer fails to have his/her employer withhold sufficient federal income taxes, and certain criteria are met, the Service may issue a lock-in letter to the employer directing the employer to withhold federal taxes at a specified rate. A letter is also sent to the taxpayer notifying him/her of the withholding tax lock-in and giving the taxpayer an opportunity to respond. Most lock-in letters are sent to employers and taxpayers systemically by the Withholding Compliance (WHC)function, but because of concerns unique to bankruptcy cases (see paragraph (6) below), Insolvency specialists and advisors will make manual referrals on a case by case basis to WHC for issuance of a lock-in letter.

Affected Chapters. Individual debtors subject to income tax withholding in all chapters except Chapter 7 No Asset are subject to Insolvency review for a referral to WHC for manual lock-in letters. Any lock-in letters issued prior to the Service's being notified of a bankruptcy filing will remain in effect for that tax year regardless of the chapter. WHC will not rescind lock-in letters based on the Service's being noticed later of a bankruptcy filing.

Stay Considerations. The Service does not consider the issuance of lock-in letters a violation of the automatic stay, since lock-in letters do not seek to withhold amounts constituting property of the estate.

Referral Criteria. LEM 5.19.11.3.4.1(1)(a) and LEM 5.19.11.3.4.1(1)(b) establish general criteria to refer cases to WHC for issuance of lock-in letters. For accounts in bankruptcy LEM 5.9.5.13 adds a balance-due dollar criterion to be met.

Procedures for WHC Referrals. IRM 5.19.11.3.4.1 and IRM 5.19.11.3.4.2 provide guidelines to follow when referring a case to WHC for a manual lock-in letter. However, an additional consideration must be addressed for debtors whose bankruptcy plans have been confirmed. (See paragraph (6) below.)

Plan Feasibility. Cases where no plans are filed or where plans are unconfirmed and the referral criteria are met can be forwarded to WHC without consulting the court, debtor, debtor's attorney, or trustee. The issuance of a lock-in letter does not affect the feasibility of a plan, since no plan has been confirmed. When a plan has been confirmed, a lock-in letter may threaten the continued feasibility of the plan if the debtor cannot make plan payments as required because of the unanticipated higher withholding rate. If the withholding will greatly increase, Insolvency should seek modification of the plan before making a referral to WHC for a lock-in letter.

Field Issue. Lock-in letters are considered a complex issue and will be handled exclusively by Field Insolvency offices. Phone calls or correspondence regarding lock-in letters received by the CIO should be directed to the Field Insolvency specialist or advisor assigned to the bankruptcy case.

Reviews for Lock-in Letters. Reviews for lock-in letter referrals must be conducted upon initial case reviews for all individual debtors subject to withholding excepting Chapter 7 No Asset debtors. The results of those reviews must be documented in the AIS history.

Secure the receiving employee's AIS number from the CIO Case Assignment Tool under the "Who/Where" tab in SERP .

From the AIS Main Menu, select option 2, Taxpayer Update screen.

Q(uery) the case docket number

Enter the docket number followed by an asterisk (*) and press the ESC key.

Verify the retrieved case is for the correct debtor and proceed to step 6. If the incorrect case is shown, repeat steps 3 and 4.

Enter U(pdate).

TAB, ENTER or arrow down to the "Technician" field and overwrite the AIS number of the receiving caseworker.

Press the ESC key to save.

Complete steps 1 through 5 from Exhibit 5.9.5-1 above.

TAB, ENTER, or arrow down to the "Access Other Screens" field.

Input P(lan), and AIS will automatically forward to the selected plan file.

In the "Plan File" , type U(pdate) and TAB, ENTER or arrow down to the "Employee" field.

Input the receiving employee's AIS number (which will be the same as the AIS number in step 7 in Exhibit 5.9.5-1), and press the ESC key to save.

E(xit) the "Plan File" and ESC to save and exit the "Access Other Screens " field and case.