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Part 5. Collecting Process

Chapter 9. Bankruptcy and Other Insolvencies

Section 10. Processing Chapter 13 Bankruptcy Cases

5.9.10  Processing Chapter 13 Bankruptcy Cases

5.9.10.1  (05-20-2008)
Introduction

  1. Reorganization of Debts for Individuals. A Chapter 13 bankruptcy represents a voluntary reorganization of debts for individuals. The debtors, who usually retain all of their assets, commit a portion of their future income to repay creditors. Proceedings normally range from 36 to 60 months, with 60 months being the maximum and most common timeframe. Under the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), for bankruptcies commencing on or after October 17, 2005, the plan length is determined by the relationship of the debtor's income to the median income in the state where the debtor filed the bankruptcy (11 USC § 1322(d)). This chapter is not available to corporations or partnerships, but only to individuals (wage earners and sole proprietors).

  2. Chapter 13 Trustee Contact. A court-appointed trustee oversees the administration of a Chapter 13 bankruptcy. Generally, Field Insolvency specialists or advisors make direct contact with trustees. Limited contact between Centralized Insolvency Operation and the trustee may be necessary, usually to resolve payment posting issues.

  3. Trustee Duties. The Chapter 13 trustee:

    1. acts as an agent of the court;

    2. oversees the fair and economical administration of cases;

    3. ensures all creditors receive an equitable distribution;

    4. receives periodic payments from the debtor; and

    5. distributes periodic payments to creditors.

  4. Protection of the Government's Interests. Sometimes the interests of other creditors compete with the interests of the IRS. Because confirmation hearings take place early in Chapter 13 proceedings, usually two to three months from the petition date, Insolvency must address case issues at a pace sufficient to protect the government's interests.

5.9.10.2  (05-20-2008)
Chapter 13 Eligibility

  1. Criteria. 11 USC § 109(e) describes four tests the debtor must meet to file a Chapter 13 bankruptcy:

    1. The debtor must be an individual, or an individual and spouse, who can file jointly; exceptions, a stockbroker or a commodities broker cannot be a debtor in Chapter 13;

    2. The debtor must have regular income (including income from self-employment);

    3. Noncontingent, liquidated, secured debts must total less than $1,010,650; and

    4. Noncontingent, liquidated, unsecured debts must total less than $336,900.

      Note:

      These limitations became effective April 1, 2007. The debt ceilings are for the total of all debts, not just tax debts.

    BAPCPA established a fifth criterion under 11 USC § 109 for Chapter 13 bankruptcies filed on or after October 17, 2005. Debtors must undergo credit counseling within 180 days before the filing of the bankruptcy petition, unless specific exceptions are met. For those exceptions see 11 USC § 109(h).

  2. Eligibility/Automatic Adjustments. As required under 11 USC § 104(b), the Chapter 13 dollar amounts are automatically adjusted at three-year intervals to reflect changes in the Consumer Price Index. As required under 11 USC § 104(b)(2), the next three-year automatic adjustments of the dollar amounts affecting the eligibility of a debtor to file Chapter 13 will occur on April 1, 2010.

5.9.10.3  (05-20-2008)
Initial Case Review for Chapter 13 Bankruptcy

  1. Time Requirement. Insolvency specialists must conduct an initial case review and take primary case actions within 10 business days of the case's being assigned to a specialist or advisor. Elements of this review may be required sooner, for example, to resolve stay violations or to respond to pending motions or defensive litigation. All actions taken and findings in the review must be documented in the AIS history.

  2. Pre-Bankruptcy Collection Actions. Activity in other Service functions may be pending or ongoing when the bankruptcy is filed (for example, a revenue officer may have outstanding levies). Coordination between Field Insolvency and the functions taking collection or examination actions helps the IRS comply with the provisions of the automatic stay.

    • The Service must protect taxpayers' rights by avoiding actions in violation of the automatic stay.

    • If a violation of the stay occurs, the IRS may be liable for damages and attorney’s fees, but not punitive damages.

  3. Levy Issues. In general, the Service should release all levies on an account immediately upon learning the taxpayer has filed bankruptcy and the automatic stay is in effect (11 USC § 362(c)(3) and (4)). Any funds levied upon, but not paid over, or property seized, but not yet sold, are property of the bankruptcy estate and should be turned over to the debtor or the bankruptcy trustee if ordered by the court. Insolvency specialists should contact Counsel on a case-by-case basis when serious levy issues arise. (See IRM 5.9.5.8, Levies and Bankruptcy.)

  4. Adequate Protection. Although used infrequently in a Chapter 13 bankruptcy, adequate protection may be considered in cases where levied funds are significant, or the debtor's property could be easily liquidated or moved. Alternately Insolvency may propose a request to lift the stay if a debtor’s ability to complete the plan is questionable. Insolvency must confer with local Counsel on unusual situations of this nature.

    Note:

    A detailed discussion of adequate protection and cash collateral, more common in Chapter 11 proceedings than in Chapter 13, can be found in IRM 5.9.8.5, Adequate Protection.

  5. Automatic Stay Review. Cases filed on or after October 17, 2005, should be reviewed for dismissals of previous bankruptcies within one year of the current bankruptcy. IRM 5.9.5.7,Serial Filers, explains how to conduct the review, and the proper actions to take depending upon the results of the review.

  6. Discharge Limitations. Chapter 13 cases filed on or after October 17 are subject to a waiting period between a previous bankruptcy discharge and the current petition date. Failure to adhere to the minimum time limitation may result in the debtor's liabilities being non-dischargeable (11 USC § 1328(f)). IRM 5.9.5.7(9),Discharge Limitations, provides instructions for reviewing accounts for allowable elapsed time between bankruptcy filings.

    Note:

    The look-back periods for both the automatic stay review and the elapsed time review are not bound by the October 17, 2005, date. Example: If a Chapter 13 case is filed October 18, 2005, and that same debtor was discharged from a previous Chapter 7 case June 10, 2002, the debtor is not eligible for a discharge in the current Chapter 13 case.

  7. Lien Refile Determinations. The specialist assigned the Chapter 13 case must review IDRS for any periods where a Notice of Federal Tax Lien (NFTL) has been filed to determine if a lien refile is appropriate. IRM 5.9.5.9.2,Refiling of Liens, explains the window for refiling liens and provides guidance for determining if a lien should be refiled. A lien refile review is required for Chapter 13 accounts only during initial case reviews.

  8. Withholding Lock-in Letters. The determination on referring cases to the Withholding Compliance function for a lock-in letter must be made during initial case review. IRM 5.9.5.13 provides procedures for lock-in letter review and referral.

  9. Letter to Non-Debtor Spouse. Upon initial Chapter 13 case review, letters must be sent to non-debtor spouses where joint prepetition liabilities covered by the bankruptcy will not be fully abated for the non-debtor spouse. The letter must:

    1. state the joint prepetition tax periods and the current balances due;

    2. advise the non-debtor spouse that (s)he continues to owe the joint debt covered by the bankruptcy;

    3. state penalties and interest continue to accrue against the non-debtor spouse during the pendency of the bankruptcy;

    4. advise the non-debtor spouse that upon bankruptcy closure, (s)he will owe taxes, penalties, and interest not paid through the bankruptcy;

    5. state collection may continue against the non-debtor spouse during the pendency of the bankruptcy;

    6. advise the non-debtor spouse (s)he may full pay the joint liabilities or make payments toward the joint liabilities during the pendency of the bankruptcy; and

    7. provide a mailing address for non-debtor spouse payments.

    Field Insolvency offices must develop local letters to meet this requirement. Counsel must approve the letter content.

5.9.10.4  (03-01-2007)
Pre-Confirmation Compliance Efforts

  1. In-Business Monitoring. In jurisdictions experiencing substantial delays prior to confirmation, Insolvency should monitor in-business taxpayers prior to confirmation. Business Master File (BMF) liabilities can be tracked systemically using TC 136. If the confirmation occurs very soon after the filing of Chapter 13 bankruptcy, the use of TC 136 may not be warranted. (See IRM 5.9.8.11,Postpetition/Preconfirmation BMF Monitoring.)

  2. Unfiled Returns. Effective October 17, 2005, no later than the day before the 341 meeting is first scheduled, the debtor must file all tax returns "with the appropriate tax authorities" that are due under applicable non-bankruptcy law for taxable periods ending during the four year period prior to or on the date of the filing of the bankruptcy petition (11 USC § 1308(a)). After Insolvency has made a reasonable attempt to resolve the non-compliance administratively, if tax returns remain unfiled by the 341 meeting, the case should be referred to Counsel for conversion or dismissal (11 USC § 1307(e)). IRM 5.9.13.18.2,Addressing Unfiled Returns, explains the use of Letter 1714 and proofs of claims to alert the trustee to debtor non-compliance. Also see 11 USC § 1325(a)(9) which makes filing the returns a requirement for confirmation.

  3. Delaying the 341 Meeting. The trustee may hold open the 341 meeting to provide the debtor an opportunity to file tax returns. For returns past due as of the petition date, such time may be no more than the later of:

    • 120 days after the date the first meeting is held; or

    • the return due date plus timely filed extensions.

    For returns that are not past due as of the petition date, delay of the 341 meeting cannot extend beyond the later of 120 days after the date of the first meeting or the date on which the return is due after a timely request for automatic extension under applicable non-bankruptcy law. After notice and a hearing and before the tolling period for filing the return(s) terminates, the bankruptcy court may extend the trustee’s filing period, but the extension may not exceed 30 days for delinquent returns or the extended due date for returns that are not yet due.

5.9.10.5  (01-01-2006)
The Chapter 13 Plan

  1. Time Limitations. In a Chapter 13 bankruptcy case, the plan may be filed concurrently with the petition. If this is not the case, the debtor must file a plan within 15 days of the petition date (Bankruptcy Rule 3015(b)). 11 USC § 1326(a)(1) requires plan payments to begin within 30 days after the date of the filing of the plan or the order for relief, whichever is earlier, unless the court orders otherwise.

  2. Basic Plan Requirements. In general, the plan should specify:

    1. the length of the plan;

    2. the monthly payment amount;

    3. the percentage of the claims being paid to each class of creditors;

    4. the rate of interest, if applicable, as set forth in IRC § 6621; and

    5. other conditions that affect the treatment of each creditor.

    For cases filed prior to October 17, 2005, if all plan requirements are met, the court must grant the debtor a super discharge of all debts provided for in the plan at the end of the Chapter 13 proceeding. Certain taxes in cases filed on or after October 17, 2005, are excepted from discharge. (See IRM 5.9.17.7(4),BAPCPA Exceptions to Discharge.) If a debtor fails to complete the plan payments, the court may still grant a "hardship" discharge.

5.9.10.5.1  (05-20-2008)
Notice of Plan and Hearing

  1. Court Notification to Creditors. Bankruptcy Rule 3015 provides that the clerk of the court shall mail a copy of the plan or a summary of the plan to each creditor, along with the notice of the confirmation hearing. Bankruptcy Rule 2002(b) provides for 25 days notice to creditors of the hearing on confirmation. For cases where the IRS is listed as a creditor, the plans are mailed to the Centralized Insolvency Operation's (CIO) post office box. The CIO clerical units will forward the plans twice weekly to the appropriate Field Insolvency office unless the bankruptcy confirmation date is within 10 calendar days of receipt. In those cases the plans will be forwarded to the Field office following procedures in IRM 5.9.11.3.2,Time Sensitive Mail.

    Note:

    An objection can be filed if a creditor receives less than 25 days notice.

  2. Confirmation Hearing. The confirmation hearing for Chapter 13 cases may not be held earlier than 20 days and no later than 45 days after the 341 meeting, unless it is in the best interests of both the creditors and the estate and no objection is filed (11 USC § 1324(b)).

5.9.10.5.2  (05-20-2008)
Plan Requirements

  1. Necessary Plan Provisions. An adequate Chapter 13 plan will:

    1. provide the trustee all, or a portion, of the debtor’s future earnings for the repayment of debts;

    2. provide for full payment, in deferred cash payments, of all priority claims under 11 USC § 507, unless the creditor agrees to a different treatment; and

    3. provide all claims in the same class receive equal treatment.

  2. BAPCPA Amendments. In addition to the requirements of an adequate plan listed in paragraph (1) above, for cases filed on or after October 17, 2005, BAPCPA has added two provisions to 11 USC § 1322 that may affect the Service.

    1. Payment of Interest. The debtor may provide for payment of interest on unsecured claims that are nondischargeable under 11 USC § 1328(a) if the debtor has disposable income sufficient to pay interest after making provision for full payment of all allowed claims.

    2. Length of Plan. The allowable length of a plan is determined by comparing the debtor's current monthly household income (times 12) to the annual median income of the debtor's state (11 USC § 1322(d)). Extensions of plan length can be granted by the court, but the court may not approve a period longer than five years.

  3. Additional Provisions. 11 USC § 1322(b) sets forth permissive actions that may be incorporated in the plan, including:

    1. modifying the rights of secured creditors (for example, paying a secured creditor the amount of its claim in deferred payments instead of having the debtor surrender the collateral); and

    2. making provisions for certain postpetition claims.

    Caution:

    Vague or ambiguous language in plans should be flagged for possible objections. Counsel's input should be sought if necessary.

  4. Plan Confirmation Conditions. 11 USC § 1325(a) states the court shall confirm a plan if the enumerated requirements are met. The requirements include::

    1. all provisions contained in the Bankruptcy Code are met and all fees are paid;

    2. the plan is proposed in good faith;

    3. unsecured creditors will receive at least the amount to which they would be entitled in a Chapter 7 bankruptcy;

    4. secured creditors will receive their collateral or the amount of their claim with interest, if paid in installments;

      Note:

      11 USC § 1325(a)(5)(B)(i) provides the lien securing the claim must be retained until the earlier of the time the underlying debt is paid or the time a discharge is granted. Also, the plan must provide for the retention of the lien if the case is dismissed or converted without completion of the plan.

    5. the plan is feasible (i.e., the debtor will be able to make all plan payments and comply with the plan; and

    6. the debtor has filed all applicable Federal, State, and local tax returns as required by 11 USC § 1308.

5.9.10.5.3  (05-20-2008)
Plan Review

  1. Timely Review of Plan. Field Insolvency specialists have sole responsibility for reviewing Chapter 13 plans and plan amendments. Absent extenuating circumstances, specialists must review plans prior to the deadline for objection to confirmation. This ensures if an objection is necessary, the referral will be made in time for the Service to be represented in bankruptcy court. If a copy of the plan or plan summary is not received from the court in ample time for Insolvency review, the specialist must access the plan on the court's electronic site or contact the court or debtor's attorney to have a copy sent directly to the Field Insolvency office address.

  2. Pre-BAPCPA Reviews. For cases filed prior to October 17, 2005, once a plan is confirmed, the provisions of the confirmed plan bind the IRS as a creditor, whether or not the plan provides for payment of the government’s proof of claim.

    Example:

    If Insolvency failed to file an estimated claim for unfiled prepetition years and the plan provides for those years in any way, the Service is required to close those years with TC 599 cc67 ("Unassessable, (Bankruptcy)" ) even though no returns were filed and no money was recovered from the bankruptcy estate.

  3. BAPCPA Reviews. The implementation of BAPCPA provisions for cases filed on or after October 17, 2005, does not lessen the need for thorough review of Chapter 13 plans. However, BAPCPA has codified some plan requirements and exceptions to discharge that protect creditors and reduce the Service's need to request that motions to objecting to confirmation be filed:

    1. Periodic payments to secured creditors must be in equal monthly amounts.

    2. If a case is dismissed or converted before completion of a plan, the Service retains its liens (if any) to the extent recognized by nonbankruptcy law.

    3. Liabilities on unfiled returns or late returns filed after two years before the petition date are non-dischargeable.

      Note:

      TC 599 cc67 will not be placed on TDI modules for Chapter 13 bankruptcies filed on or after October 17, 2005. Insolvency should establish local procedures with Counsel's guidance for the best way to notify the court of a debtor's failure to file returns for periods for which a return is due.

  4. Pre-Confirmation Trustee Plan Review. The Chapter 13 trustee reviews plans and claims prior to confirmation. The Service should file proofs of claim as soon as possible after a Chapter 13 petition is filed as confirmation hearings are held shortly after the § 341 meeting of creditors. IRM 5.9.10.5.4, Objecting to a Plan , and 5.9.10.5.5, Reasons to Object, provide information concerning plan objections.

  5. "Provides for" – Plan Provision Problem. Frequently, Chapter 13 plans include a provision stating all priority debts under 11 USC § 507 will be paid in full. Some courts have held such a provision adequately "provides for" priority tax debts; consequently, they must be discharged under 11 USC § 1328(a), even if the plan does not actually provide for any payments on the tax debt.

  6. Timely Claims. The Service should file a claim prior to the general bar date, or preferably by the confirmation date (should confirmation occur first), whenever possible. This protects the government's interests by ensuring priority and other tax claims will be included and paid under the plan.

    Note:

    For cases filed on or after October 17, 2005, trust fund taxes are excepted from discharge even if the Service files an untimely claim or does not file any claim (11 USC § 1328(a)(2)). Therefore, it is in the Service's best interest to file an untimely claim, as the debtor may modify the plan to provide for the liability.

  7. Unacceptable Plan. If the plan does not provide for appropriate payment of the Service's claims, the Insolvency specialist should follow the guidance in IRM 5.9.10.5.4 below.

5.9.10.5.4  (01-01-2006)
Objecting to a Plan

  1. Objection/Negotiations. When a bankruptcy specialist judges a plan to be inadequate, an objection must be considered. The objection may be raised by:

    1. Insolvency's negotiating acceptable terms with the debtor’s attorney prior to confirmation to avoid potential litigation;

    2. objecting to the plan at the 11 USC § 341 meeting; or

    3. making a referral to Associate Area Counsel, requesting a formal objection be made to the plan.

  2. Referral System. Field Insolvency and Counsel should work together to coordinate an efficient system for routing referrals, allowing for adequate control and timely actions through use of the AIS "referral" screen. All referrals must include the debtor's TIN(s). All referrals to Counsel must be documented on the AIS referral screen.

    Reminder:

    Referrals to local Counsel should address case-specific questions, not policy or procedural issues set forth by National Office.

  3. Insolvency Responsibilities. When an objection is in order, the Field bankruptcy specialist should:

    1. refer to the local bankruptcy court rules controlling the case for timeframes to object;

    2. make prompt contact with the debtor's attorney to attempt informal resolution; and

    3. if appropriate, consult with Counsel on the proper method for a formal objection.

  4. Objection to Plan Factors. Besides LEM 5.9.4 criteria, special circumstances and local guidelines may be established to control the number of plan objections.

  5. Timely Objections. Once a specialist has decided to refer an objection to confirmation to Area Counsel, the referral must be made timely to give Counsel adequate notice to prepare a quality objection to the plan. Associate Area Counsel can advise local offices of the number of days in advance Counsel needs to receive a referral to prepare an adequate objection.

  6. Outreach Efforts. Outreach to Insolvency stakeholders should be an integral part of the local Insolvency program. Personal interactions with trustees and bar association members can foster cooperation of all parties and address issues of mutual concern.

5.9.10.5.5  (05-20-2008)
Reasons to Object

  1. Protection of the Government's Interests. In many jurisdictions, the Chapter 13 trustee assures the court the plan meets the conditions listed under 11 USC § 1325. However, the trustee might not object to a plan that adversely affects an IRS claim. The IRS should object to a plan when appropriate to protect the government's interests while tax accounts are under the jurisdiction of the bankruptcy court. ( See IRM 5.9.10.7, After Confirmation. )

  2. Ineligibility. One ground for filing an objection is "ineligibility." A debtor may be ineligible for Chapter 13 relief for several reasons, but commonly the debtor's liabilities exceed the dollar limitations for a Chapter 13 proceeding. The following examples demonstrate debtors ineligible for Chapter 13 filing.

    1. The total of the debtor's secured or unsecured debt exceeds the limitation for secured or unsecured debt in a Chapter 13 bankruptcy.

    2. The entity's name on the petition is the name of a partnership , which research confirms; but a partnership is not eligible to file Chapter 13.

    3. The debtor's occupation is listed in court filings as a stockbroker. A stockbroker is not eligible to file a Chapter 13 bankruptcy.

  3. Plan Concerns. Additionally the Service may object to confirmation because the plan:

    1. fails to meet the requirements of 11 USC §§ 1322 and 1325 (for example, priority and secured claims will not be paid in full);

    2. is not feasible given the debtor's current income, expenses, and future tax obligations;

    3. proposes a balloon payment;

    4. discriminates against the IRS by treating the Service's claims differently than other creditors in the same classification;

    5. proposes payments outside of the plan;

    6. proposes to abandon collateral to the government or proposes to distribute property in lieu of cash;

    7. is to be modified by the debtor after confirmation if such a modification could impair the government’s claim; or

    8. proposes less than full payment of all unsecured general tax claims and provides for less than all of the debtor’s disposable income, as defined in 11 USC § 1325(b), to fund the plan.

  4. Deficient Plans - Exceptions. In exceptional cases the Chapter 13 debtor may be unable to pay the IRS's claims as required under the Bankruptcy Code, and it is in the taxpayer's and the government's best interests not to have the case converted or dismissed.

    Example:

    If a taxpayer files a Chapter 13 bankruptcy to prevent foreclosure on the family residence, and conversion to a Chapter 7 case will result in minimal or no payments toward the IRS's priority, the best interests of the government and of the debtor may be to agree to partial payment of the priority tax claims under the plan of reorganization and specifically exempting such claims from discharge under the terms of the plan. When the bankruptcy is closed after completion of the plan, the taxpayer may submit an administrative OIC for the remaining tax liabilities.

  5. Unacceptable Deficient Plans. Under no circumstances will the IRS accept less than would be recoverable in a Chapter 7 case. Nor will the IRS consider a plan providing payment of less than is statutorily required unless the following is true:

    • The plan does not provide for the payment of claims with lower priority than those of the IRS.

    • All income not necessary for the health and welfare of the debtor's family or the production of income is committed to the plan.

  6. Factors for Evaluating Deficient Plans. The following considerations should be weighed before deciding to agree to treatment of the IRS's claims that does not meet the requirements of the Bankruptcy Code:

    • Debtor's ability to pay the IRS's claim as required by the Bankruptcy code

    • Debtor's compliance with filing requirements

    • Probability the plan will pay the IRS more than if the case is dismissed or converted to a Chapter 7 liquidation

    • Debtor's probable ability to continue making payments over the time remaining on the CSED

    • Feasibility of the proposed plan of reorganization

    • Existence of factors precluding the debtor from dismissing the bankruptcy and submitting an administrative offer in compromise

      Example:

      The IRS is the only creditor in the case.

    • Dischargeability of the tax liabilities

    • Agreement by other creditors with the same priority, such as state taxing authorities, to receive less than full payment of their claims

  7. Acceptance of Deficient Plans. If a debtor demonstrates it is in the government's best interest to accept less favorable treatment than is required under the Bankruptcy Code, the specific payment terms must be incorporated into the debtor's plan of reorganization and are subject to the approval of the bankruptcy court. The plan must also provide statements asserting:

    1. the Service has affirmatively agreed to treatment of its claim that differs from the treatment required under the Bankruptcy Code;

    2. the debtor will comply with all filing requirements and withholding and estimated tax payment requirements during the life of the plan; and

    3. the government's rights to collect upon a default in plan payments.

    Note:

    The AIS history must reflect the factors considered in the decision to accept treatment of the IRS's claims irrespective of Bankruptcy Code requirements.

  8. Burden Falls to the Debtor. Unless the Chapter 13 debtor timely provides information to Insolvency demonstrating the inability to pay the IRS's claim as required by the Bankruptcy Code and conversion or dismissal of the case is not in the best interest of the government, the case should be referred to Counsel to file an objection to the plan.

  9. Contents of Objection Referral. The referral to Counsel objecting to the plan must state the actions taken to resolve plan deficiencies with debtor's counsel. These may include the following:

    • The debtor did not demonstrate acceptance of a deficient plan is in the government's best interest.

    • The debtor did not provide sufficient information to make such a determination.

    • The debtor's payment proposal is not feasible.

    • The tax claims are non-dischargeable and full collection is likely outside of bankruptcy.

5.9.10.6  (05-20-2008)
Field Insolvency AIS Actions

  1. Confirmation Date. The date to be input by all Field Insolvency offices on the AIS entity screen for the confirmation date field is the actual date the plan is confirmed. Projected dates are not to be input. At confirmation and before transfer of a case to CIO, the Field specialist must verify the plan and prepare any adjustment requests (see IRM 5.9.5.10,Adjusting Bankruptcy Accounts) resulting from confirmation actions and follow-up for adjustment posting before case transfer.

  2. Loading Payment Plans. Trustees in some jurisdictions send payments to the Service before a plan has been confirmed. To permit these payments to be posted through AIS, Field offices that receive pre-confirmation payments from the trustee must load the Payment Plan Monitoring screen for each case when a proof of claim is filed. An estimated effective date must be input on the AIS Payment Plan Monitoring screen. ( See Exhibit 5.9.10-1.) An estimated confirmation date should not be entered on the AIS entity screen. A plan payment amount for the dummy plan must be entered to allow payment posting. A fictitious low dollar amount is suggested if an actual payment amount is not known.

    Note:

    Prior to transferring any Chapter 13 case to CIO, the AIS Payment Plan Monitoring screen must be accurately loaded for all cases for which a POC has been filed.

  3. Amended Claims and Plans. Field Insolvency caseworkers must update the Payment Plan Monitoring screen when an amended claim is filed and allowed by the court.

  4. History Summaries. Before a case is transferred to the Centralized Insolvency site, a Field Insolvency specialist must summarize the case history on AIS. If specific information is lengthy, the summary can reference previous history entries by date. The summary should be identified by *****SUMMARY***** in upper case letters. Sample minimum summaries are as follows:

    • Unfiled returns, including MFTs and periods (e.g., "Unfiled 30 2003" )

    • Prior installment agreement information, including agreement type, amount and day of month (e.g., "Prior IA: direct debit @ $150, 25th ea. mo." )

    • Refund turnover orders (e.g., "Refund turnover order, trustee John Doe" or "Refund order, see history 4/02/04" )

    • Pending exam or reassessment (e.g., "Exam on 2003" or "Reassessment of TC 300 for 2002 at close of bk" )

    • Non-debtor spouse information (e.g., "NDS - Jane Smith SSN XXX-XX-1234 for 2001" )

    • Unusual plan provisions (e.g., "Plan does not provide for secured periods. Do not discharge 30 1999." )

      Note:

      If no issues exist, the summary should simply state " No Issues."

5.9.10.7  (01-01-2006)
After Confirmation

  1. Property of the Estate. 11 USC § 1327 explains the effects of confirmation. All property of the estate vests in the debtor upon confirmation unless the plan or order confirming the plan provides for different treatment. Property that vests in the debtor is free of any claim or interest provided for in the plan.

  2. Terms Binding. The IRS is bound by the terms of a confirmed plan even if it provides for less than full payment of the Service's claims. But a plan cannot be confirmed if the terms conflict with the Service's rights under the bankruptcy code, (e.g., discharge of taxes resulting from a fraudulent return is prohibited for cases filed on or after October 17, 2005).

    Reminder:

    Objecting to a plan before confirmation is critical when an objection is appropriate.

  3. Modifications. The IRS may be able to move for modification of the plan to obtain an increase in payment of its unsecured general claims when the debtor’s disposable income has increased.

5.9.10.7.1  (03-01-2007)
Modification of Plan

  1. Plan Modified. The plan may be modified after confirmation, but before full payment, to increase or reduce the amount of payments, to extend or reduce the time for such payments, or to alter the amount of the distribution to a creditor.

    1. For cases filed prior to October 17, 2005, payments may not extend beyond three years after the date the first payment is remitted under the original confirmed plan, or beyond the extended five-year period as approved by the court.

      Note:

      The length of the plan period for cases filed on or after October 17, 2005, is tied to the debtor's income in relation to the median income of the state in which the debtor resides (11 USC § 1322(d)).

    2. 11 USC § 1329(a) provides the debtor, the trustee, or an unsecured creditor may request modification of a confirmed plan.

    3. Insolvency should scrutinize a plan modification as carefully as an original plan.

    4. If modification is not acceptable to the Service and LEM 5.9.4 criteria for referral to Counsel are met, a timely objection to the modified plan should be raised. Field Insolvency should consult Counsel for advice as necessary.

    Caution:

    In many jurisdictions, post-confirmation modifications will not be considered when an objection should have been raised prior to confirmation. Once confirmation has occurred, the court is less inclined to allow a change in the plan, unless some significant change has developed since confirmation. ( See IRM 5.9.10.9, Postpetition Tax Liabilities. See IRM 5.9.10.9.2, Section 1305 Claims.)

5.9.10.7.2  (05-20-2008)
Impact of the Automatic Stay

  1. Duration of the Automatic Stay. For cases filed prior to October 17, 2005, the automatic stay is not lifted until the case is dismissed, the debtor receives a discharge, or the case is closed by the court. Therefore, contacting the debtor for demand of payment and collection of prepetition liabilities may be prohibited. ( See IRM 5.9.10.8, Monitoring the Chapter 13 Plan, and See IRM 5.9.10.9, Postpetition Tax Liabilities.) However, for cases filed on or after October 17, 2005, the automatic stay may terminate 30 days after the petition date with respect to the debtor and the debtor's property that is not property of the bankruptcy estate, or the stay may not arise at all. (See IRM 5.9.3.5(2),Individual Serial Filers and BAPCPA and IRM 5.9.5.7,Serial Filers.)

    Note:

    The stay may be lifted to grant a creditor temporary relief from the stay regardless of the petition date.

  2. Domestic Support Obligations. For bankruptcies commencing on or after October 17, 2005, 11 USC § 362(b)(2)(F) excepts from the automatic stay the interception of tax refunds to pay any past due domestic support obligations. (See IRM 5.9.4.4.3.1(3), BPI 07.)

  3. Postpetition Payments for Prepetition Taxes. Acceptance of postpetition payments in a Chapter 13 bankruptcy proceeding for prepetition taxes may violate the automatic stay. Thus, postpetition tax payments for prepetition taxes usually should be made through the Chapter 13 trustee. Insolvency may confer with Counsel if this matter arises.

  4. Prepetition Installment Agreement. Payments from a debtor on a prepetition installment agreement generally should not be accepted from a Chapter 13 debtor after the debtor has filed for bankruptcy. Counsel may provide guidance as needed.

  5. Debtor Spouse and Non-Debtor Spouse/Joint Return. To minimize chances of a violation of the Bankruptcy Code occurring, a TC 520 freeze code should be input on the jointly-filed balance due account even when only one of the spouses is in bankruptcy. (See IRM 5.9.4.2(5)(e),CSED Indicators. ) However, Insolvency must address issues relating to debtor and non-debtor situations (for example, CSED concerns and community property issues). Counsel advice should be sought as necessary.

  6. CSED Issues and Considerations. Periodic CSED monitoring of the non-debtor spouse must be conducted by Insolvency.

    1. Insolvency may issue an "Other Investigation" (OI) to a field revenue officer group to determine collection potential from the non-debtor spouse or to protect the CSED if the collection statute is a concern.

    2. The delinquent account could be addressed in the debtor's plan.

    3. The non-debtor spouse may continue with a previously-approved payment agreement with the Service (if applicable).

    4. If the non-debtor spouse makes payments on the joint tax liability in addition to the debtor spouse making plan payments through the trustee, Insolvency must amend the Service's claim periodically or send a credit letter to the trustee to update the claim amount(s) for the court.

    Note:

    If a CSED for a non-debtor spouse is imminent or has passed, management must be informed.

  7. Decision to Retain or Return Payment. A payment may be received by the Service from a source other than the trustee after the bankruptcy filing. If research indicates a balance due account on a joint liability, yet only one spouse is in bankruptcy, Insolvency should:

    1. determine who submitted the payment (the debtor or the non-debtor spouse);

    2. try to determine the designation or intent of the payment to decide if IRS has a right to retain the funds (for example, the funds may be from the non-debtor, who wants to continue with a prepetition installment agreement);

    3. take precautionary measures so the debtor's rights are not violated; and

    4. consult Counsel when legal advice is required.

  8. Revenue Officer Contact with Insolvency. Revenue officers may not take any collection action after a taxpayer has filed Chapter 13 unless such action is cleared with Insolvency. Employees in field Collection must contact Insolvency promptly after a taxpayer has filed a bankruptcy to determine if any information or advice is needed. If necessary, Insolvency will elevate complex or unusual situations to Counsel.

    Caution:

    On cases where the automatic stay is in effect, collection must be stayed on any prepetition tax debt. Every effort must be made to prevent enforcement actions against the debtor (e.g., notice, lien, levy) while the debtor is under the protection of the automatic stay.

5.9.10.8  (01-01-2006)
Monitoring the Chapter 13 Plan

  1. Monitoring of Plans. In most jurisdictions, trustees provide their own plan payment monitoring systems to default Chapter 13 debtors who fail to make payments. Centralized Insolvency Operations may choose to use the AIS plan monitoring report to determine if payments are being received as promised; however, this report can be unreliable. Postpetition tax obligations are best monitored through the weekly generation of Litigation Transcript System reports. (See IRM 5.9.12.2, Litigation Transcript System.)

  2. Debtor Compliance. 11 USC § 521(j) provides that if a debtor who files bankruptcy on or after October 17, 2005, fails to file a postpetition tax return or properly file an extension the Service may request the court convert or dismiss the case. The court must convert or dismiss the case if the debtor fails to satisfy the requirement within 90 days of the request by the Service. Insolvency should refer a request to Counsel for a motion to convert or dismiss.

  3. Collection Actions Prohibited. Systemic notices and collection actions for prepetition taxes are not appropriate in a Chapter 13 proceeding unless the automatic stay is lifted or not imposed. However, one informational notice of a prepetition balance due is allowed.

  4. Postpetition Liabilities and Property of the Estate. Collection of postpetition tax liabilities of a Chapter 13 debtor is complicated by a division among courts concerning what is considered "property of the estate" after confirmation. Some court cases have granted IRS the right to take collection action on postpetition debts in Chapter 13 proceedings when earnings or income used to fund the plan are not adversely impacted.

  5. Impact of Bankruptcy Estate Interpretations. After consultation with Counsel, as necessary, Insolvency must determine the most appropriate and effective actions to be taken regarding postpetition tax liabilities within the boundaries, if any, imposed by the court. The legal interpretation of the "bankruptcy estate" in a given area will determine the course of action taken by the Service.

  6. Conversion/Dismissal Considerations. If, in the course of a bankruptcy, Insolvency determines a debtor is not adhering to the plan, and the plan is not modified, Insolvency may consider conversion/dismissal motions, particularly in cases of egregious non-compliance. No action should be taken until Field Insolvency has contacted the trustee to attempt to resolve the plan problems and issues. Counsel may be consulted on an " as needed" basis before the formal referral is forwarded. The bankruptcy court is more likely to give favorable consideration to the Service's conversion/dismissal motion if made in the early stages of a bankruptcy rather than toward the end of the plan.

5.9.10.8.1  (01-01-2006)
Property of the Estate after Confirmation

  1. Bankruptcy Code Guidelines. Three sections of the Bankruptcy Code affecting the determination of " property of the estate" after confirmation are:

    1. 11 USC § 541 . The property of the estate includes virtually all property in which the debtor has an interest at the time the petition is filed, including property in another's possession and community property.

    2. 11 USC § 1306. Included in property of the estate is any property acquired after the petition date but before the case is closed, dismissed, or converted, including both § 541 property, wages and other income.

    3. 11 USC § 1327 . Assets revest in the debtor at confirmation, unless otherwise specified in the plan or confirmation order.

  2. Service Position – Property of the Estate in a Chapter 13 Proceeding. The Service's position, generally, is after confirmation, the bankruptcy estate is limited to the portion of the debtor's income or other earnings necessary to fund the plan.

    1. Case law reflects various other positions on this issue, including both the position that all of the debtor's property remains in the estate post-confirmation and the position that only property acquired post-confirmation remains in the estate.

    2. The plan can provide that property remains in the estate.

    3. Area Counsel's advice should be sought when clarification is required on this subject.

  3. Community Property. In community property states, property of the estate includes postpetition community property acquired by the non-debtor spouse. IRM 5.9.3.5.1.1, Community Property, provides additional information on this topic.

  4. No Separate Taxable Entity in a Chapter 13. Although the bankruptcy estate is a separate taxable entity upon the filing of petitions by individuals under Chapters 7 and 11, no separate taxable entity exists in a Chapter 13 case ( IRC §1398 and IRC § 1399). As a result, separate tax returns (Form 1041) are not filed for Chapter 13 estates.

  5. Allowed/Disallowed Post-Confirmation Actions. After confirmation the Service can generally file NFTLs for postpetition taxes. To avoid litigation on the issue of whether filing tax liens for postpetition taxes violates the automatic stay, the NFTL should include an annotation stating, "This Notice of Federal Tax Lien is not being filed with respect to property while it remains property of the bankruptcy estate of the taxpayer." In some jurisdictions, the Service can administratively seize real estate or tangible property to collect postpetition liabilities, but cannot take collection against property committed to the plan or needed by the debtor to make payments to the trustee. Wage levies should exclude the amount needed to fund the monthly plan.

    Caution:

    The Service must be wary of taking collection actions that interfere with funding the Chapter 13 plan. Even if assets are not property of the estate, collection may impair the debtor's ability to fund the plan (for example, seizure of a debtor's business) and may be prohibited by the bankruptcy court.

  6. When Property Remains Property of the Estate. Where local law provides all property remains property of the estate after confirmation, no collection action for postpetition taxes is permitted unless relief is obtained from the automatic stay. Or if the debtor's plan provides all property remains property of the estate after confirmation, no collection action may be taken against such property. Any notices of federal tax lien filed with respect to postpetition liabilities should include an annotation the lien does not attach to property of the estate. (See paragraph (5) above.)

    Note:

    Setting off postpetition overpayments against postpetition liabilities may not violate the automatic stay.

  7. Seek Counsel Advice. If any collection action is contemplated against a Chapter 13 debtor (or any debtor in a bankruptcy) while the stay is in effect, Insolvency should seek the advice of local Counsel prior to taking distraint action . The debtor is under the protection of the bankruptcy court, and the debtor's rights must be protected.

5.9.10.9  (05-20-2008)
Postpetition Tax Liabilities

  1. Postpetition Tax Liabilities. Taxes incurred after the date of the bankruptcy filing are generally considered to be postpetition tax liabilities. The Service's position is the accrual date, not the date of the assessment nor the date the tax was payable, determines whether an account is considered a prepetition or a postpetition liability.

    Example:

    A 2006 income tax (balance due) return has a year ending of December 31, 2006. Taxpayer filed bankruptcy on December 30, 2006. The tax was assessed on April 30, 2007. The resulting balance due account is considered a postpetition tax liability, because the tax liability accrued on December 31, 2003, one day after the petition was filed.

  2. Factors and Considerations. Postpetition tax liabilities are handled in various ways by Insolvency groups throughout the country. In all cases ACS caseworkers or revenue officers should contact a CIO liaison to confirm the actions they are contemplating against debtors in bankruptcy are appropriate.

  3. Important Considerations. The Service can deal with postpetition tax liabilities in several ways, and, in determining which option to exercise, Field Insolvency specialists must consider:

    1. if the automatic stay is in effect, and if the CSED is tolled or running;

    2. the amount owed;

    3. the debtor's ability to pay;

    4. the debtor's past compliance history; and

    5. if the plan is just beginning or has progressed to later stages.

  4. Local Level Considerations. At the local level, the following factors may play a role in determining how Insolvency handles postpetition liabilities.

    1. Local Insolvency staffing and resources.

    2. Local field Collection staffing and resources.

    3. Counsel's staffing, resources, and recommendations.

    4. The level of cooperation with the trustees and members of the local barn.

    5. The commitment, activity, and success of local outreach efforts.

    6. Established procedures and guidelines among the various Service functions and their effectiveness.

    7. The existence of local rules/agreements and standing orders.

  5. Approaches. Field Insolvency groups may use various approaches when dealing with postpetition tax liabilities, including:

    • filing 11 USC § 1305 claims (usually requires a motion to modify plan) — see paragraph (8) below and also IRM 5.9.10.9.2, Section 1305 Claims

    • sending OIs to ROs for investigation and possible collection actions (may require lifting of stay)

    • filing a motion to lift the automatic stay, for possible refund offset— requires court intervention

    • referrals for motions to convert or dismiss — determined on a case-by-case basis (e.g., conversion due to ineligibility for Chapter 13 or dismissal due to non-compliance)

    • assertive actions by trustees — some trustees will initiate dismissal actions when debtors are accruing postpetition liabilities

    • administrative collection against exempt property or property not used to fund the plan (collection from specific assets)

    • exploring alternatives with debtor prior to distraint action(s)

    • installment agreement

    • modification of plan

      Caution:

      If the debtor refuses to modify the plan or is negligent in doing so, the Chapter 13 trustee may pursue modification in the bankruptcy court. The IRS also has the right to file such a motion, if necessary. But once confirmation has taken place, creditors have minimal success with such a request.

    • referring the case to Counsel to move for conversion or dismissal on bankruptcies commenced on or after October 17, 2005, when a postpetition tax return has not been filed (11 USC § 521(j))

    • Pursuing collection from the non-debtor spouse in a joint income tax return filing (except in community property states where this is disallowed). (See IRM 5.9.3.5.1.1,Community Property.)

    • Local outreach efforts with the courts, trustees, and local bar associations

    • Waiting to pursue administrative collection outside of bankruptcy

    Note:

    These options may not be available in some jurisdictions.

  6. Postpetition Levy Action. In a Chapter 13 case, if the plan does not provide for payment of a postpetition tax liability, generally the postpetition liabilities can be collected (including by use of levy action) from any asset not dedicated to the plan. In addition to monies required to fund the plan, the debtor is entitled to receive the exempt amounts from a wage levy accorded to taxpayers under the IRC. Further, Insolvency must follow local rules or standing orders impacting this position.

    1. If wages and future earnings of the debtor are designated to fund the plan, and the IRS serves a wage levy against the debtor for postpetition debts, the levy must state it reaches only those wages which exceed the payments to the trustee.

    2. IRM 5.9.3.7,Collection Due Process (CDP) Cases, provides information on debtors' rights, including pre-levy notice when levy action is being considered for postpetition tax debts.

      Caution:

      The automatic stay may prohibit some actions to collect postpetition tax liabilities after confirmation of the Chapter 13 plan. However, the filing of notices of federal tax liens and setting off postpetition overpayments may not be violations of the automatic stay. Counsel should be consulted for legal advice, because judicial districts differ as to which assets (if any) are protected property of the estate after confirmation. IRM 5.9.4.1 and IRM 5.9.10.8.1 give additional information on property of the estate.

      Note:

      The same considerations regarding Chapter 13 postpetition levy actions apply to individual Chapter 11 cases filed on or after October 17, 2005.

  7. Payments Made Outside the Plan. The IRS may make arrangements with the debtor to have the postpetition liabilities paid outside the plan, but such an arrangement (an installment agreement), is generally not in the best interests of the government.

    1. Such an arrangement is solely between the debtor and the IRS.

    2. If an installment agreement is entered into, the trustee will not oversee these payments.

    3. The Service should generally discourage this option since default on plan payments allows the Service to move to convert or dismiss. Those remedies are not available in side-agreements.

    4. Also, if additional funds are available, the debtor should use them to pay unsecured general claims; the debtor is expected to dedicate all disposable income to fund the plan per provisions of the Bankruptcy Code.

  8. Payment through the Trustee. Insolvency may request payment of postpetition debt through the court by filing a 11 USC §1305 claim. Although §1305 claims may be accepted as filed, they are not always paid. Some debtors fail to modify the plan to include the postpetition liabilities, complicating the discharge process. In addition CSED concerns can be created for the Service with the filing of 11 USC § 1305 claims. ( See IRM 5.9.10.9.2.)

  9. Detailed Documentation Imperative. Because the CIO technical units work Chapter 13 discharges for all jurisdictions, the action a Field Insolvency caseworker takes on a postpetition module must be documented in detail, including instructions for discharge if a §1305 claim has been filed. IRM 5.9.5.4,AIS Documentation, provides guidance on required AIS documentation.

    Note:

    Depending on local court practice, some §1305 claims must be discharged even if not paid.

  10. CNC Accounts – 53ed. A tax account may be put in a Currently Not Collectible (CNC) "53" status (completed by use of Form 53) only under strict IRM CNC guidelines. In a Chapter 13 bankruptcy, with a joint return balance-due situation, and only one of the spouses in bankruptcy, a "53 " of a joint account, or any portion of the account, is not appropriate during the pendency of the bankruptcy of the debtor spouse while the debtor is under the court's jurisdiction.

  11. Post-Discharge Administrative Collection. The Service may choose to do nothing to collect the postpetition tax debt(s) until the Chapter 13 debtor receives a discharge. The Service may then attempt to collect the tax administratively. Generally postpetition taxes will not be discharged unless provided for in the plan.

    1. The debtor is disadvantaged if the IRS waits until discharge to collect postpetition liabilities because the liabilities continue to accrue interest and penalties during the bankruptcy.

    2. The debtor may be in a better financial position after discharge to pay the taxes due, but the reverse could be true.

    3. Serious collection statute complications and issues may arise.

      Caution:

      The CSED may not be tolled by the bankruptcy since the automatic stay does not absolutely prohibit the collection of postpetition liabilities not provided for in the plan. Counsel can provide guidance.

  12. Discharge Provisions of 11 USC § 1328(a). Unless an exception applies, only prepetition claims provided for by the plan, which have been filed and allowed or disallowed, and postpetition 11 USC § 1305 claims provided for by the plan, are discharged by 11 USC § 1328(a).

5.9.10.9.1  (01-01-2006)
Collection from Specific Assets

  1. Other Investigations. Insolvency has the option to request an OI from field Collection when real property, not specifically retained in the estate, is available to effect collection.

  2. Retirement Plans. Insolvency may levy on some types of retirement plans without going through field Collection if the plans are determined to be excluded from the bankruptcy estate. (See IRM 5.9.17.4.3,Insolvency Levy Procedures for Excluded Retirement Plans.)

  3. Benefits of Distraint Action. Field Insolvency may consider issuing a levy on excluded retirement plans or request an Ol for distraint action, with Counsel guidance and concurrence, after alternatives have been considered. If a levy/seizure is to be done, lifting of the automatic stay may be required. The benefits of a distraint action may be:

    • outstanding postpetition tax debts can be collected after confirmation and applied towards the taxpayer's tax debt(s) to reduce taxpayer burden

    • stay violations can be minimized by taking collection action against targeted property which is not property of the estate

    • future tax compliance can be promoted and encouraged by the deterrent effect

  4. Risks of Distraint Action. The risks inherent in taking distraint actions are:

    • generally few assets merit collection activity in a typical Chapter 13 case

    • analyses can be time-consuming

    • Field Insolvency specialists may need to review each plan and confirmation order to ensure specific property was not retained

    • collection actions that may prevent the debtor from completing the plan may still be challenged (for example, a seizure of the debtor's business may be challenged in court because it has an adverse effect on completion of the confirmed plan)

    • Collection personnel, unfamiliar with the bankruptcy case or provisions of the Bankruptcy Code, may violate the stay by making a demand for payment of prepetition taxes or by applying payments to prepetition tax liabilities instead of to postpetition debts

    • lifting of the stay, requiring court approval, may still have to be requested to avoid legal repercussions

5.9.10.9.2  (01-01-2006)
Section 1305 Claims

  1. Postpetition Tax liabilities — 11 USC § 1305. Chapter 13 specifically provides for postpetition debt in 11 USC § 1305. This section of the Bankruptcy Code allows tax liabilities accruing postpetition to be claimed and allowed in Chapter 13 cases.

  2. Who Can File . Under 11 USC § 1305 only tax claimants (for example, the IRS) and consumer debt creditors, whose debt is necessary to the Chapter 13 plan, have the authority to file a claim under § 1305 procedures.

  3. Classification. A § 1305 claim is treated as a prepetition claim. Claims for postpetition taxes should not be filed as administrative claims because the Service views postpetition taxes as constituting a liability of the debtor, rather than the estate.

  4. Interest and Penalties. Interest and penalties are not usually claimed on § 1305 claims. Local practice varies.

  5. Bar Date. Section 1305 claims have no bar date, but local procedures may set time limitations.

  6. Form to Use. Counsel's assistance may be needed to determine the correct form to use in a particular Insolvency area. However, Form B10, Proof of Claim, and Form 10 Attachment usually are completed for this purpose. A statement should be entered on each § 1305 claim to identify for the court the type of claim being filed.

    Example:

    "THIS CLAIM IS BEING FILED UNDER THE AUTHORITY OF TITLE 11 USC § 1305."

  7. Local Rules. Field Insolvency specialists must understand local rules/agreements or standing orders affecting the treatment of postpetition tax liabilities in their area and include a detailed summary in the AIS history so caseworkers in the CIO can take appropriate action upon discharge.

  8. Benefits of § 1305 Claims. The IRS can benefit from filing § 1305 claims because:

    • the possibility of violating the stay is lessened

    • collection is achieved through the trustee

    • monitoring of payments can be done systemically using AIS

    • full compliance may be achieved

    • future tax compliance may be promoted

    • the Service will be paid as a priority creditor

    • tax delinquencies may not "follow" the taxpayer out of bankruptcy to be collected post-discharge

    • the debtor is provided with a more thorough "fresh start "

  9. Risks of Filing § 1305 Claims. Attendant with benefits are the following risks of § 1305 Claims:

    • In most jurisdictions the plan must be modified to provide for the additional claim. If debtors fail to do this, the discharge determination process is complicated.

    • Once provided for in the plan, the tax liability may be dischargeable.

    • Plan modification may lower the amount the Service's prepetition unsecured claims receive.

    • The Service may receive little or nothing for interest and penalties.

    • The trustee may not pay § 1305 claims, because generally they are filed after plan confirmation, and funds may not be available to pay postpetition debts.

    • § 1305 claims require monitoring by Insolvency.

    • Serious CSED issues may arise, generally resulting in Counsel involvement.

    • § 1305 claims may not be accorded priority status and thus may be discharged without full payment.

  10. Filing of a § 1305 Claim. Insolvency management sets local policy on filing § 1305 claims based on economic feasibility.

    Caution:

    Even though a § 1305 claim is technically allowed by the court, it does not necessarily follow the IRS will receive payment(s) on its claim.

  11. Modification of Plan Based on a § 1305 Claim. The debtor should file a motion to modify the plan to include the § 1305 claim. It is generally beneficial for the Service to send a written request to the debtor to advise of the need for a modification of the plan so the Service can file a § 1305 claim. A copy should be sent to the debtor's attorney.

    Reminder:

    In some areas, the Chapter 13 trustee may request the debtor to modify the plan to include postpetition tax liabilities. The trustee, as well as the IRS, can file a motion to modify the plan. Per 11 USC § 1329, an unsecured creditor has the right to seek modification of the plan.

  12. Field Insolvency Assignment. If a Field Insolvency specialist files a § 1305 claim and modification of the plan is required before the Service can receive payments, the Field Insolvency group must retain control of that case until the plan modification has been approved. Only after plan modification has been approved by the court should the case be transferred back to the CIO for monitoring. (See paragraph (14) below for an exception.)

  13. Discharge under 11 USC § 1305. If a claim is filed under § 1305 and the debtor provides for the postpetition tax claim by modifying the plan, upon completion of the Chapter 13 plan, the debtor will receive a discharge of these taxes under 11 USC § 1328(a). Only through completing a Chapter 13 plan and receiving a discharge under 11 USC §1328(a) will the debtor obtain relief for these postpetition taxes.

    Note:

    For BAPCPA cases certain taxes will be excepted from discharge even if provided for in the plan.

  14. Plan Modification Not Required. If the court or trustee does not require a plan to be modified to allow for § 1305 payments, the case can be transferred back to CIO once the § 1305 claim has been sent to the court. The AIS documentation must specify under what circumstances the period(s) on the § 1305 claim can be discharged.

    Example:

    "1305 claim filed on 30 9412. If 1305 claim not full paid, do not discharge."

  15. Collection Alternatives. The IRS does not have to file such a claim, and the debtor cannot file a § 1305 claim on behalf of the IRS.

5.9.10.10  (05-20-2008)
Court Intervention

  1. Motions before the Court. In cases of serious postpetition non-compliance, court intervention may be an appropriate solution. Some of the court options the Service may consider include a motion to:

    1. convert the case to a Chapter 7 proceeding;

      Note:

      For cases filed on or after to October 17, 2005, conversion to a Chapter 7 case might be subject to dismissal under the means test (11 USC § 707(b)).

    2. dismiss the case; or

    3. lift the automatic stay to allow distraint action.

      Reminder:

      For cases filed on or after October 17, 2005, the stay may not be in effect; or with respect to the debtor and the debtor's property that is not property of the estate, the stay may terminate 30 days after the petition is filed. (See IRM 5.9.5.7,Serial Filers.)

  2. Counsel Coordination. Coordination with Counsel and adherence to LEM 5.9.4 must be maintained since the volume of non-compliant debtors might overwhelm Counsel's ability to file motions and to argue and resolve issues. For the benefit of all parties, litigation should become an option only after all alternatives have been explored.

  3. Advantages of Court Intervention: The Service may benefit from court intervention because:

    • it may prove to be a positive influence on the debtor's tax compliance, present and future

    • it may allow the debtor to remain in bankruptcy longer, improving the debtor's overall finances and opportunity for a fresh start

    • for cases filed prior to October 17, 2005, the debtor is prohibited from filing another bankruptcy for 180 days after the debtor requests dismissal subsequent to a motion to lift the stay (11 USC § 109(g)(2))

    • the debtor may lose protection of the automatic stay if (s)he files another bankruptcy within one year

    • seeking relief through court action may be the only means, not in violation of the automatic stay, to address a debtor's non-compliance

    • avoidance of damages against the Service due to the stay's being lifted

  4. Risks of Court Intervention. The downsides of asking the court for relief are it:

    • may be expensive for the government

    • is time consuming for all parties concerned

    • may increase tax non-compliance due to delay (e.g., pyramiding of taxes could continue)

    • can delay collection actions due to pending legal action

      Note:

      Courts may be unwilling to grant such requests, at which point the Service's options are limited.

  5. Protection of the Government's Interests. In some cases, after a court motion is filed, modification of the plan to pay a postpetition claim may be an acceptable resolution. To protect the government's interests in this event, aside from requiring a modification of the plan that does not have an adverse impact on prepetition claims, the IRS should secure (as applicable) a provision requiring:

    1. future compliance (for example, filing of required tax returns);

      Reminder:

      For cases filed on or after October 17, 2005, non-compliance is grounds for conversion or dismissal (11 USC § 1307 (e)).

    2. lifting of the stay to collect any future liabilities; and/or

    3. proofs of deposit and/or estimated tax payments.

5.9.10.10.1  (03-01-2007)
Conversion

  1. Conversion to Another Chapter. A debtor may convert from Chapter 13 to another chapter as long as the debtor is eligible to file under that chapter. A court order is not required for a voluntary conversion from Chapter 13 to Chapter 7. For cases filed prior to October 17, 2005, the debtor is required only to file a notice of conversion. The filing date of the notice is deemed to be the date of conversion to Chapter 7.

    Reminder:

    For cases field on or after October 17, 2005, conversion to a Chapter 7 filing might be subject to dismissal under the means test.

  2. Creditor Election. A creditor may also seek a conversion for cause, although this is not often done in Chapter 13.

  3. US Trustee. The Chapter 13 trustee may seek a conversion for cause.

5.9.10.11  (01-01-2006)
Distribution of Funds

  1. Application of Payments. Generally, all funds received from the trustee are posted to AIS using the payment plan monitoring screen. Unless designated differently by the court, payments are systemically applied to allowed claims, by category, as follows:

    1. Secured claims. (Each secured period is paid in full, then payment is applied to accrued interest on that module before payments are applied to the next oldest module.)

    2. Priority claims. (Only the tax and interest are paid.)

    3. Unsecured claims. (Only the tax and interest are paid.)

    4. Penalties on priority claims.

    5. Penalties on unsecured general claims.

    Note:

    The Service maintains its right to apply payments according to the government's best interests which may not be reflected in the above list of order of payment application.

  2. BAPCPA Payment Provision. BAPCPA added 11 USC § 524(i) which makes it a violation of the discharge injunction for any creditor to willfully fail to credit payments received under a confirmed plan for bankruptcies commencing on or after October 17, 2007. If the debtor can prove misapplied payments caused material injury, the creditor may be subject to damages and attorney's fees under IRC § 7433(e). The following are exceptions to this provision:

    • The order confirming the plan is revoked

    • The plan is in default

    • The creditor has not received payments in the manner required by the plan

    If the creditor corrects the misapplication of payments before the discharge is granted, no violation of the discharge injunction is considered to have occurred.

  3. Non-Plan Payments. Occasionally non-plan payments are received by the Service on a bankruptcy case that are not remitted through the Chapter 13 trustee. Insolvency must document all particulars surrounding receipt of such payments. If payments are retained, AIS should be updated to indicate a payment received outside the plan to reflect an accurate balance amount.

  4. Payment Screening. Insolvency should screen such a payment to determine if the Service is entitled to apply the payment as a credit to the debtor's federal tax account.

    1. If Insolvency determines a payment should not be credited, timely actions must be taken to dispose of the funds appropriately. This may include returning the uncashed check to the remitter or preparing a manual refund request on Form 5792.

    2. If a payment has been received and deposited by the Service, and determination is made later the payment should be returned, Insolvency will initiate actions to generate a refund either to the Chapter 13 trustee or to the debtor, per local procedures.

  5. Proper Screening/Allowance of Payments. Examples of payments that may be credited to the taxpayer's account and generally allowed to be credited to the debtor's account after proper screening is done by Insolvency (e.g., research conducted, advice obtained from Counsel, concurrence from trustee, if appropriate), are as follows:

    • A voluntary payment from the debtor or co-debtor

    • A payment received from the sale of property

    • A payment received from a lien discharge

    • A payment from a non-debtor spouse on a joint return

  6. Clarify Claim/Amend or Withdraw. If such a payment is received, and the Service determines it is entitled to retain the payment, Insolvency will amend/ withdraw the proof of claim, as applicable, or send a credit letter to the trustee depending upon local procedures. This is necessary for claim clarification purposes.

5.9.10.12  (03-01-2007)
Trustee Audit

  1. Audit of Chapter 13 Debtors. In 2006 a Chapter 13 debtor audit program was implemented. The US Trustee randomly selects cases to be audited by private contractors who check for material misstatements in the debtors' statement of affairs and schedules. The auditors send notice with a list of material misstatements to the US Trustee and parties in interest, including creditors. When received at the CIO, these notices will be forwarded to the assigned Field Insolvency offices for review and possible referral to Counsel for civil action and, where warranted, for consultation with the Fraud Technical Analyst concerning criminal referral to CI.

Exhibit 5.9.10-1  (05-20-2008)
Dummy Plan Screen

"Effective" Date. Before pre-confirmation payments can be posted to the AIS Payment Plan Monitoring screen, a dummy plan must be loaded by Field Insolvency specialists or advisors. After proof of claim data have been entered on the AIS Claim screen, the following actions should be taken to load a dummy plan.
1. From the AIS Main Menu, select item 6 for Payment Monitoring.
2. From the Payment Monitoring Menu, select item 1 for Payment Monitoring Data, and Enter.
3. Type A(dd) to add the new plan information.
4. Enter the docket number.
5. Enter the plan type.
6. Enter the employee number.
7. Enter the payment frequency.
8. Enter the effective date using the petition date. Disregard the alert, " The taxpayer record has no confirmation date."
9. Enter the date of the first expected payment.
10. Enter a payment amount.
11. Enter any optional interest rates. Disregard the alert, "You cannot enter a plan; the case has no confirmation date."
12. Hit ESC(ape) to save.
13. Type U(pdate) to update the designated payments and changeable terms fields if necessary.
14. Confirm the Plan Verified field has a Y. If not, update any periods with an N to show a Y. Payments will not post if the Plan Verified fields do not show a Y.

Note:

Current IRM 5.9 instructions for accessing information and inputting data on the Automated Insolvency System (AIS) are based on the Informix database 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.


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