4.27.2 Examiner Responsibilities

Manual Transmittal

September 12, 2019

Purpose

(1) This transmits revised IRM 4.27.2, Bankruptcy, Examiner Responsibilities.

Material Changes

(1) This IRM was updated to incorporate field examiner procedures from IRM 4.27.5, Miscellaneous Provisions, relating to prompt determination requests, prompt refund requests, Chapter 12 requests for determinations of the tax effects of proposed plans, and individual Chapter 11 debtor requirements. Content from IRM 4.27.5 related to Planning and Special Programs (PSP) responsibilities was moved to IRM 4.1.1.6.18, Prompt Determination Requests. IRM 4.27.5 is obsoleted.

(2) Updates were made to reflect current legal and procedural requirements and corrections were made to citations as appropriate. In addition, paragraphs were renumbered due to the addition of IRM 4.27.2.1, Program Scope and Objectives, and IRM 4.27.2.5, Miscellaneous Provisions.

(3) The following significant changes were made:

IRM Reference IRM Title Description of Change
4.27.2.1 Program Scope and Objectives Added new section. Incorporated information from other sections in this IRM to provide Background, Authority, Roles and Responsibilities, Acronyms and Command Codes, Terms, and Related Resources.
4.27.2.5 Miscellaneous Provisions Added overview to describe bankruptcy cases relating to prompt determination requests, prompt refund requests, Chapter 12 requests for determinations of the tax effects of proposed plans, and individual Chapter 11 debtor requirements.
4.27.2.5.1 Prompt Determination of Tax Liability Added guidance for field examiners when examining requests for prompt determination of unpaid tax liability. Moved and updated content from IRM 4.27.5.2. and IRM 4.27.5.2.1.
4.27.2.5.2 Prompt Determination of Tax Refund Added guidance for field examiners when examining requests for prompt determination of tax refunds. Moved and updated content from IRM 4.27.5.3.
4.27.2.5.3 Chapter 12 Bankruptcy Plan - 11 USC Section 1231(b) Requests Added guidance for field examiners when reviewing chapter 12 bankruptcy plan requests for determinations of the federal income tax effects of proposed plans of reorganization. Moved and updated content from IRM 4.27.5.4.
4.27.2.5.4 Individual Chapter 11 Debtors Required Filings Moved content from IRM 4.27.5.5.

Effect on Other Documents

This material supersedes IRM 4.27.2, dated February 9, 2017.

Audience

Small Business/Self-Employed (SB/SE) Field Examination employees

Effective Date

(09-12-2019)


Maha H. Williams
Director, Examination - Field and Campus Policy
Small Business/Self-Employed

Program Scope and Objectives

  1. Purpose. This IRM section outlines procedural requirements when an examiner is notified of a bankruptcy case; including miscellaneous provisions requiring special handling of a bankruptcy case.

  2. Audience. These procedures apply to all SB/SE Field and Specialty examiners, excluding Estate and Gift Tax.

  3. Policy Owner. The Director, Examination - Field and Campus Policy, who is under the Director, Headquarters Examination.

  4. IRM Owner. Field Examination Special Processes, which is under the Director - Examination Field and Campus Policy.

  5. Primary Stakeholders. SB/SE is the primary stakeholder of the Examination Bankruptcy Program.

  6. Contact Information. To recommend changes or make any other suggestions related to this IRM section, see IRM 1.11.6.6, Providing Feedback About an IRM Section - Outside of Clearance.

Background

  1. This section provides instructions and guidance for examiners when examining taxpayers who have filed or are preparing to file bankruptcy.

  2. This section also addresses miscellaneous provisions requiring special handling of bankruptcy cases; including prompt determination requests and requests for prompt refund.

Authority

  1. See IRM 4.27.1.1.2, Authority, for general authority relating to bankruptcies.

  2. Rev. Proc. 2006-24 - Provides the procedures a trustee or debtor-in-possession representing a bankruptcy estate must follow to request a prompt determination by the Service of any unpaid tax liability of the estate.

  3. Rev. Proc. 2010-27 - Provides the procedure to be followed by the bankruptcy estate trustee in filing a claim for credit or refund of any overpayment of tax.

Roles and Responsibilities

  1. The Director, Headquarters Examination, is the executive responsible for providing policy and guidance for SB/SE Examination employees and ensuring consistent application of policy, procedures, and tax law to effect tax administration while protecting taxpayers’ rights. See IRM 1.1.16.3.5, Headquarters Examination, for additional information.

  2. The Director, Examination - Field and Campus Policy, reports to the Director, Headquarters Examination, and is responsible for the delivery of policy and guidance that impacts the examination process. See IRM 1.1.16.3.5.1, Field and Campus Policy, for additional information.

  3. Field Examination Special Processes (FESP), which is under the Director, Examination - Field and Campus Policy, is the group responsible for providing oversight and policy and procedural guidance on specialized examination processes to SB/SE field examiners and group managers. See IRM 1.1.16.3.5.1.2, Field Exam Special Processes, for additional information.

  4. All examiners must perform their professional responsibilities in a way that supports the IRS Mission. This requires examiners to provide top quality service and to apply the law with integrity and fairness to all.

  5. Income tax examiners, their managers, and clerical support staff should thoroughly acquaint themselves with the procedures and information contained in this IRM, as well as other resources, such as those listed in IRM 4.27.2.1.6, Related Resources.

Acronyms

  1. The following table lists commonly used acronyms and their definitions as referenced throughout this IRM:

    Acronym/Code Definition
    AIMS Audit Information Management System
    AIS Automated Insolvency System
    BAPCPA Bankruptcy Abuse Prevention and Consumer Protection Act
    CCP Centralized Case Processing
    CIO Centralized Insolvency Operation
    DOJ Department of Justice
    BRA 94 The Bankruptcy Reform Act of 1994
    FESP Field Exam Special Processes
    IDRS Integrated Data Retrieval System
    LLC Limited Liability Company
    PSP Planning and Special Programs
    SNOD Statutory Notice of Deficiency
    TC Transaction Code
    USC United States Code

Terms

  1. See IRM 4.27.1.1.6, Terms, for definitions of the following terms:

    • Bankruptcy

    • Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA)

    • Bankruptcy Code

    • Bankruptcy Court

    • Bankruptcy Petition

    • Bankruptcy Reform Act of 1994 (BRA 94)

    • Bar Date

    • Chapter 7

    • Chapter 9

    • Chapter 11

    • Chapter 12

    • Chapter 13

    • Chapter 15

    • Claim

    • Confirmation

    • Debtor

    • Discharge

    • Estate

    • Examiner

    • Individual Debtor

    • Insolvency

    • Liquidation

    • Petition Date

    • Pre-Petition

    • Proof of Claim

    • Reorganization

    • Trustee

  2. See IRM 4.27.3.1.5, Terms, for definitions of the following terms:

    • Automatic Stay

    • Creditor

    • Dismiss

    • Principle of Bankruptcy

    • Schedules and Statements

Related Resources

  1. Procedural guidance on bankruptcies can be found throughout IRM 4.27, Bankruptcy, and IRM 5.9, Bankruptcy and Other Insolvencies.

  2. For basic information on bankruptcy see Pub 908, Bankruptcy Tax Guide.

    Caution:

    Although publications are good sources of general information, they should not be cited to sustain a position. See IRM 4.10.7.2.8, IRS Publications.

  3. Document 13219, Automated Insolvency System - User Guide.

  4. Bankruptcy Web Page (http://mysbse.web.irs.gov/examination/tip/bankruptcy/default.aspx).

  5. Examination Bankruptcy Coordinators in Technical Services are listed on the Bankruptcy - Exam Technical Services Web Page (http://mysbse.web.irs.gov/examination/tip/bankruptcy/contacts/12268.aspx).

  6. Field Insolvency Office (http://serp.enterprise.irs.gov/databases/who-where.dr/insolvency/national-field-centralized-site-directory.html).

  7. The following table contains related IRMs that examiners may find helpful and are referenced throughout this IRM:

    IRM Title
    IRM 4.1.1.6.18 Prompt Determination Requests
    IRM 4.20.2.2 General Collectibility Considerations
    IRM 4.27.1 Bankruptcy Petitions
    IRM 4.27.3 Review and Processing Procedures
    IRM 4.31.2 TEFRA Examinations - Field Office Procedures
    IRM 4.31.7 TEFRA Bankruptcy
    IRM 5.9.1 Overview of Bankruptcy
    IRM Exhibit 5.9.1-1 Glossary of Common Insolvency Terms
    IRM 5.9.2 The Bankruptcy Code and Collection
    IRM 5.9.3 Debtors’ Delinquent Accounts
    IRM 5.9.4 Common Bankruptcy Issues
    IRM 5.9.5.6.1 Closing Codes
    IRM 5.9.9.5.1 Determinations of Tax Implications of Chapter 12 Plans
    IRM 5.9.13 Manual Proofs of Claim and Common Claim Issues
    IRM 5.17.8.20 Return Filing Requirements
    IRM 25.1.2.6 Bankruptcy Fraud

Overview

  1. The Bankruptcy Handbook has been prepared to provide instructions and guidance to examiners assigned returns of taxpayers that have filed, or are preparing to file, bankruptcy. This section details the procedural requirements of an examiner when they are notified of a bankruptcy case. The filing of bankruptcy does not preclude the IRS from beginning or proceeding with an examination. For Bankruptcy Chapter definitions, please refer to IRM 4.27.2.1.5, Terms, and IRM 5.9.2.3, Bankruptcy Code Chapter Organization.

Notification of Bankruptcy Proceedings

  1. Insolvency uses various means to notify Examination that a bankruptcy petition has been filed by taxpayers under examination. It primarily uses the Automated Insolvency System (AIS), in addition to inputting various IDRS command codes that reflect a bankruptcy filing. Insolvency inputs a TC 520 with closing code 60, 61, 62, 63, 64, 65, 66, 67, 81, 83, 84, 85, 86, 87, 88 or 89 on the taxpayer’s IDRS transcript. See IRM 5.9.5.6.1, Closing Codes. As a rule, examiners should pull current IDRS transcripts and Administrative Information Management System (AIMS) prints during the pre-planning stage of each case to determine whether a taxpayer has filed bankruptcy. An IDRS AMDISA print will reflect a bankruptcy freeze code U or X.

  2. The Examination Bankruptcy Coordinator in Technical Services may receive notification from Insolvency regarding an open examination on a taxpayer that has filed bankruptcy. If notified, the Coordinator will notify the examiner assigned to the return and the group manager. See IRM 4.27.2.4, Group Procedures.

  3. No less than 30 calendar days before the bar date, the assigned Examination/Appeals function will ensure that Insolvency is notified of any potential assessment or refund which is not yet reflected on IDRS so that a proof of claim may be timely filed with Bankruptcy Court. If a final determination of tax, pre-petition interest, and pre-petition penalties is not made by this date, an estimate of these amounts, based upon all the facts, should be given. Upon completion of the examination action, Insolvency should be notified of the complete final determination and may then file an amended claim.

  4. If the case will require significant processing procedures, please refer to IRM 4.27.1.3.1, Significant Bankruptcy Case Issues.

  5. Examination employees who become aware of bankruptcy proceedings through any other means should follow the procedures in paragraphs (3) and (4) above, so the collection of any pending tax is protected by a proof of claim timely filed in the Bankruptcy Court. Contact your Examination Bankruptcy Coordinator in Technical Services (http://mysbse.web.irs.gov/examination/tip/bankruptcy/contacts/12268.aspx) or Insolvency to find out the status of the bankruptcy and the bar date.

Group Procedures

  1. During all phases of an examination (classification and pre-planning to closure), collectibility should be considered. Refer to IRM 4.20.2.2, General Collectibility Considerations. The filing of a bankruptcy petition does not preclude the IRS from examining a taxpayer; however, this fact should be given some weight when deciding whether to conduct an examination. You may find it helpful to discuss the case with your Examination Bankruptcy Coordinator in Technical Services. The Insolvency Bankruptcy Specialist may be able to give helpful information.

  2. Before initiating an in-depth income tax examination of a corporation which has filed an "asset" Chapter 7 bankruptcy case where all the debtor corporation’s assets will be liquidated, examiners should consider (with Insolvency’s assistance) the collectibility of the income tax deficiencies as a result of the examination. This is because a corporate debtor would, for all practical purposes, cease to exist at the conclusion of a Chapter 7 bankruptcy and secured claims are generally paid before unsecured priority tax claims. Of course, sources other than the corporate debtor or its scheduled assets may exist for the Service to later collect taxes determined to be due, as in the cases of trust fund taxes, consolidated group income taxes, controlled group pension excise taxes, undisclosed potential tax refunds or overpayments, amounts due the debtor from other federal government agencies for which "offsets" may be allowed, and potential transferee assessments.

  3. Bankruptcy project codes should be updated on AIMS, as soon as possible, after notification of the bankruptcy case is received. Project codes and tracking codes should be added according to your local guidelines. Contact your local PSP for guidance or refer to the Local Tracking Code list.

    Bankruptcy Chapter Project Code
    7 0663
    11 0664
    12 0665
    13 0666
  4. At the time of notification of the bankruptcy case, the responsible examination function will verify via IDRS commands TSUMY and AMDISA that the bankrupt taxpayer is not an investor in a TEFRA proceeding. If the taxpayer is an investor in a TEFRA proceeding, the filing of a bankruptcy petition begins the running of the one year statute of limitations provided in IRC 6229(f), Special Rules, for partnership tax years that begin before December 31, 2017. If it is determined IRC 6229(f) one year statute applies, steps must be taken to assure a statutory notice of deficiency is issued for tax deficiencies resulting from the key case related issues. Contact your TEFRA coordinator with questions.

  5. The normal three year statute of limitations provided by IRC 6501, Limitations on Assessment and Collection, should be protected at the examination group level. The responsible examination personnel should solicit a consent to extend the statutory period of limitations before the expiration of the IRC 6501 date. In the case of a joint return where only one spouse has petitioned for bankruptcy, separate consents should be solicited for each spouse. If a trustee has been appointed in the bankruptcy case, Counsel should be consulted for an opinion as to whether the bankrupt taxpayer and/or the trustee should sign the consent. IRC 6501(c)(4), Exception by Agreement, provides the Service must give notice to taxpayers of their right to refuse to extend the period of limitations, or to limit the extension to particular issues.

  6. If an examiner uncovers evidence of bankruptcy fraud, whether or not it would result in any tax consequences, their fraud technical advisor should be consulted for assistance in preparing a referral to the appropriate function or agency. For more information, refer to IRM 25.1.2.6, Bankruptcy Fraud.

Miscellaneous Provisions

  1. This section addresses the following situations requiring special handling for bankruptcy cases:

    • Prompt Determination of Tax Liability (IRM 4.27.2.5.1),

    • Prompt Determination of Tax Refund (IRM 4.27.2.5.2),

    • Chapter 12 Bankruptcy Plan - 11 USC Section 1231(b) Requests (IRM 4.27.2.5.3), and

    • Individual Chapter 11 Debtors Required Filings (IRM 4.27.2.5.4).

Prompt Determination of Tax Liability

  1. Rev. Proc. 2006-24; 2006-22 I.R.B. 943, provides the procedures a trustee or debtor-in-possession representing a bankruptcy estate must follow to request a prompt determination by the Service of any unpaid tax liability of the estate.

  2. The Service has 60 days from the date of receipt of a request for a prompt determination of any unpaid tax liability to advise the trustee of the decision to examine a tax return or accept it as filed. IRM 4.1.1.6.18, Prompt Determination Requests, provides the steps PSP must follow when receiving these types of requests. PSP is responsible for mailing Letter 5531, Prompt Determination of Tax Liability, to the trustee or debtor-in-possession.

  3. When a return requesting a prompt determination of any unpaid tax liability is selected for examination, PSP establishes the return on AIMS using source code 73 and project code 0668. The return is sent to a field group in a red folder instructing the examiner to complete the examination within 180 days of the request.

  4. When an examiner is assigned a return to examine with a prompt determination request, the examiner should become familiar with IRC 1398, Rules Relating to Individuals’ Title 11 Cases, and IRC 108, Income from discharge of indebtedness, before beginning the examination of the bankrupt entity. There are numerous issues and consequences associated with the returns of these and related entities, including the Form 1040 of the individual debtor. Refer to Notice 2006-83 in IRB 2006-40, Individual Chapter 11 Debtors, for details on Chapter 11 individual cases.

  5. A return cannot be surveyed after PSP issues Letter 5531, Prompt Determination of Tax Liability. If a determination is made not to examine the return, the examiner must follow the procedures in IRM 4.10.8.2, No Change and No Liability Cases, to no change the return.

  6. The trustee or debtor-in-possession must be notified of any tax due within 180 days of receipt of the request for prompt determination. As soon as the examination report is prepared, the examiner should forward a copy of the report to the appropriate Field Insolvency Office (http://serp.enterprise.irs.gov/databases/who-where.dr/insolvency/national-field-centralized-site-directory.html) so an Administrative Claim can be filed and an immediate assessment of any resulting tax deficiency may be considered pursuant to IRC 6871(b), Immediate Assessment with Respect to Certain Title 11 Cases.

  7. When a bankruptcy estate return is selected for examination and the 180-day deadline cannot be met for reasons beyond the control of the Service, a Bankruptcy Court order extending the time limit must be requested through Counsel. The examiner should initiate this process in a written memorandum routed through their manager to Counsel at least 45 days prior to the end of the 180-day period. The request should state the need for Counsel’s review, approval, and forwarding to the Department of Justice (DOJ). A copy of the extension request should be sent to PSP for monitoring. The extension memorandum should address the following:

    • The reason for requesting the extension. The extension is more likely to be granted if the reason for the request is due to circumstances beyond the control of the Service, for example, the taxpayer has not provided the records requested despite several document requests (copies of which should be attached to the memo). Reasons generally not acceptable for requesting an extension may include heavy workloads, vacations, training, details, etc. In such instances, the case should be reassigned to another examiner as soon as possible.

    • The extension period sought. The extension request should allow for sufficient time and contingencies to complete all work on the case and issue the final Examination report.

  8. If Counsel and the DOJ concur with the examiner’s extension request, then DOJ will file a motion with the Bankruptcy Court requesting the extension. The Court will set a date for a hearing on the motion and notify the various affected parties. It is at the discretion of the Bankruptcy Court whether to grant a motion to extend the 180-day period. The judge will make a decision on or after the date of the hearing and all parties will be notified.

    Note:

    The examiner should be prepared to immediately close the case in the event that no additional time is granted. In addition, the procedures in paragraph (6) above for filing the Administrative Claim should be followed.

  9. If the 180-day period (or period of extension, if applicable) is not met, all amounts owed the Service in excess of the tax shown on the return that is paid by the debtor may be discharged against the estate, trustee, debtor, or its successor, except under specified circumstances such as misrepresentation or fraud. The Service will be prohibited from collecting any discharged amounts owed from the debtor or its successor.

Prompt Determination of Tax Refund

  1. Rev. Proc. 2010-27; 2010-31 I.R.B. 183, provides the procedures to be followed by the bankruptcy estate trustee in filing a request for credit or refund of any overpayment of tax. This procedure is applicable to all chapters of bankruptcy except Chapter 9, Municipal Debt Adjustment, and Chapter 15, Ancillary and Cross-Border.

  2. If the trustee or debtor-in-possession requests a refund, the applicable refund procedures will apply except under 11 USC 505(a)(2)(B) the Bankruptcy Court has the jurisdiction to determine the refund amount 120 days after the trustee’s request.

  3. A request for refund will be deemed to have been made if:

    1. The trustee files a claim for refund in response to the Service’s proof of claim; or

    2. The trustee files a tax return or amended return in which there is a claimed overpayment.

  4. IRM 4.1.1.6.18, Prompt Determinations Requests, provides the steps PSP must follow when receiving these types of requests. PSP is responsible for mailing Letter 5531-A, Prompt Determination of Tax Refund, to the trustee or debtor-in-possession.

  5. If the request for credit or refund is selected for examination, the field examiner should notify the trustee or debtor-in-possession within 120 days of receipt of the request as to whether the refund is allowed in whole or in part. If an extension of time is necessary, the Service should discuss an extended time table with the trustee or debtor-in-possession after coordinating with Counsel, but no motion to extend the 120-day time period is appropriate or necessary. The Service does not lose the authority to deny a tax refund if no determination is made within 120 days. After 120 days, the trustee may seek a merits determination of the estate’s right to the refund in Bankruptcy Court.

Chapter 12 Bankruptcy Plan - 11 USC Section 1231(b) Requests

  1. Chapter 12 of the Bankruptcy Code provides for the adjustment of debts of a family farmer or fisherman with regular annual income and contemplates the filing of a plan to do so. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) amended 11 USC 1231(b) to allow proponents of Chapter 12 bankruptcy plans to request determinations of the tax effects of proposed plans. Rev. Proc. 2006-52, 2006-48 I.R.B. 995, provides the procedures to be followed when requesting determinations and provides they must be filed in writing with the Centralized Insolvency Operation (CIO). See IRM 5.9.9.5.1, Determinations of Tax Implications of Chapter 12 Plans, for CIO processing guidelines.

  2. Tax Effects of Proposed Plans: BAPCPA amended 11 USC 1231(b) allowing Bankruptcy Courts to authorize proponents of Chapter 12 plans to request determinations of the federal income tax effects of proposed plans of reorganization, limited to questions of law. Should a controversy arise between the Service and the debtor, the court may declare the tax effects of a proposed plan after the earlier of the date on which the governmental unit responds to the request or 270 days after the request.

  3. Required Information: The exact information required when requesting a determination is provided in section 7.01 of the first revenue procedure issued each year (e.g., Rev. Proc. 2019-1, 2019-1 I.R.B. 1). This revenue procedure is updated annually but may be modified or amplified during the year.

  4. Copy of Proposed Chapter 12 Plan: In addition to the information above, the requesting party must include a copy of the proposed Chapter 12 Plan along with a copy of the Bankruptcy Court order allowing the proponent to make the request.

  5. Acknowledgement: PSP will mail a letter to the requestor advising a processable application has been received and the date received per section 3.02 of Rev. Proc. 2006-52.

  6. Time Frame: The plan proponent must be notified of the determination within 270 days from receipt of a processable application. The 270-day time frame will not begin until a processable application is received.

  7. Application Reviewed: The Application will be assigned to a field examiner who will work with Counsel to analyze the tax ramifications of the proposed plan. An examination may be warranted at the advice of Counsel due to the impact of the proposed plan.

  8. Letter Prepared: The field examiner will prepare the Determination of Tax Effects of Chapter 12 Plan letter. The examiner should contact the Examination Bankruptcy Coordinator in Technical Services and Counsel if they need assistance in drafting the letter. Counsel must approve the letter before it is mailed to the plan proponent.

  9. Letter Issued: The letter must be reviewed and signed by the examiner’s manager to indicate their approval. The examiner will mail the letter to the plan proponent within the 270-day time frame.

  10. Closing the Case: If an examination was opened, the Proposed Chapter 12 Plan and Plan Determination letter will remain with the examination case file. If an examination was not opened, the Chapter 12 plan package should be filed with the latest tax return filed using Form 9856, Attachment Alert.

  11. Unless the Bankruptcy Court declares otherwise pursuant to 11 USC 1231(b), a field office examining the debtor’s return must follow the determination if:

    1. A copy of the determination is attached to the tax return to which it relates;

    2. The determination is properly reflected in the return;

    3. The representations upon which the determination was made reflected an accurate statement of the controlling facts;

    4. The transactions proposed in the plan were carried out substantially as proposed; and

    5. No change has occurred in the law that applies to the period during which the transactions were consummated.

Individual Chapter 11 Debtors Required Filings

  1. Notice 2006-83 in IRB 2006-40, Individual Chapter 11 Debtors, provides guidance regarding certain income tax returns and information returns that must be filed for individuals who file bankruptcy cases under Chapter 11 of the Bankruptcy Code on or after October 17, 2005.

  2. This notice also provides guidance for:

    1. Employers of these individuals,

    2. Persons filing Forms W-2, 1099-INT, 1099-DIV, 1099-MISC, and other information returns (including Schedule K-1) that report payments to these individuals,

    3. Chapter 11 trustees in bankruptcy cases filed by these individuals,

    4. Tax treatment of post-petition income as the result of the enactment of section 1115 of the Bankruptcy Code, by BAPCPA, and

    5. Correct reporting of self-employment tax on Form 1040 and Form 1041.

Closing Procedures - Agreed Closures

  1. Agreed cases are closed directly to Centralized Case Processing (CCP) if the bankruptcy was filed after October 22, 1994.

  2. If a trustee is appointed in the bankruptcy case, Associate Counsel should be consulted for an opinion as to whether the trustee, in addition to the taxpayer should sign the final examination report.

  3. If the automatic stay is still in place, the Service is prohibited by Title 11 of the United States Code (11 USC), also known as the United States Bankruptcy Code, Chapter 3, Subchapter IV, § 362, Automatic Stay, and IRM 5.17.8.10, Automatic Stay - 11 USC § 362, from making any attempt to collect pre-petition tax liabilities and post-petition tax liabilities incurred by the debtor’s bankruptcy estate. For this reason, the following procedures should be followed to ensure the Service does not violate the automatic stay:

    1. Advance payments and installment agreements may not be solicited.

    2. In unagreed income tax cases, see the procedures detailed in IRM 4.27.2.7, Closing Procedures - Unagreed Closures with Automatic Stay.

    3. Partially agreed deficiencies should be forwarded to CCP for assessment, if the bankruptcy petition was filed after October 21,1994. Follow unagreed closing procedures once the agreed portion has been assessed.

Closing Procedures - Unagreed Closures with Automatic Stay

  1. Taxpayers under the automatic stay protection will be furnished a copy of the examination report and advised of their appeal rights. The following bankruptcy preliminary (30-Day) letters are used for this purpose and explain rights unique to a taxpayer in bankruptcy proceedings:

    1. Letter 915-B (DO), 30-Day Bankruptcy Letter, (Office Audit),

    2. Letter 950-B, 30-Day Bankruptcy, (Field Exam), or

    3. See IRM 4.19.13.20, Bankruptcy, for Correspondence Exam procedures.

      Note:

      When fewer than 240-days remain on the statute of limitations, use Letter 5153-D, Examination Report Transmittal - Statute <240 Days (Bankruptcy).

  2. The bankruptcy preliminary letters will be expeditiously prepared and issued at the group level for all unagreed examination cases with a bankruptcy filing. The case will then be included in the group’s 30-day suspense file. Management will ensure adequate group controls are in place on cases in 30-day status. Bankruptcy preliminary letters will be sent by regular mail, except when it is necessary to use certified mail. If certified mail is used, return receipts will be requested.

  3. If both spouses on a joint return have filed a bankruptcy petition with separate residences, a duplicate original of the preliminary bankruptcy letter will be mailed to each spouse. The duplicate letters will be accompanied by those items listed in (6) below. The administrative file should include the documentation of the separate residences as well as being noted on Form 3198, Special Handling Notice for Examination Case Processing.

  4. If only one spouse on a joint return has petitioned Bankruptcy Court, a regular 30-day letter should be issued to the non-petitioning spouse. The spouse who is in a bankruptcy case will be issued a bankruptcy preliminary letter. Regular 30-day letters include but are not limited to the following:

    1. Letter 915, Examination Report Transmittal;

    2. Letter 950-A, Examination Change - 30-day Letter; and

    3. Letter 525, General 30 Day Letter.

  5. A copy of the bankruptcy preliminary letter with enclosures should be mailed to the taxpayer’s representative if indicated in the administrative file.

  6. Bankruptcy preliminary letters will be accompanied by the following:

    1. A copy of the examination report. Taxpayer’s copy should not include transmittal letters or other reports of confidential nature.

    2. An appropriate waiver form.

    3. Pub 3498, The Examination Process.

  7. When prepayment credits shown on the return are changed, the examination report accompanying a bankruptcy preliminary letter will disclose separately the increase or decrease in income tax liability and the adjustment to prepayment credits. The accompanying waiver will show the full deficiency amount before any adjustments due to change in prepayment credits. A statement attached to the waiver will show the adjustment to the prepayment credits with the net amount due.

  8. If the taxpayer agrees during the period provided by the 30-day letter, follow the procedures under IRM 4.27.2.6, Closing Procedures - Agreed Closures.

  9. If the taxpayer files an appeal, forward the case to Appeals through Technical Services. Be sure to note on the Form 3198, the bankruptcy status.

  10. If you receive no response, forward the case to Technical Services for issuance of a SNOD or an Unagreed Notice of Worker Classification (for Employment Tax cases with an IRC 7436, Proceedings for Determination of Employment Status, issue). Note on the Form 3198, the bankruptcy status.

  11. In the event the non-bankrupt spouse agrees to the deficiency but the bankrupt spouse does not, follow quick/prompt assessment procedures to have the non-bankrupt spouse assessed. Note on the Form 3198, that the non-bankrupt spouse has been assessed under MFT 31 before forwarding the case to Technical Services for issuance of a notice of deficiency to the bankrupt spouse. Refer to IRM 4.10.8.12.3, Separate Assessments on Joint Taxpayers.

Closing Procedures - Surveys and No-Change Closure

  1. When closing a surveyed return or no-change case, follow normal procedures. Bankruptcy has no effect on these types of closures.