4.27.2  Examiner Responsibilities  (08-21-2009)

  1. This section details the procedural requirements of an examiner when they are notified of a bankruptcy proceeding. The filing of bankruptcy does not preclude the IRS from beginning or proceeding with an examination.  (08-21-2009)
Notification of Bankruptcy Proceedings

  1. Insolvency uses various means to notify Examination that a bankruptcy petition has been filed by taxpayers under examination. They primarily use the Automated Insolvency System (AIS) in addition to inputting various IDRS 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, Closing Codes. As a rule, examiners should pull current IDRS transcripts and AIMS prints during the pre-planning stage of each case to determine whether a taxpayer has filed bankruptcy. An AMDISA print will reflect a bankruptcy freeze code U or X.

  2. The Examination Bankruptcy Coordinator in Technical Services no longer receives notice of bankruptcy filings via the INS notification system.

  3. No less than 30 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 AIMS so that a proof of claim may be timely filed with the Bankruptcy Court. If a final determination of tax, pre-petition interest, and penalties is not made by this date, as good an estimate as possible of these amounts, based upon all the facts, should be given. Upon completion of the examination action, Insolvency should be notified of the correct final determination and may then file an amended claim.

  4. If the case will require that significant processing procedures be followed or meets the definition of a Large Bankruptcy Case, please refer to IRM, Significant Bankruptcy Case Issues. Coordinated Examination Program's procedures must be followed to ensure the coordination of examination issues on a more expedited basis.

  5. Examination employees who become aware of bankruptcy proceedings through any other means should follow the procedures in paragraphs (3) and (4) above, so that the collection of any pending tax is protected by a proof of claim timely filed in the Bankruptcy Court. Please contact your Examination Bankruptcy Coordinator in Technical Services or Insolvency to find out the status of the bankruptcy and the bar date.  (08-21-2009)
Group Procedures

  1. During all phases of any examination (classification and pre-planning to closure), collectibility should be considered. Refer to IRM, Bankruptcy. 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 extensive income tax examination of a corporation which has filed an "asset" Chapter 7 bankruptcy case where all the debtor corporations 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. If applicable, bankruptcy project codes should be updated on AIMS as soon as possible after notification of the bankruptcy proceeding is received. See IRM, Required Actions Prior to Bankruptcy Suspense, for the list of applicable project codes.

  4. At the time of notification of the bankruptcy proceeding, 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 section 6229(f). If it is determined that the IRC section 6229(f) one year statute applies, steps must be taken to assure that 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 section 6501 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 section 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 proceeding, Area Counsel should be consulted for an opinion as to whether the bankrupt taxpayer and/or the trustee should sign the consent. IRC section 6501(c)(4) provides that 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, Bankruptcy Fraud.  (08-21-2009)
Closing Procedures For Agreed Closures

  1. Petitions filed prior to October 22, 1994 - If the bankruptcy petition was filed prior to October 22, 1994, and the bankruptcy is still open, the tax cannot be assessed for the bankrupt taxpayer. The case will need to be forwarded to Technical Services bankruptcy suspense. When forwarding for suspense, note on the Form 3198, Special Handling Notice for Examination Case Processing, the bankruptcy status, "Pre-10/22/1994 bankruptcy/agreed-forward to bankruptcy suspense." Be sure to protect the ASED of a non-bankrupt spouse by following quick/prompt assessment procedures before sending the case for suspense. Also note on the Form 3198, "MFT 31 assessment for non-bankrupt spouse has been completed," if warranted.

  2. Petitions filed on or after October 22, 1994 -If the petition was filed after October 21, 1994, the tax can be assessed. The case should be forwarded to Centralized Case Processing (CCP) for assessment and closure.


    Write on Form 3198, " Post -10/21/1994 bankruptcy/agreed. Please assess."

  3. If a trustee has been appointed in the bankruptcy proceeding, Area Counsel should be consulted for an opinion as to whether the trustee should sign the final examination report in addition to the taxpayer.

  4. If the automatic stay is still in place, the Service is prohibited by 11 USC section 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 that 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, Closing Procedures - Unagreed Cases 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.

  5. If the automatic stay is still in place, the Form 3198 must identify the specific taxpayer in bankruptcy and whether the bankruptcy petition was filed before or prior to October 22, 1994, to prevent assessments made in violation of the automatic stay.

  6. Review an AMDISA print to ensure the case is fully established before forwarding the case for assessment or suspense.  (08-21-2009)
Closing Procedures—Unagreed Cases 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 explains rights unique to a taxpayer in bankruptcy proceedings:

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

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

    3. Letter 525-B (SC), 30-Day Bankruptcy Letter.

  2. The bankruptcy preliminary letters will be expeditiously prepared and issued at the group level for all unagreed bankruptcy cases. The case will then be included in the group’s 30-day suspense file. Management will ensure adequate group controls 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 but 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.

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

    1. Letter 915 (DO), Letter to Transmit Examination Report;

    2. Letter 950-A(DO), 30-Day Letter; and

    3. Letter 525 (SC), General 30 Day Letter.

  5. A copy of the bankruptcy preliminary letter with enclosures should be mailed to the taxpayer’s representative if so 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. Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don't Agree, or Publication 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 closing procedures under IRM, Closing Procedures for 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 notice of deficiency. 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, Separate Assessments on Joint Taxpayers.  (08-21-2009)
Closing Procedures-Surveys and No-change Closure

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

More Internal Revenue Manual