| Part 5. Collecting Process Chapter 9. Bankruptcy and Other Insolvencies Section 4. Common Bankruptcy Issues -------------------------------------------------------------------------------- 5.9.4 Common Bankruptcy Issues After-Acquired Property. In a Chapter 12 or 13 bankruptcy, property acquired after the petition date but before the case is closed, dismissed, or converted to another chapter, including wages and community property, becomes property of the estate (11 USC §§ 1207 and 1306). In general, some property, especially wages or other income used to fund the plan, may continue to be property of the estate after confirmation. IRM 5.9.10.8.1 gives additional information about the post-confirmation estate in a Chapter 13 bankruptcy. BAPCPA Individual Chapter 11. As with Chapter 12 and 13 cases, property of the estate for individual Chapter 11 cases filed on or after October 17, 2005, includes wages and other property acquired postpetition but before the case is closed or converted (11 USC § 1115). Note: Counsel Guidance. Complex issues surround what constitutes the property of a bankruptcy estate. Counsel should be contacted for guidance when case-specific issues arise. Exempt, Excluded, and Abandoned Property. Property may be exempted or excluded from the estate or abandoned by the trustee. IRM 5.9.17.4provides a full discussion of these property issues as they affect possible postpetition collection. 5.9.4.2 (01-01-2006) Note: ) Assessment Statute Expiration Date (ASED) Suspension Timeframes. For bankruptcy cases filed before the enactment of BRA 94, the running of the statutory period for assessment (ASED) is suspended during the period the assessment is prohibited (while the automatic stay is in effect) and for 60 days thereafter (IRC § 6503(h)(1)). To compute a new ASED, 60 days are added to the unexpired time (number of days) remaining on the original statute as of the petition date. Then that amount of time is added to the date of discharge or dismissal (or the date the stay was lifted) to establish the new ASED. (For ASEDs on Exam cases, Examination should be consulted.) Collection Statute Expiration Date (CSED) Suspension Timeframes. The running of the statutory period for collection (CSED) is suspended for the period collection is prohibited (e.g., while the automatic stay is in effect, and in the Chapter 11 context, post-confirmation during the period in which (1) the Service's claim is allowed, (2) the confirmed plan provides for full payment of the tax debt, and (3) the plan is not in substantial default) plus six months (IRC § 6503(h)(2)). Computation of a new CSED is similar to an ASED computation. Six months are added to the unexpired time (number of days) remaining on the original statute as of the petition date and that total is added to the discharge or dismissal date (or the date the stay was lifted) to establish the new CSED. Note: CSED Recomputation – Manual Input of TC 550. For non master file (NMF) accounts, a manual input of TC 550 is necessary. The input of a TC 550 must be timely (for example, when the court grants a discharge or dismisses a case). The presence of an unreversed TC 520 in the module will not prevent TC 550 from posting. If a TC 550 is input to a module with an unreversed TC 520 with a bankruptcy closing code, automatic computation of the CSED when the TC 521 posts will not occur. CSED - Taxpayer Identification Number (TIN) Indicators. The CSED for a tax module is displayed on IDRS. This information is used by Collection employees to determine the time remaining on a collection statute (i.e., if collection actions may be taken on a balance due account). Individual Tax Return. If a debtor filed an income tax return in any status other than " married filing joint," the CSED is extended for the period the stay is in effect plus six months regardless of the debtor's marital status or if the bankruptcy was a individual or joint filing. Joint Return - Spouses Filed Joint Bankruptcy. If the tax module is for an IMF joint assessment and the husband and wife have filed a joint bankruptcy, the collection statute is extended against the husband and the wife. Joint Return - Both Spouses Filed Individual Bankruptcies. If the spouses filed a joint return, but filed individual bankruptcies, the CSED is extended individually for each debtor with each spouse's extension being dependent upon the duration of the stay in his or her own bankruptcy case. In this situation the MFT 30 module usually must be mirrored to two MFT 31 modules, taxpayers residing in community property states being possible exceptions. Joint Return - Only One Spouse in Bankruptcy. If only one spouse files bankruptcy, and the joint (prepetition) tax return was filed under the non-debtor spouse's Social Security Number (SSN), then Service personnel handling the account(s) must know to whose SSN the CSED extension and freeze code apply. CSED Indicator Codes make this identification possible. An Individual master file (IMF) CSED TIN indicator is input as part of the transaction data of the TC 520. MFT 31 mirroring is usually required when the bankruptcy is discharged or dismissed. CSED Indicator Codes. The TC 520, closing code, and CSED TIN indicator, can identify which taxpayer spouse is in bankruptcy and to whom the CSED extension applies. The CSED TIN indicator is input by the Insolvency Interface Program (IIP) during initial processing. The indicator codes can also be input manually (i.e., as part of the manual TC 550 extensions in bankruptcy). The applicable IMF CSED TIN indicator codes are: CSED Protection - MFT 31 for Non-Debtor Spouse. To protect the collection statute, Insolvency must be aware of CSED problems that may develop on the non-debtor spouse account. (See IRM 5.9.3.5.1.1,Community Property, and IRM 5.9.17.6, Joint Account and Non-Debtor Spouse.) When considering collection from a non-debtor spouse, an MFT 31 mirroring may be appropriate if a CSED is imminent. IRM 5.9.17.22.3 provides procedures for the MFT 31 mirror process. Protection of the CSED on a non-debtor spouse is unnecessary if: plan payments are sufficient to satisfy the claim and pay the total outstanding liability to a level below the tolerance amount for an MFT 31 transfer; the case would, absent the bankruptcy, expire in the queue (where IDRS accounts are maintained in a hold file and assigned a lower priority status than current accounts; or the account has an unreversed currently-not-collectable (CNC) closure based on financial data (TC 530 cc24 through cc 32). Caution: OI Potential. If, at the time a bankruptcy petition is filed, a case is assigned to an RO, an OI may be initiated to ensure continuity of case actions. OIs may be useful in Chapter 7 cases (for example, investigating exempt, excluded, and abandoned property and lien equities). 5.9.4.2.1 (03-01-2007) Sovereign Immunity. BRA 94 waived the government's sovereign immunity against judgments in connection with enumerated provisions (preferences, violations of stay, etc.). However, sovereign immunity remains in effect on the awarding of punitive damages, and attorney fees are capped. Assessments Allowed. Before BRA 94, the Bankruptcy Code prohibited assessment of a tax liability unless the court granted relief from the automatic stay. After October 22, 1994, in most cases, the automatic stay for assessment of any tax, including original tax returns, adjustments, Trust Fund Recovery Penalty (TFRP), and agreed audit deficiencies no longer applied (11 USC § 362(b)(9)). Note:
Impact on ASEDs. BRA 94 has had an impact on ASED computations. Most Taxes Can Now Be Assessed. For debtors who filed bankruptcy on or after October 22, 1994, the automatic stay does not prohibit the IRS from assessing any tax where the Service would not be required to issue the taxpayer a statutory notice of deficiency. These include 1) the taxpayer's self-assessments arising from filed returns; 2) agreed audit deficiencies; 3) Trust Fund Recovery Penalty (TFRP) assessments; and 4) audit deficiencies where the statutory period for petitioning the Tax Court has expired prior to the filing of bankruptcy. Unagreed Prepetition Audit Deficiencies. For debtors who filed bankruptcy on or after October 22, 1994, 11 USC § 362(a)(8) and IRC § 6213(f) stay the debtor from filing a Tax Court petition for the period of the automatic stay plus 60 days thereafter. Accordingly, for debtors with an outstanding notice of deficiency, the ASED is suspended as a result of the bankruptcy petition Computation of the ASED in Bankruptcy Situations. Due to IRC § 362(a)(8) and IRC § 6213(f), bankruptcy suspends the statute of limitations on assessment in cases where a statutory notice of deficiency has been issued and the stay prohibits the commencement or continuation of a Tax Court proceeding involving that tax liability. Rev. Rul. 2003-80, 2003-29 IRB 80 provides published guidance explaining the effects of bankruptcy on the limitations period for assessment. BAPCPA. For cases filed on or after October 17, 2005, BAPCPA limits the stay on Tax Court proceedings regarding an individual debtor’s tax liability only with respect to a taxable period ending before the order for relief (the stay applies to both prepetition and postpetition corporate liabilities so long as it is a liability the bankruptcy court may determine) (11 USC § 362(a)(8)). Therefore, the indirect ASED stay with respect to deficiency liabilities resulting from IRC § 6213(a) will no longer apply with respect to an individual debtor’s postpetition liabilities. Consent to Extend ASED. Under BRA 94 the Service may obtain a valid consent to extend the statute of limitations on assessment from entities in bankruptcy. A TC 560, input by Examination, indicates an extension of the ASED. 5.9.4.3 (05-13-2008) Exam (INS/AIMS) and Insolvency (AIS). Since INS is an interface between the Automated Insolvency System (AIS) and Exam's Audit Information Management System (AIMS), its effectiveness depends upon both systems having current information. For INS to function as designed, Insolvency must enter date information timely on AIS, such as petition, bar, conversion, dismissal, and discharge dates. All actions taken on the case should be input on the system as the events occur, including all case closing actions. Examination Contacts to Insolvency. If an examination is open on a prepetition period, an Examination employee will: contact the responsible Field Insolvency caseworker or CIO liaison; but continue with established examination bankruptcy procedures; and advise Insolvency of any proposed Exam-initiated deficiencies or adjustments that might result in a refund or a credit to the taxpayer. This should be done at the earliest possible time before the bar date by sending Insolvency a memorandum, or a locally developed form (along with a copy of the transmittal letter to the Examination report), or a copy of the Revenue Agent Report (RAR). Note:
Exam's "HOLD" File. Examination establishes a "HOLD" file of cases for which a statutory notice has been issued, and assessment is stayed because a Tax Court petition cannot be filed under 11 USC § 362(a)(8). Periodically Examination transmits a list of these cases to Insolvency. Timeframe for Insolvency to Contact Exam. Within five workdays of receipt of the exam list, Insolvency will advise Examination which assessments (if any) can be made. Insolvency's response will show the date the stay was lifted, if applicable. Determining the -L Freeze. INS does not pick up bankruptcies filed in geographical areas outside of where the primary Examination case is assigned. As a safeguard, Insolvency must run IIP Process D to detect the -L freeze, which indicates accounts selected for an audit and which may require interoffice coordination. Alternatively, or, in addition, access to the Automated Insolvency System (AIS) (read only capabilities) can be granted to the examination function. Abusive Tax Avoidance Transactions (ATAT). During the initial case review process Insolvency caseworkers will determine if a TC 420 (-L freeze) is present with ATAT project codes. CIO cases will be reassigned to the designated Field Insolvency specialist or advisor if any ATAT code is identified. The Field Insolvency caseworker must review the following to identify inconsistencies: Bankruptcy schedules Statement of Financial Affairs Tax returns Financial statements The Field Insolvency caseworker should contact the Exam ATAT Coordinator to determine if further investigation is needed. In cooperation with Area Counsel and Exam and Collection ATAT Coordinators, Insolvency will decide if a bankruptcy fraud referral should be pursued. Employee Plans. Insolvency will advise the Employee Plan (EP) function of the TEGE division when a large dollar or significant case Chapter 11 bankruptcy is filed so EP can research any impact the bankruptcy might have on the EP program. (See IRM 5.9.8.4(15),Notice to TEGE.) Insolvency Follow–Up/Monitoring. Because confirmations take place quickly in some bankruptcies (notably in Chapter 13), monitoring methods must be established by Field Insolvency for cases involving examination issues. If research indicates one or more tax periods are being examined, and the assigned Exam function has not contacted the Insolvency group, Insolvency should contact that Exam unit to gather current information on the status of the audit. Reminders - Assessment of Taxes. The Service may, notwithstanding the automatic stay,: assess an agreed tax deficiency (26 USC § 6213(d)). assess a tax shown on a return filed by the taxpayer (26 USC § 6201(a)(1)). assess taxes which are not subject to the deficiency procedures (e.g., the Trust Fund Recovery Penalty, whether the taxpayer agrees or not) (26 USC § 6671). Note: assess a tax deficiency on an individual debtor's postpetition period for bankruptcies filed on or after October 17, 2005 (11 USC § 362(a)(8)). Unagreed Deficiency Assessments. Postpetition assessments of unagreed deficiencies on prepetition periods for which the statutory response time to file a Tax Court petition has not expired are violations of IRC 6213 and must be reversed within two days of identification. Such an assessment would not be valid because the debtor cannot petition the Tax Court while the automatic stay is in effect, and the time to file the petition is therefore tolled. When an Insolvency caseworker determines that such an assessment has posted, the caseworker must contact the Exam or AUR bankruptcy coordinator by phone or secure email to request a reversal of the TC 300/290 assessment. Exam or AUR will input the reversal upon Insolvency notification to meet the two business day requirement. If contact with the bankruptcy coordinator cannot be made to ensure the reversal will be initiated within two business days, the Insolvency caseworker must input the reversal on-line or send an expedited request to Centralized Case Processing (CCP) to have the assessment reversed. If the reversal of the assessment is input by Insolvency or CCP, the Insolvency caseworker must advise the applicable bankruptcy coordinator by phone or secure email of the reversal as soon as possible so the assessment file can be suspensed until closure of the bankruptcy. Note: Documentation. Insolvency must accurately document all contacts with Examination functions in the AIS history at the time of contact. IRM 5.9.5.4,AIS Documentation, provides guidance on required AIS documentation. 5.9.4.3.1 (05-13-2008) Petitions to Tax Court. When one spouse is in bankruptcy during an examination of a joint prepetition tax year, and the IRS issues a statutory notice of deficiency, the time for filing the debtor's Tax Court petition is suspended, and the assessment statute is suspended until the debtor is granted or denied a discharge or dismissed from bankruptcy. However, the time to file a Tax Court petition and the assessment statute for the deficiency is not extended on the spouse who did not file bankruptcy. If the non-debtor spouse does not timely file a Tax Court petition, the deficiency against the non-debtor spouse must be assessed to protect the ASED. Exam's Request for Mirroring. If Examination determines the deficiency assessment must be made on the non-bankrupt spouse because of the assessment statute, the Exam function will contact the CIO. Because Exam does not have the ability to establish MFT 31 modules, Centralized Insolvency will mirror the module so the assessment can be made. Exam's Required Actions. Exam will: contact Insolvency with their determination the non-bankruptcy spouse must be assessed the deficiency; input the TC 421 to reverse the MFT 30 –L freeze so mirroring of the MFT 30 module can be done; monitor for the TC 421 to post on MFT 30 module and contact Insolvency; and monitor for the creation of the MFT 31 mirrored modules and re-input the TC 420 on the MFT 30 module. Insolvency's Required Actions. Insolvency will: maintain the bankruptcy freeze (-V or –W for closing code 81). The mirroring can be accomplished without the reversal of the bankruptcy freeze and will remain unreversed to ensure the automatic stay is not violated; input the required transaction codes to mirror the module (see IRM 5.9.17.22.1,MFT 31 Mirror Modules ); and input TC 521 on the MFT 30 module after the TC 420 is re-input to ensure the module remains on the system. (See IRM 5.9.13.9(2), Examination Adjustments.) Caution: 5.9.4.4 (05-13-2008) Mutuality of Debts. Although 11 USC § 553 expressly preserves only the right to setoff when both the credit and the debt occur prepetition, nothing in the Bankruptcy Code abrogates the Service's non-bankruptcy rights to setoff. Thus, setoff may also be available when the credit or the debt occurs postpetition as long as the debts are mutual. ( See IRM 5.9.4.4.2, Postpetition Payments and Credits.) Although the Service has a right to setoff mutual debts, for bankruptcies filed before October 17, 2005, the automatic stay prohibits the actual making of the setoff until the stay is lifted. BAPCPA created an exception to the stay for offsets of prepetition income tax refunds against prepetition income tax claims as explained in paragraph (3) below. Insolvency caseworkers should consult Area Counsel for advice for a specific jurisdiction on the applicability of the automatic stay for setoffs not covered by BAPCPA. BAPCPA Provision. BAPCPA allows prepetition income tax refunds to be offset against prepetition income tax liabilities without a lift stay for bankruptcies filed on or after October 17, 2005. The exception does not apply if an action is pending to determine the amount or legality of a tax liability. (11 USC § 362(b)(26)) However, the IRS may hold any prepetition income tax refund until the validity of the liability is resolved or until the Service is granted adequate protection. Violations of the Automatic Stay. After a bankruptcy is filed, accounts should be examined and research completed promptly to determine if credits are present that need to be resolved, if refunds should be retained or turned over to the debtor or trustee, and if any illegal offsets have occurred. This should be done during the initial review of accounts in Insolvency. (See IRM 5.9.13.4, Case Reviews.) Timeframe to Correct. If a violation of the Bankruptcy Code has inadvertently occurred, corrective actions must be initiated within two workdays. Erroneous No Liability Case. An offset may be discovered in an apparent "no liability" case where a tax refund was applied to full pay an existing balance due tax account after a bankruptcy petition was filed. If the bankruptcy freeze code was not input timely, the account could erroneously appear to be one of " no liability" when it is reviewed later in Insolvency. An offset action of this type may be a violation of the automatic stay. Note:
Refunds Not Offset but Retained by the Service. The Service may retain ("freeze" under controlling case law) refunds to protect its right of setoff. These refunds may be retained whether they arise prepetition or postpetition. Service policy emphasizes making prompt determinations. Counsel advice may needed when a refund will be frozen for a substantial length of time. Timeframe. When Insolvency discovers refunds are being retained, the Insolvency caseworker will begin the refund credit resolution process within 30 calendar days. Refunds must not be held solely in anticipation of a future dismissal or discharge that will lift the stay and allow for the Service to offset a credit generated during the pendency of the bankruptcy. Refund Determination. Insolvency must make a refund determination within 30 calendar days of identification of the credit, either to: Issue Refund. Issue the refund to the trustee or debtor, as required by local rules/agreement, order, plan or practice; or Refer to Counsel. An expedited referral should be made to Counsel (if necessary) to file a motion to lift the automatic stay to effectuate a refund offset; or Retain Refund. Retain the refund to protect the Service's right of offset, but only with concurrence of Counsel. Guidelines for Refund Determination. SBSE Counsel has issued tolerance criteria for referrals of issues to Associate Area Counsel offices. (See LEM 5.9.4.) These criteria may be adjusted by local Counsel depending on staffing and case loads. If a referral for offset is not appropriate, general refund guidelines are set forth in IRM 5.9.4.4.1(2), Table - Credits, Refunds, Offsets. Stay Lifted to Allow Refund Offset. It is Service policy not to offset a refund unless the automatic stay has been lifted for periods protected by the automatic stay. Reminder: Secured Status. Generally, the refund entitles the Service to a secured status on the proof of claim – to the extent of the outstanding tax liabilities. Any refund excess will be refunded to the debtor or trustee, per local guidelines or Counsel advice. Clarify Claim Status. Also, Insolvency must amend or withdraw a claim or issue a credit letter to the trustee, per local procedures, after the offset is completed to clarify the Service's claim for the court. Chapter 13. After a Chapter 13 confirmation, the Centralized Insolvency Operation must make a prompt decision either to retain a refund, forward it to the debtor or the trustee, or, if the refund arose postpetition, offset it against other postpetition liabilities. Contacts to Insolvency. If an IRS employee (outside of Insolvency), receives a written inquiry regarding a refund, credit, or offset issue on a debtor whose bankruptcy case is still active (i.e., unreversed TC 520 with a bankruptcy closing code), the employee must promptly contact the CIO liaison for resolution. If the inquiry is received by phone, after disclosure verification, the caller can be directed to call the CIO toll free at 1-800-913-9358. (See the "exception" below.) Insolvency actions will depend upon the bankruptcy chapter, the petition date, when the credit became available, and standing orders or local rules covering a specific bankruptcy court. If appropriate, the CIO liaison will direct the initiating employee or the debtor to a Field Insolvency caseworker to handle the issue. Exception: Refund Considerations/Problems: Insolvency must consider issues surrounding potential refunds for accounts under bankruptcy protections such as the following : Improper FMS/TOP offset potential exists Offset for domestic support obligations allowed under BAPCPA 2005 for cases filed on or after October 17, 2005 Inability to generate a systemic refund (the manual refund issuance process takes longer) Court order or plan dictating how refund disposition is to be handled Potential or actual violation of the automatic stay Potential for duplicate refunds Change of venue (i.e., case relocated to another court after bankruptcy petition filed) Mailing address problems Mandated redirection of the refund to an entity other than the debtor Debtor and non-debtor spousal issues on a joint return/joint refund situation Preparation of Manual Refunds. AIS has a template for Form 5792, Request for IDRS Generated Refund , to be completed by the Field Insolvency specialist or the CIO caseworker. Form 3210, Document Transmittal, can also be generated from AIS to transmit Forms 5792 for processing. IRM 5.9.16.4,Manual Refunds, details steps to be taken by both Field Insolvency and the CIO in processing refund requests. 5.9.4.4.1 (01-01-2006) Note: TABLE — Credits, Refunds, Offsets. Unless any standing orders, local rules, or agreements allow for different treatment, prepetition credits and refunds may be resolved using the following table: IF the bankruptcy is filed on or after October 17, 2005, and ... THEN... Language for Claiming Setoff Amounts. IRM 5.9.13.21(3), Language for Insertion on Claim, provides wording to include on the proof of claim when the Service is claiming a right of setoff. 5.9.4.4.2 (01-01-2006) Postpetition Credits and Prepetition Debts. Since 11 USC § 553 does not create an independent right to setoff but rather preserves the Service's non-bankruptcy rights, the Service holds it can set off postpetition credits against prepetition debts and vice versa as long as the debts are mutual (i.e., both the credit and the debt are owed to/by the taxpayer). However, some courts have held the Service does not have a right to set off postpetition credits against prepetition liabilities. Caution: Non-Mutual Debts - Chapters 7 and 11 Individuals. In a Chapter 7 or 11 individual case, the bankruptcy estate generally is a separate taxable entity. A credit owed to a debtor in these chapters cannot be set off against a tax owed by the estate due to the lack of mutuality. Chapter 7 Discharge/Payments/Offsets. If payments are received from taxpayers for taxes that have been discharged under Chapter 7, or refunds have been offset to dischargeable periods, corrective actions must be initiated within two workdays of the date the Service becomes aware of the violation of the Bankruptcy Code. (See IRM 5.9.6.6,Automatic Stay, and IRM 5.9.17.8, Discharge Injunction.) Paragraph (5) below discusses an exception to this general rule. Caution: Voluntary Payments – Guidelines. At times an individual debtor may make a voluntary postpetition payment. Acceptance of such payments does not violate the automatic stay as long as the payments are truly voluntary. Voluntary payments by an individual Chapter 7 debtor can be accepted and applied to non-dischargeable periods. However, the payments cannot be made from property of the estate. (See IRM 5.9.4.17(6), Payments Received on a Pre-Existing Installment Agreement.) Table - Postpetition Payments and Credits. The table below provides additional information on postpetition payments and credits. IF... THEN... 5.9.4.4.3 (03-01-2007) Treasury Offset Program (TOP) Offsets. Treasury's Financial Management Service (FMS) holds the responsibility for administering tax refund offsets to outstanding child support or state and federal agency debts. These offsets are referred to as TOP offsets. A TOP offset is generated on the module as a TC 898 with an offset trace number (OTN), an offset amount, and a debtor-TIN field which is present if the offset is for a secondary spouse. Mechanics of TOP Offsets. TOP offsets occur after the IRS has certified a refund to FMS for payment (TC 840/846 on account), but before FMS direct deposits or mails the refund check. A TOP offset reduces the amount of the IRS refund by the amount of the TC 898 offset. TOP offsets can occur against either or both SSNs on a Filing Status 02 (married taxpayers filing a joint return), so one or two TC 898s may be input for each TC 840/846 refund issued, one with and one without a debtor TIN. Note: Guidelines for Debtor Assistance. The FMS database relies on timely notifications from governmental agencies to keep accounts information accurate, reflecting eligibility for offsets. When an offset to another federal/state agency does occur, the FMS database may not reflect current information from that agency, thereby resulting in violations of the automatic stay. If the debtor contacts Insolvency for help, Insolvency is required to take the appropriate steps listed in IRM 5.9.4.4.3.2, Referral of Taxpayer to FMS, to assist the debtor. Note: 5.9.4.4.3.1 (03-01-2007) BPI 03. For cases with a bankruptcy petition date prior to October 17, 2005, when CC RFUND is input on an MFT not eligible for offset, the indicator will show (03) BANKRUPTCY. A TC 520 on the account with a date prior to October 17, 2005, will generate a BPI 03 on refunds that are issued systemically. If a BPI 03 was not input previously, manual refunds issued from accounts with a petition date prior to October 17, 2005, with a (–W) or (–V) freeze require input of a BPI 03 to indicate no refund offset(s) may be made. An annotation in the "Remarks" section of Form 5792 must state, "INPUT BPI 03" BPI 07. BAPCPA allows offsets of income tax refunds to delinquent domestic support obligations on bankruptcies filed on or after October 17, 2005. BPI 07 alerts FMS the taxpayer is in bankruptcy, but offsets to domestic support obligations are allowed because those offsets do not violate the automatic stay. The Service has the right to offset a refund against taxes, if allowed, before FMS has an opportunity to claim part or all of the remaining refund for offset against domestic support obligations. FMS is responsible for forwarding to the debtor or to the trustee any funds not offset. Requests for refunds to debtors or trustees for cases filed on or after October 17, 2005, must contain the annotation, "INPUT BPI 07." BPI 08 and 09. The Injured Spouse Unit will inform Insolvency when a bypass indicator should be placed on a Form 5792 being initiated by Insolvency. Bypass indicator 08 represents a primary spouse who has filed a injured spouse claim, and BPI 09 represents the secondary spouse as the injured spouse. When the Injured Spouse Unit advises Insolvency of the need to change the BPI to 08 or 09, the Insolvency employee must annotate the AIS history in a manner that highlights the requirement to use the 08 or 09 indicator code. AIS Generated Forms 5792. Form 5792 accessed through screen 13 on the AIS Main Menu includes an input field for the BPI code. If no datum is input manually, that field will default to either BPI 03 or BPI 07 depending upon the petition date of the bankruptcy. If the Injured Spouse Unit advises Insolvency the correct BPI should be 08 or 09, the Insolvency caseworker must override the BPI default by manually inputting 08 or 09 in the BPI field as appropriate. BPI Postings. The BPI will be posted/displayed along with the TC 840/846 on all output screens such as TXMOD, IMFOL, BMFOL, and on MFTRA transcripts. The BPI will also show with the pending transaction. Debt Indicators. Debt indicators which may signal a refund offset are found on line 13 of command code INOLES. IRM Exhibit 2.3.47-8, Command Code INOLES IMF Specific Screen, explains the significance of each letter code used as a debt indicator. This information allows the caseworker to determine if a refund may potentially be offset rather than fully refunded to the debtor or trustee. 5.9.4.4.3.2 (01-01-2006) Agency for Taxpayer Contact. If a taxpayer contacts Insolvency and requests help in retrieving a tax refund from a state or other federal agency, Insolvency is to refer the taxpayer immediately to "the offending agency" (i.e., the agency who received the refund) for the required assistance. Taxpayer to Contact Agency. If the taxpayer knows the name of the agency, Insolvency should advise the taxpayer to contact that agency. Note: FMS Help Desk. If the taxpayer does not know the name of the agency, Insolvency will tell the taxpayer to call the FMS Help Desk 1–800–304–3107 which can provide assistance to the taxpayer on the TOP offset issue. TOP Notice to Taxpayer. When a taxpayer's refund is offset for child support or a federal agency debt, FMS issues a TOP offset notice to the taxpayer. The notice includes the name, address, and phone number of the agency and the telephone number of the FMS Help Desk. It will be helpful for debtors to have this information at hand when they call the FMS Help Desk. Complaint to Proper Agency. The majority of complaints involving TOP offsets require the agency receiving the offset to make the refund, and the IRS is generally not involved. Any resulting legal dispute is between that agency and the debtor, and not the IRS. Reminder: 5.9.4.4.3.3 (01-01-2006) No Liability Error. On a preliminary case review, the debtor may appear to owe no federal taxes. However, the "no tax" determination may be inaccurate if the IRS made an offset to full pay an IRS balance due account in violation of the automatic stay. When an illegal offset has occurred to a balance due account, a debt is still due the Service. The refund may have erroneously paid the account, partially or in full, due to the illegal offset. Therefore, the IDRS account balance (either showing zero or a minimal balance remaining) will not be accurate. The Service must initiate corrective actions within two work days of discovery of the illegal offset. Centralized Insolvency Operation Actions. If an offset meets the criteria for referral to Counsel and the case resides in the CIO inventory, the CIO caseworker must request the CIO liaison transfer the affected case to Field Insolvency to consider referral actions. The transfer must be accompanied by a phone call or fax alerting the Field Insolvency group of the referral request. Field Insolvency Referrals. The Field Insolvency caseworker, following the criteria set by Associate Area Counsel, must determine if the offset warrants referral for a lift stay, negotiations for adequate protection, or refund to the debtor or trustee. IF... THEN... 5.9.4.4.4 (03-01-2007) Note: Authorization. The law passed under the Taxpayer Relief Act of 1997 (Public Law 105–34) § 1024 authorizes the IRS to levy up to fifteen percent of specified payments continuously (IRC § 6331(h)). The FPLP was developed to implement this law. Note: Bankruptcy Prohibition. During regular collection activity of the Service (non-bankruptcy), the FPLP allows systemic continuous levies on certain federal disbursements using a paperless process. However, the Service is prohibited from using this levy program against persons in bankruptcy unless the automatic stay has been lifted. Paragraph (7) below outlines Insolvency actions regarding this program as it impacts accounts in bankruptcy. FPLP Indicators. Modules selected for the FPLP remain in their original master file status codes. (NMF is not included.) Command codes TXMOD, ENMOD, IMFOL and BMFOL can be used for research. MF (I/BMFOL) displays the indicator FMS LEVY>1 on the entity screens if at least one module has been selected in the FPLP. IDRS (ENMOD and TXMOD) displays the indicator FMS>1 on the entity (ENMOD) screens if at least one module has been selected in the FPLP. Each tax module (TXMOD, IMFOLT/BMFOLT) also displays the following: FMS LEVY/CD>1 Currently not included in the FPLP; however, at one time the module was included for FPLP FMS LEVY/CD>3 Currently included in FPLP (TC 971 AC 060) FMS LEVY/CD> (other alpha/numeric code) Current or pending block from FPLP Action Codes. Tax liabilities sent to FMS for levy under the FPLP can be identified by 97X action codes (ac) listed below: TC 971 ac 060 — module selected for FPLP TC 972 ac 060 — reversal of module selected for FPLP (computer generated only) TC 971 ac 061 — block or release of module from FPLP Note: TC 972 ac 061 — reversal of block on module TC 971 ac 062— module matched or levied under FPLP with identifying DLN Selected/Match/Levy Indicators. If a module is selected for the FPLP, a TC 971 ac 060 posts. Once FMS matches a federal disbursement with a delinquent module, a TC 971 ac 062 posts. TC 971 ac 062 also indicates a levy has been issued. Note: Insolvency Actions. The actions an Insolvency caseworker must take to recognize and resolve FPLP cases are listed below. When an Insolvency caseworker identifies a tax module that has been selected for the FPLP (the tax module displays a TC 971 ac060), a TC 520 must be input timely. For cases sent to FMS but not matched, the input of the TC 520 should reverse the module in time to prevent a levy action (TC 972 ac060). Reminder: These cases are identified during a normal review of cases in Insolvency. On FPLP match/levy modules (tax module shows TC 971 ac062), Insolvency must notify the FPLP Coordinator expeditiously. Insolvency employees must use Form 4844 and indicate "FPLP LEVY RELEASE" so the Coordinator can have the module(s) removed from the FPLP. This will facilitate a prompt release of a levy if necessary. Note: The official signing Form 4844 in Insolvency must have delegation authority to approve levy releases. The request for an FPLP levy release may be faxed, hand-carried, or sent by secure email to the FPLP coordinator. Unless email is not available for a protracted period of time, all requests for an FPLP levy release originating at the CIO must be sent by secure email. Emailed levy release requests should be sent with a request for a "read receipt" to satisfy the receipt verification requirement in item (7) below. Insolvency must verify and document the FPLP Coordinator received Forms 4844 on all cases. Copies of Forms 4844 and any attachments must be retained in Insolvency until the levy release has been confirmed. If a levy payment is received by the Service as a result of a FPLP levy action while the automatic stay is in effect, Insolvency must request a manual refund, following procedures for returning or refunding levy proceeds. Note:
5.9.4.5 (01-01-2006) 5.9.4.5.1 (05-13-2008) Document Review. Insolvency should provide quality customer service and protect the government's interests by a timely review of the schedules and proposed sale documents to ensure the sale is an arms-length transaction for fair value and the proceeds of the sale are distributed in order of lien priorities. Lien on Property. If the Service filed an NFTL prior to the bankruptcy petition, and the debtor seeks to sell personal property free of the tax lien, the debtor may be required to obtain consent for the sale from lienholders, including the IRS. In such cases Insolvency should consider giving conditional consent under IRC § 7425(c)(2) based upon immediate payment to the IRS of the lien equity in the property being sold. Insolvency should refer the case to Counsel if it is determined conditional consent is warranted. If the debtor seeks to sell real property free of the federal tax lien, Insolvency should contact Counsel to determine if IRC 6323(f)(4) affects that specific case. Sale Proceeds. If the debtor sells exempt property, the proceeds of the sale will normally go to the debtor rather than into the estate. However, if the Service filed an NFTL prior to the petition date, and the debtor sells exempt personal property, the IRS is entitled to the sale proceeds. If the debtor sells exempt real property, Insolvency must contact Counsel to determine if IRC 6323(f)(4) affects that specific case. Sale of Property with Partial Exemption. Trustees or debtors may move to sell assets for which the debtor has claimed a partial exemption under 11 USC § 522. In those situations the trustee or the debtor will seek permission to pay a portion of the proceeds of the sale to the debtor as part of the motion to sell the property. If the Service has filed a valid prepetition Notice of Federal Tax Lien or if the Service has filed an allowable priority claim (11 USC § 522(c)(1) and (2)), the Service should object to the trustee's motion to sell and request the exempt amount (or the portion in which the Service may claim an interest) be distributed directly to the IRS instead of to the debtor. Assuming the LEM 5.9.4criteria for referral are met, these cases should be referred to Counsel for the filing of this objection. Certificate of Discharge. The order approving the sale may provide the property be sold free and clear of liens, with liens to attach to the sale proceeds. Usually this order is sufficient to clear the title, but the IRS may be requested to provide a Certificate of Discharge of the property from the lien. The federal tax lien will then no longer attach to the specific piece of property being sold. The certificate can be provided unless a legitimate reason exists not to do so. Insolvency should request the following: Statement of facts concerning the sale Legal description of the property Copy of the court order approving the sale Any other pertinent information Lien Discharge. After review a discharge may be provided in the same manner as in a non-bankruptcy situation. The discharge will be prepared by an employee assigned to handle Certificates of Discharge in Technical Services Advisory or Insolvency. Tax Consequences. The tax impact of any sale should be evaluated. If the sale will result in a significant capital gains tax, this may be an administrative expense payable in a Chapter 11 case on the effective date of the confirmed plan. In individual Chapter 11 cases, this takes on additional importance because the bankruptcy estate is a separate, taxable entity. If the bankruptcy estate cannot pay the tax on the effective date, the case will likely convert to Chapter 7. The argument can be made that without abandonment, the sale will significantly diminish the estate because of the capital gains tax. Note: 5.9.4.5.2 (05-13-2008) Trustee Involvement. In some jurisdictions trustees instruct the IRS to issue a written communication, often a Form 10492, Notice of Federal Taxes Due, to the escrow company so the Service will be paid directly from the escrow funds. Other trustees make the demand to the escrow company directly so all funds flow through them for disbursement to the creditors. In either case, Insolvency must advise the trustee of the amount necessary to satisfy the Service's secured claim so a release of the lien can be filed or a certificate of discharge provided. Insufficient Proceeds. If proceeds from a sale are insufficient to satisfy the lien, the lien generally should not be released. Instead a certificate of discharge can be provided to discharge the specific property sold from the lien. Insolvency caseworkers should consult Counsel with questions about the propriety of releasing a lien or providing a certificate of discharge. Form 10492 Preparation. To prepare an accurate Form 10492, the Insolvency caseworker must have copies of the IRS's claim and the Chapter 13 plan including amendments or modifications as well as the order confirming the plan. The preparation of Form 10492 varies depending upon the facts of a particular case, but most fall into one of the following scenarios: The IRS has an allowed secured claim, and the Service's claim is oversecured. (See IRM 5.9.13.19.2(6), Oversecured.) The confirmed plan makes no provision for payment of the secured claim with postpetition interest under 11 USC § 506(b). Form 10492 should include postpetition interest computed at the IRC rate against the total amount of the secured claim, less any postpetition plan payments received from the trustee and allocated to the secured claim. The plan contains a provision for payment of the IRS's secured claim at a specific interest rate. Form 10492 should compute postpetition interest on the amount provided for in the plan at the interest rate set forth in the confirmed plan. For cases filed prior to October 17, 2005, command code COMPA should not be used to compute postpetition interest unless the plan specifies the IRC rate of interest will be used. For cases filed on or after October 17, 2005, COMPA is the correct command code to use. Postpetition payments from the trustee allocated to the secured claim must be deducted. The plan provides for payment of the IRS's secured claim for less than is shown on the IRS's proof of claim. The Insolvency caseworker should consult with Counsel to determine if the Service is bound by the terms of the confirmed plan or if the Service may insist upon payment of the amount shown on its secured proof of claim. The demand for lien payoff from the escrow agent or title company is made before the Chapter 13 plan has been confirmed. This may occur when a sale or refinance of real property is pending at the time the bankruptcy is filed. Insolvency should instruct the debtor to: The debtor has accrued postpetition taxes, and an NFTL has been recorded for those postpetition liabilities. The Insolvency caseworker must review the plan and order for confirmation. If the subject property revested to the debtor and the confirmation order permits the debtor to sell or refinance property without court approval, the IRS may be allowed to issue Form 10492 for the full amount of the postpetition liability including accruals. If the plan specifically provides the subject property will be sold or refinanced to fund the plan, the IRS may be prohibited from making an escrow demand for the postpetition taxes unless sufficient equity exists to pay all of the debtor's prepetition claims and postpetition tax debts. Counsel should be consulted in those cases. Insolvency may consider issuance of a Certificate of Discharge or Subordination under IRC § 6325 for the NFTL related to the postpetition taxes. Caution:
5.9.4.6 (01-01-2006) Trustee Authority. Generally the trustee or debtor-in-possession in Chapter 11 cases has the authority under the Bankruptcy Code to avoid preferences. The trustee can recover a preferential payment for the benefit of the estate. Preference Criteria. To qualify as a preference, a tax payment must be: made on or within 90 days before the date of the bankruptcy filing; made while the debtor was insolvent; an amount more than the IRS would have received in a Chapter 7 bankruptcy proceeding; and a payment on account of an antecedent debt, in other words, a late payment of tax. Note: Ordinary Course of Business Exception. Debts incurred and paid by the debtor in the ordinary course of business or financial affairs cannot be avoided as preferences. Trust Fund Payments. Prepetition voluntary payments of trust fund taxes cannot be avoided as preferential transfers, because they are not considered to be transfers of property of the debtor. Rather, the funds are held in trust for the United States. Adversary Proceedings. A preference action must be brought as an adversary proceeding in the bankruptcy case. Such actions must be referred to Counsel. 5.9.4.7 (01-01-2006) Prior Court Ruling. The bankruptcy court may not re-examine a tax liability ruled on by a court of competent jurisdiction before the filing of the bankruptcy petition. Criteria for Court Determination. The bankruptcy court can determine the right of the estate to a tax refund if the taxing authority does not rule on the trustee's refund claim within 120 calendar days (11 USC § 505(a)(2)(B)). Note: 5.9.4.8 (05-13-2008) Prompt Determination Requests. A trustee in a bankruptcy proceeding may ask the IRS to make a " prompt determination" of any unpaid liability of the estate for any tax incurred during the administration of the case. The trustee can request this by submitting a tax return and requesting a prompt determination of that return (11 USC § 505(b)(2)). Area of Responsibility. Insolvency will review requests for prompt determinations for completeness (see IRM 5.9.4.8.1(3) below) and return the request to the originator should the request package be incomplete. Insolvency will forward all requests to Examination for prompt determination via Form 3210. If no signed Form 3210 acknowledgment is returned from Exam, Insolvency will contact Exam to verify receipt. Critical Timeframes. The government has 60 calendar days from the date the request is received in Insolvency to notify the trustee the return has been selected for examination. The government has a total of 180 calendar days from the date of the request to complete the examination and to notify the trustee of any additional tax due. (A longer period may be granted with court permission.) Failure to notify the trustee within 60 days or to complete the examination within 180 days will discharge the estate, the trustee, the debtor, and any successor to the debtor from any liability for the tax. The discharge will occur upon payment of the tax shown on the return unless the return is fraudulent or contains a material misrepresentation. Court's Mailing Matrix - IRS Address. Pursuant to 11 USC § 505(b)(1)(A), the clerk of each bankruptcy court is required to keep a list where government offices may designate an address for serving prompt determination requests. Each Insolvency office should ensure the local bankruptcy clerk lists the following national Insolvency address for serving prompt determination requests: 5.9.4.8.1 (05-13-2008) Copy of Return. Filed with the request for prompt determination must be an exact copy of a valid return for the completed taxable period filed by the trustee or debtor-in-possession. To be valid the return must be signed under penalties of perjury. If the section of the return form that requires it be signed under penalties of perjury is modified in any way, such as by striking out, deleting, or changing the language of that requirement, that return form will not qualify as a valid return. Elements of a Request. Before forwarding the prompt determination request to Examination, Insolvency must review the request package to ensure it is acceptable for Exam processing per Rev. Proc. 2006-24. A prompt determination request must include a signed written request submitted in duplicate with: a statement that the request is for prompt determination of a tax liability, specifying the type of return and the tax period for which the request is being filed; the name and location of the office where the original return was filed; the name of the debtor; the debtor’s TIN; the type of bankruptcy estate; the bankruptcy case number; and the location of the bankruptcy court. Note:
Complete Package. Insolvency must determine that the documents with mandatory information specified in Revenue Procedure 2006-24 are received and are complete. If documents required from the trustee or debtor-in-possession are missing or incomplete, all of the documents received will be returned to the fiduciary by Insolvency with an explanation identifying the missing papers or information. Insolvency will request the package be resubmitted with the correct documentation. New timeframes start on the date a complete package is received by Insolvency. Note: Verification and Transmittal to Examination. Insolvency is responsible for the immediate transmittal of all documents in a complete prompt determination request to Examination. The copy of the return should be prominently marked at the top: "COPY ONLY – FURNISHED PER REV. PROC. 2006-24." Insolvency must verify the return sent to them is a copy. If an original return is received, Insolvency must duplicate it, furnish a copy (so marked) to the appropriate Exam function, and immediately forward the original for normal processing to the designated Campus. Shipping Instructions. After prompt determination request packages have been confirmed as complete, with one exception, they are to be forwarded by overnight courier to the appropriate PSP Examination function. The exception pertains to corporations that fall under the scope of the Large and Mid Size Business (LMSB) division. Those requests must be shipped overnight to: To determine if a corporation's account is handled by LMSB, the Insolvency caseworker must access cc INOLES on IDRS. If the business operating division on INOLES is identified as " LM," then the prompt determination package must be sent to the above address. Timeframes. Transmittal to the appropriate Examination function must be done within three workdays of the date the copy of the return is received by Insolvency. The transmittal must be done within this timeframe because within 60 calendar days from the date the request is received in Insolvency, Examination has to review the copy of the return and advise the fiduciary if the return is to be selected for examination. AIS Histories. Some of the prompt determination requests are for cases not on AIS. Establishing a case on AIS for the sole purpose of monitoring a prompt determination request is not necessary. However, if a case has been established on AIS, the history documentation must annotate the receipt of a prompt determination request and subsequent actions taken. 5.9.4.8.2 (01-01-2006) Note: 5.9.4.9 (05-13-2008) Service Policy. When a taxpayer has filed for bankruptcy protection, IRS's policy is not to consider administrative offers in compromise from a taxpayer in bankruptcy. Instead Insolvency considers payment proposals, usually in the form of plans filed by the debtor in the bankruptcy case, under guidelines set forth in IRM 5.9.8.14.2, IRM 5.9.9.6, or IRM 5.9.10.5.5 depending upon the type of bankruptcy case filed. Rule. The rule to follow on OICs by the Service: Administrative offers in compromise are returned to the debtor as "not processable" if the taxpayer is a debtor in a bankruptcy case for which a discharge has not yet been entered. However, even though administrative offers in compromise are not considered when a taxpayer is in bankruptcy, in appropriate cases, the Service may work with the debtor within the bankruptcy case to achieve a result that is in the best interests of both the debtor and the Service. (See IRM 5.9.8.14.2(7),Deficient Plans - Exceptions, and IRM 5.9.10.5.5(4),Deficient Plans - Exceptions.) Specific Bankruptcy Chapters. Listed below is the Service's policy for specific bankruptcy chapters which clarify the IRS's position on the processing and consideration of OICs in bankruptcy-related situations. Chapter 7. Only after a discharge or a dismissal has taken place, can an administrative OIC be considered by the Service in a Chapter 7 proceeding. Because a Chapter 7 discharge is usually issued quickly, the taxpayer is not harmed by the delay. Furthermore, once the discharge is entered, the Service will be able to determine which taxes are discharged and will be able to make a determination of " Doubt as to Collectibility" under its administrative offer in compromise procedures. (See IRM 5.8.10.2.3(2),Acceptance of Offer in Compromise after Chapter 7 Bankruptcy.) Chapter 11. In Chapter 11 cases involving individual debtors, as in Chapter 13 cases, the Service will not consider any OICs prior to discharge. When the Chapter 11 debtor is not an individual, an administrative OIC can be considered in unusual circumstances after plan confirmation, but only with respect to tax liabilities which are the subject of a defaulted plan if the default cannot be cured or the plan modified. Such an administrative OIC is only appropriate if unanticipated changes in circumstances cause an inability to meet the terms of the plan. The decision for consideration of an OIC must be made on a case by case basis. The Service can decline to consider an administrative OIC after a Chapter 11 default if the particular facts of the case show an administrative OIC would be inappropriate. Note: Chapter 12. Administrative OICs in Chapter 12 generally will not be considered. However, in unusual instances, changed circumstances may justify consideration of an administrative OIC in defaulted Chapter 12 plan cases, just as in defaulted Chapter 11 plans, especially since Chapter 12 bankruptcies tend to involve struggling small businesses. Chapter 13. An administrative OIC will not be considered prior to discharge during the pendency of a Chapter 13 plan. Note:
Consideration of an Administrative OIC. The Service's decision to consider an administrative offer in compromise from debtors who have taken advantage of the relief offered under the Bankruptcy Code is limited to the situations described above. The Service's decision to accept an administrative offer in compromise falls within the discretion of the Service. Prepetition OIC Down Payments. When a debtor has submitted an OIC with a down payment prepetition, and (s)he files bankruptcy while the OIC is pending, the IRS may generally retain the down payment. A down payment made within 90 days before the filing of a bankruptcy may qualify as a preferential transfer and be avoidable under 11 USC § 547(c). However, the trustee has the burden of proving this payment is a preference. The IRS may retain this OIC down payment until the trustee persuades the Service the payment is a preference and not subject to the exceptions under 11 USC § 547(c). Some payments, namely those to pay off trust fund taxes, are not avoidable as preferences, because the debtor has no property interest in the funds. Postpetition OIC Down Payments. When a debtor submits an OIC with a down payment postpetition, the down payment should be treated in the following manner according to the bankruptcy chapter under which the debtor has filed for bankruptcy protection: Chapter 7. The Service can keep the down payment submitted with the OIC, without violating the automatic stay, if the payment is made from postpetition earnings for non-dischargeable taxes. Postpetition earnings are not property of the estate, and the Service may retain down payments made with such earnings even if the OIC is deemed unprocessable. In this situation, Insolvency should document the AIS history screen with pertinent information relating to such payments, including any contacts made with the debtor on this matter, and confer with Counsel should legal advice be required. Chapter 11. The Service cannot retain OIC down payments submitted by a Chapter 11 debtor postpetition. In general, property of the estate in Chapter 11 may include property listed under 11 USC § 541 that is obtained postpetition. For Chapter 11 debtors who are individuals, property of the estate includes postpetition earnings. The Service may not retain OIC down payments made with property of the estate. Chapter 12 and 13. The Service cannot retain OIC down payments submitted by a Chapter 12 or 13 debtor postpetition. In Chapter 12 and 13, property of the estate includes property under 11 USC § 541 that is acquired postpetition and earnings obtained postpetition. The Service may not retain OIC down payments made with property of the estate. 5.9.4.9.1 (01-01-2006) Tax Claim. If the taxpayer files for bankruptcy before the terms and conditions of an administrative offer in compromise are completed, any claim the IRS files in a bankruptcy proceeding will be a tax claim. The Service's policy on treatment of an accepted administrative OIC for specific bankruptcy chapters when payments have not yet been completed is discussed below. Chapter 7 Asset Case. The Service should file a proof of claim for the full amount of the unpaid tax liabilities. In Chapter 7 cases no mechanism exists for the debtor to assume an executory contract, such as an OIC. However, if once the bankruptcy case is concluded and the taxpayer promptly resumes payments under the offer, or the amount of the offer was paid in full as a result of distributions in the bankruptcy case, the Service should honor the offer of the postpetition debtor. Note:
Chapters 9, 11, 12. Generally, the same guidelines are followed as for a Chapter 13 (below). Counsel can provide specific legal guidance. Chapter 13. When a taxpayer with an accepted but not yet completed administrative offer in compromise files a Chapter 13 petition, the Service should file a protective claim for the full underlying tax liability to protect the Service's interests. The proof of claim should cover the full amount of the unpaid underlying tax liability, because the Service is entitled to collect the full amount of the unpaid underlying tax liabilities if the OIC is breached (non-performance of contract). However, the debtor can choose to assume the OIC as an executory contract in a Chapter 13 plan. This means the debtor agrees, as part of the Chapter 13 confirmation process, to honor the OIC and fulfill its terms during the bankruptcy case. If the debtor assumes the OIC, the offer should not be treated as breached, and the plan should provide for the full amount due under the OIC. As noted above, the proof of claim will list the full underlying tax liabilities. Once the debtor chooses to assume an OIC, the debtor has agreed to pay in full the remaining obligation under the OIC. Accordingly, the Service must honor the OIC by accepting its payment as satisfying the obligation. The debtor will have a choice (1) to assume the OIC in the plan or (2) to be liable for the underlying tax liability, whichever is in the debtor's best interest. The proof of claim should contain an annotation to reflect it is being filed as a "Protective Claim" in the event the debtor does not assume the OIC as an executory contract in the plan. If the debtor assumes an OIC in a Chapter 13 plan, but the case is subsequently converted to a Chapter 7, the Service may claim the full underlying tax liability as listed on the proof of claim. Caution:
Future Compliance Provisions. In a case under any bankruptcy chapter, if the debtor has made all payments under the OIC but is still subject to the future provisions of the offer, a proof of claim should not be filed. Chapter 13 . If the debtor later fails to pay postpetition taxes and is still in a Chapter 13 bankruptcy, the Service can use the normal remedies available to it to collect liabilities that become payable during the bankruptcy plan. Generally, the Service files a claim under 11 USC §1305 for the liabilities or seeks conversion or dismissal of the bankruptcy case. Chapters 11 and 12. In a Chapter 11 or a 12 bankruptcy, if the case is still pending, the Service can seek conversion or dismissal of the case for failing to pay postpetition taxes. Note: Chapter 7. In Chapter 7, the Service can terminate the defaulted OIC after the automatic stay is lifted and collect non-dischargeable liabilities administratively. Re-Input of Status 71. If a postpetition taxpayer wishes to continue to make payments after bankruptcy, to comply with the terms of a previously accepted OIC, Insolvency should request status 71 (OIC status) be re-input on IDRS when closing the bankruptcy. Service Coordination. Close coordination and cooperation among Insolvency, field Collection, and Counsel is integral to the prompt and efficient handling of administrative OICs in bankruptcy. IRM 5.8,Offer in Compromise, provides additional information on administrative OICs. Counsel should be consulted for assistance and legal advice on case-specific issues. Note: Communication. A contact list should be established between Field and Centralized Insolvency units and other IRS offices who work on bankruptcy-related cases, including OIC groups and Campuses, to facilitate communication among these units. The list should be updated periodically to remain an effective communications tool for employees who work administrative OICs and bankruptcies. 5.9.4.10 (01-01-2006) Detection of Potential Bankruptcy Fraud. During the pendency of a bankruptcy case, Insolvency caseworkers may obtain or develop information indicating a federal criminal offense may have been committed. The evidence may implicate the debtor, the trustee, a third party, or a representative in the proceeding. Third Party Contacts and Insolvency. If a Field Insolvency specialist or advisor submits a fraud referral to Criminal Investigation, third party contact provisions under IRC § 7602(c) apply until the actual referral is made to CI. Development of Referral. The information Insolvency gathers may indicate offenses over which the Service has jurisdiction under Title 26 Internal Revenue Code, for example, filing false tax returns, and Title 18 tax-related violations. Also, Insolvency caseworkers may discover "pure" Title 18 violations, over which the Service does not have responsibility. Note: Bankruptcy Fraud Information. Information relating to bankruptcy fraud procedures is found in Document 9762 (9–96), Desk Guide Bankruptcy Crime Referrals. 5.9.4.10.1 (01-01-2006) Criminal Investigation (CI), or the Disclosure Office handling the jurisdictional area of the bankruptcy court where the case is filed. Criminal Investigation (CI) Referrals. Fraud referrals for tax-related violations based on Title 26 and related statutes are routed to CI by the bankruptcy fraud technical advisor as outlined in paragraph (5) below. If a potential referral relates to bankruptcy tax offenses (for example, income tax evasion in conjunction with concealment of assets from the bankruptcy trustee), the matter should continue to be developed for referral to CI. Likewise, if a referral relates to a concealment of assets from the bankruptcy trustee and indications of a money laundering violation are present, it is handled by CI. Disclosure Referrals. Fraud technical advisors (see paragraph (5) below) should direct referrals to the local Disclosure Office when non-tax criminal activity is suspected that does not meet CI referral criteria, including activities relating to "pure" bankruptcy fraud under 18 USC § 157 and Concealment of Assets, False Oaths and Bribery under 18 USC § 152. Disclosure's Responses to Fraud Referrals. If the Disclosure Officer determines the referral from Insolvency merits further review, the information will be forwarded to the appropriate agency for additional investigation. Instructions on the nature of information needed in the non-tax referral to Disclosure can be found in IRM 11.3.28.8,Disclosure of Return Information...Concerning Nontax Criminal Violations. Working Fraud Referrals. Field Insolvency caseworkers should process a bankruptcy fraud referral as follows. The Insolvency caseworker originating a bankruptcy fraud referral forwards the referral to the fraud technical advisor. (See IRM 5.9.4.10.2 below.) If assistance is needed to prepare a quality referral, the fraud technical advisor can advise the employee. If the fraud technical advisor needs guidance with the referral, (s)he may contact Counsel for assistance. The fraud technical advisor routes the completed referral either to CI or the local Disclosure Office as appropriate. 5.9.4.10.2 (01-01-2006) Fraud Coordinator Responsibilities. The fraud technical advisor ensures referrals are complete prior to sending them forward. For assistance in perfecting the referral, the fraud technical advisor may contact Counsel. Once a fraud referral package has been completed, the fraud advisor transmits it to the appropriate office. Quality Referrals. Each Field Insolvency office should have a list of criteria for the selection of cases for referral consistent with local procedures. Insolvency groups should work closely with Counsel to develop referrals with a high probability of acceptance for prosecution. 5.9.4.10.3 (01-01-2006) Bankruptcy Fraud Indicators. Listed below are common indicators of bankruptcy fraud. Absence of or evasiveness by knowledgeable officers for testimony purposes at the bankruptcy court's 341 meeting of creditors. Concealment of assets. Conduct contrary to industry practice. Discrepancies between pre- and post-bankruptcy filing financial information provided to the IRS (e.g., to revenue officers). Failure to keep usual business records. Fire, theft, or loss prior to or after the bankruptcy. Frequent amendments to schedules, statements of financial affairs, and/or monthly operating reports. Frequent cash transactions. Inability to contact principals at debtor’s stated business location. Incomplete or missing books or records. Inconsistencies between recent financial statements, tax returns, and debtor’s schedules and statement of financial affairs. Inflated salaries, bonuses, or cash withdrawals by officers, directors, shareholders, or other insiders. Payoff of loans to directors, officers, shareholders, relatives, or other insiders shortly before bankruptcy. Recent departure of officers, directors, or partners. Serial bankruptcy cases. Sudden depletion of inventory postpetition. Transfer of property to insiders, shareholders, and/or relatives shortly before bankruptcy. Unanswered questions, or incomplete information on debtor’s schedules and statement of financial affairs. Unusual depletion of assets shortly before the bankruptcy filing. Engaging in illegal activities. Indications that valuable assets belonging to the taxpayer are being acquired or held in the names of others. Making false, misleading, or inconsistent statements. Personal living standard and assets inconsistent with income. Self-serving statements with no documentary proof. Submitting a false document or affidavit. Trying to conceal a pertinent fact or record. 5.9.4.11 (01-01-2006) Confidentiality. No indication or confirmation of CI involvement can be given to a debtor or debtor's representative attempting to obtain more specific information on a tax account or tax issue even if the debtor or representative is being persistent. If a debtor or debtor's attorney asks if a criminal investigation is open on the debtor's case, the Insolvency caseworker must contact Counsel and CI immediately to determine the proper response. Insolvency must take no actions that might jeopardize an ongoing criminal investigation. Prompt CI Contact. Insolvency must promptly contact CI at the Campus on all inquiries involving account(s) with CI controls. Campus CI can provide contact information for the CI Special Agent (SA) who requested the controls. When CI controls are identified on accounts, even if the freeze is only on one of several tax modules, Insolvency must contact CI immediately to advise CI of the bankruptcy filing and Insolvency's plans to file a proof of claim (if applicable). A meeting should be scheduled with the Special Agent in Charge (SAC), the Insolvency specialist and manager, and SBSE and Criminal Tax Counsel to discuss coordinating the civil and criminal cases. Counsel Advice. If Insolvency requires legal advice on any case in which CI advises withholding collection (such as not filing a proof of claim), prompt contact with Counsel should follow according to local management direction. If any issues arise between Insolvency and CI, Insolvency should seek Counsel's advice. (See IRM 5.9.13.16,Criminal Investigation Involvement.) 5.9.4.12 (01-01-2006) In the case of a prepetition tax for which a return becomes due during the proceeding (the due date of the return is after the petition date), no failure to pay penalty will be asserted during the pendency of the bankruptcy. In the case of a tax for a prepetition delinquent return which was recently filed, or if the prepetition tax was assessed before the start of the proceeding, the penalty will be asserted up to the petition date. In the case of an additional liability for a prepetition tax year, the penalty will be asserted from the date of assessment to the petition date. In all of the instances listed above, no penalty will be asserted while the bankruptcy case is active. The penalty is suspended from the petition date. The penalty resumes from the date the case is dismissed or closed on non-dischargeable liabilities. If Incurred by Trustee or DIP. A failure to pay penalty will continue to accrue on tax incurred by the trustee or debtor-in-possession unless the failure occurred pursuant to an order of the court finding probable lack of funds in the estate to pay administrative expenses. IDRS. In most cases, IDRS will properly restrict failure to pay penalties unless a manual restriction has been placed on the account with a TC 270 and TC 271. For 941 taxes IDRS will also suppress FTP penalties for the entire module because it cannot differentiate just the withheld portion. IRC References. The penalties described above are found in IRC § 6651 (failure to pay penalty), IRC § 6654, (estimated tax penalty - individual), and IRC § 6655 (estimated tax penalties - corporations). 5.9.4.13 (05-13-2008) Note: A Quality Referral. A quality referral by Insolvency contains the specifics of why representation in court is necessary. All helpful information must be provided to the Service's legal representative. Such information and data must be attached to the referral to ensure the government's interests are protected. (If all data are not available at time of initial referral, the remainder should be sent as soon as possible for association with the referral.) (See IRM 34.3.1.1.7, Referral to the Department of Justice in Bankruptcy Code Cases.) Pattern Referral to Local Counsel. To standardize referrals Collection Policy, SBSE Division Counsel, and AIQ have worked with Field Insolvency offices to produce pattern forms to be used by Field Insolvency to refer cases to local Counsel. The pattern forms, one for Chapters 11 and 12 and another for Chapters 7 and 13, can be accessed through the AIQ-Insolvency website. AIS Referral Screen. All referrals to Counsel must be entered on the AIS referral screen with a follow-up date seven days prior to any court established deadline. If the referral is not in response to a specific court action with a defined deadline, the follow-up date should be set 30 days from the date of referral. Managerial Intervention. If no response has been received from Counsel by the referral follow-up date, the assigned caseworker must contact Counsel to learn the progress of the referral. If the issue(s) surrounding the referral has not been resolved, the caseworker must ask Counsel for a date by when a response from Counsel can be expected. If Counsel's response is not received by the date specified, the caseworker should elevate the referral to the group manager to contact Counsel. Reassignment to CIO. All referral and follow-up actions must be resolved prior to case reassignment to Centralized Insolvency for cases transferred to Field Insolvency for referral to Counsel. 5.9.4.13.1 (05-13-2008) Authorizing Language. All referrals to either of these offices are made by letter and must contain the following authorizing language: "This matter is being referred directly by our office because it concerns routine issues. In the event that an issue concerning the interpretation or implementation of a BAPCPA provision arises, we request that you seek the views of our local Area Counsel. You are hereby authorized under the provisions of IRC § 7401 to take whatever action you deem necessary to aid the Internal Revenue Service in collection of the above captioned debtor’s outstanding federal tax liabilities. Specifically, we suggest and request that your office… " Direct Referral Authorization. The authorization to commence direct referrals to DOJ or USA on cases where the IRS’s proof of claim is less than $1 million, includes the following: Motions on behalf of the IRS, objections to plans based on the debtor's failure to file tax returns and responses to the debtors' objections to unassessed (estimated) claims filed by the IRS in cases where the debtor failed to file an income tax return. Motions to dismiss or convert cases, except those involving organizations that claim an exemption from taxation under IRC § 501. Motions relating to the debtor's failure to make timely payments under a plan and/or accrual of post-confirmation liabilities. Responses to objections to IRS claims where the debtor disputes whether the tax was paid or return was filed. Responses to debtor's motion to determine dischargeability of a tax except where 1) the debtor has filed consecutive bankruptcies; 2) the debtor defaulted on an offer in compromise; or 3) the denial of discharge would be premised on 11 USC § 523(a)(1)(C) (such as fraudulent returns or evasion of tax). Note: Business Reason. Before referring a case directly to DOJ or the USA, the specialist or advisor must consider if the desired result of the referral is based on a business reason that will benefit the Service and possibly the debtor. If the contemplated direct referral serves no definable business purpose, the referral should not be made. Never should a direct referral be made as simply a punitive action against a debtor. Example: "Mixed" Issues Are Not Direct Referrals. Many referral cases involve " mixed" referral issues (for example, a referral is made because of unfiled returns, but the plan also has feasibility problems). These " mixed" issues cases are not considered to be Direct Referral cases. They should be referred to IRS Counsel as had been the practice prior to the Direct Referrals Program. All Other Referrals. All other referrals not falling into the above categories should be referred directly to local Counsel, following LEM 5.9.4 criteria and using the pattern referral form found on the AIQ website. When in doubt about whether the direct referral criteria apply, specialists should consult Counsel. 5.9.4.13.2 (01-01-2006) 5.9.4.13.3 (03-01-2007) Referral Criteria. Once such a referral is made, Counsel assumes responsibility for coordinating the various IRS functions to ensure timely processing. When one or more of the following circumstances are present in a case, it should be referred to Counsel. (See Chief Counsel Notice CC 2005-004.) The debtor has a $100 million or more in gross assets. The debtor files a motion to restrict or prohibit the sale or other disposition of its stock. The debtor files a motion to sell or otherwise dispose of a significant or material portion of its assets for consideration other than cash. The plan provides for a significant delay between plan confirmation and debt discharge (for example, debts are discharged after the close of the tax year when plan confirmation occurs). The debtor files a prepackaged plan. The plan provides for the creation of a liquidating trust and the terms of the plan do not conform to the requirements for a liquidating trust in Revenue Procedure 94-45. The disclosure statement or plan indicates that there are foreign tax claims against the debtor. The plan provides for the termination of a qualified pension plan. The disclosure statement or plan indicates that the debtor has experienced a 20% or greater workforce reduction after one year before the bankruptcy petition was filed. The debtor proposes to pay off a previously unpaid pension contribution. The debtor fails to meet minimum funding obligations for its pension plans or proposes that minimum pension funding obligations will not be met. The plan anticipates a reduction of employment taxes based upon a substantial re-characterization of workforce relationships, or wage compensation, with no indication of a sufficient change in the underlying facts to support such re-characterization. Note: 5.9.4.14 (05-13-2008) Valid Tax Return. For what constitutes a valid tax return in bankruptcy proceedings, IRM 5.9.2.9.1.2,A Valid Tax Return, can be referenced. 5.9.4.15 (01-01-2006) Chapter 11. Debtors in Chapter 11 bankruptcies filed on or after October 17, 2005, can face conversion to Chapter 7 or dismissal if they fail to file tax returns due after the date of the order for relief or fail to pay taxes owed after the petition date in a timely manner (11 USC § 1112 (b)(4)(I)). Motions to Convert or Dismiss. Since the courts or the trustees may be unaware of a debtor's noncompliance with tax laws, the government's interest may best be served by Field Insolvency's filing a motion to convert or dismiss bankruptcies commenced on or after October 17, 2005, in those instances. 5.9.4.16 (01-01-2006) Note: Protecting the Taxpayer's Rights. The presence of a bankruptcy freeze does not nullify a taxpayer's rights under the Bankruptcy Code or the innocent spouse provisions in the IRC. Caution: Offsets. Consistent with the IRS’s policy not to take collection action when an innocent spouse claim is pending, the Service generally will not make setoffs while an innocent spouse claim is pending. (See IRM 25.15.3.4.5(1).) However, in cases when both innocent spouse claims and bankruptcies are pending, specific bankruptcy procedures should be followed as an exception to this general policy. In such cases, the Service will claim secured status on its proof of claim based upon any setoff rights it may have. Mirroring of Joint MFT 30 modules. If the Service determines either spouse is relieved (fully or partially) of the joint liability on the MFT 30 module (due to the granting of the innocent spouse claim), MFT 31 mirror modules must be created in order to adjust the tax modules for each spouse appropriately. Note: Debtor's Filing of Innocent Spouse Claim. The innocent spouse determination may become final before the disposition of the bankruptcy case requiring the affected modules to be adjusted to reflect the determination. When MFT 30 modules require mirroring, all actions should be coordinated between functions to protect the debtors. CCISO will: contact Insolvency with their determination of the innocent spouse claim; maintain the bankruptcy freeze –V or –W for closing code 81; input the necessary actions to create the MFT 31 mirror modules; do the adjustment for the innocent spouse claim determination; and reverse their freeze on the MFT 30 and 31 modules. Proof of Claim Preparation. A proof of claim is prepared and filed (if applicable) in the regular manner while an innocent spouse claim is pending, disregarding the future outcome of the claim. If the innocent spouse claim determination is for a debtor spouse and the debtor spouse meets the criteria for (full or partial) relief, the Service’s proof of claim must be amended or withdrawn, as appropriate if a POC has been filed. Insolvency caseworkers must verify the MFT 30 and MFT 31 modules have been adjusted to reflect any relief granted by CCISO. Reversal of TC 520 to Allow Processing of Claims. Only Insolvency will reverse the bankruptcy freeze codes when applicable and take the following actions: IF... THEN... Note: Monitoring. Coordination between functions is essential. CCISO should contact Insolvency when its actions have been completed. Complete Documentation. CIO technicians must document the AIS history with all actions taken to complete the process on the MFT 30 and MFT 31 modules. Joint and Several Liability. In January, 2005, a master file enhancement to mirror MFT 30 to MFT 31s for both spouses became effective. The MFT 30 module liability is cleared by the generation of TC 604. The liability is then mirrored to both spouses' MFT 31 modules and adjusted appropriately for the innocent spouse determination. Any remaining liabilities on the MFT 31 mirrored modules are linked systemically on master file. Payment made by one spouse is systemically credited to the other spouse’s MFT 31 until one is satisfied. Prior to MFT 31 mirroring, innocent spouse claims(s) were processed via the split/transfer process and may have had a joint MFT 30 module where both taxpayers still owe jointly and severally for a portion of the surviving liability. 5.9.4.17 (05-13-2008) Form 900, Tax Collection Waiver. Pursuant to IRC § 6502(a), as amended by the IRS Restructuring and Reform Act of 1998 (RRA 98), the Service can no longer obtain waivers of the statute of limitations (Form 900) for collection except in two situations: one being in conjunction with a valid installment agreement, and, the other, a release of a levy. Bankruptcy Does Not Terminate a Valid Installment Agreement. After an installment agreement becomes effective, the Internal Revenue Code limits the conditions terminating such an agreement; a bankruptcy petition is not one of them. (See IRC § 6159(b) and Treas. Reg. § 301.6159-1(c) and (c)(2)(i).) Note: Change to Status 72. If a taxpayer files a bankruptcy petition after entering into an installment agreement, transaction code (TC) 520 bankruptcy freeze is input. This action causes the account status to change from 60 to 72. Termination of Installment Agreement – Appeal Rights. If an installment agreement appears to be in default, before an installment agreement can be terminated: a notice and explanation of the reasons for termination must be given in writing to the taxpayer 30 days in advance; the Service must provide for an independent administrative review of the proposed termination (Treas Reg. § 301.6159-1; and IRM 5.14.11); and the taxpayer has the right to appeal the termination to an Appeals officer should the Service still decide to terminate the installment agreement. (See IRC § 7122(d)(2) and IRM 5.14.11.9.) Payments on a Pre-Existing Installment Agreement. Individual debtors sometimes make voluntary postpetition payments (either by check or automatic debits from bank accounts or wages) for liabilities pursuant to an installment agreement that was entered into before bankruptcy. Chapter 7 Individual . Voluntary postpetition payment(s) made by an individual Chapter 7 debtor, either by check or automatic debits from bank accounts or wages for the above-stated purpose, can be accepted by the Service. Such payment(s) will be applied to non-dischargeable period(s). Acceptance of such payments is not considered to be a violation of the automatic stay as long as the payments are truly voluntary (i.e., no harassment or coercion by the IRS). (See IRM 5.9.4.4.2(5), Voluntary Payments – Guidelines.) Caution: Chapter 13 and BAPCPA Individual Chapter 11 Cases. Property of a Chapter 13 estate or of an individual Chapter 11 estate which commenced on or after October 17, 2005, generally includes all property acquired postpetition, including postpetition wages. Therefore payments should be made through the plan. So payments based on a prepetition installment agreement should not be accepted from a debtor who has filed a Chapter 13 bankruptcy or who has filed an individual Chapter 11 bankruptcy on or after October 17, 2005. Note: If payments of this type are received in Chapters 11 (for cases filed prior to October 17, 2005) and 12, consultation with Counsel may be necessary. Re-input of Status 60. At the end of a bankruptcy, the IDRS status code should be returned to its pre-bankruptcy status of "60" when criteria for reinstatement are met. Criteria for Reinstatement. To be eligible for reinstatement of an installment agreement, the debtor must be in full compliance and must not have incurred any postpetition tax debts. (See IRM 5.14.1.5.1,Compliance and Installment Agreements.) Most types of installment agreements (e.g., direct debit, payroll deduction, credit card payments, or check or money order) can be reinstated without paying a reinstatement fee, but Insolvency can only directly input or request input of installment agreements where the payments are remitted directly by the debtor through check or money order. For all other types of installment agreements, the debtor should call Accounts Management for reinstatement. The Mechanics of Reinstatement. Using "IADIS" print-outs generated by IIP, Insolvency caseworkers must annotate terms of installment agreements in the AIS history and flag status 60 cases meeting reinstatement criteria at the beginning of the bankruptcy process. Documentation must include the type of agreement (direct debit, payroll deduction, etc.), the date of monthly payment, and the monthly payment amount. Centralized Insolvency. At the closure of a bankruptcy case with a previous IA where the debtor made direct payments and meets criteria for reinstatement, the caseworker should reinput the terms of the installment agreement on IDRS using CC IAGRE. (See IRM Exhibit 5.19.1-8, IDRS Input of Reinstated or Restructured/Revised Installment Agreements.) The installment agreement must be input while the TC 521/522 is pending to prevent a collection notice from being sent to the taxpayer. Field Insolvency. Caseworkers should complete Form 4844 stating the terms of the direct payment agreement with the statement, "Re-establish the installment agreement while the TC 521/522 is pending, and waive the user fee. The installment agreement was suspended because of bankruptcy." Reinstatement requests should be sent to Centralized Case Processing for input. Note:
Protection of the Taxpayer's Rights. The Service protects taxpayers' rights while the debtor is under the protection of the bankruptcy court (11 USC § 362). Therefore, an installment agreement should be regarded as suspended – not terminated – during the pendency of a bankruptcy proceeding. Even if the debtor incurs additional liabilities or does not remain in compliance, an installment agreement should not be terminated while the automatic stay is in effect, because a termination could be viewed as a violation of the automatic stay. Documentation. Proper documentation in the case history must reflect pertinent information relating to a valid installment agreement and the bankruptcy process. AIS histories may become a part of the bankruptcy court litigation process. IRM 5.9.5.4,AIS Documentation, provides guidance on required AIS documentation. 5.9.4.18 (03-01-2007) Violations Occurring Prior to October 23, 2004. 31 USC § 5321(a)(5) authorizes a civil monetary penalty for any person who willfully violates (or willfully causes any violation of) § 5314 not to exceed the greater of: an amount equal to the balance in the account at the time of the violation up to $100,000, or $25,000. Violations Occurring on or after October 23, 2004 (Not Willful). 31 USC § 5321(a)(5)(A) authorizes a civil monetary penalty for any person who violates (or causes any violation of) § 5314 in an amount not to exceed $10,000. The penalty is waived for reasonable cause. Violations Occurring on or after October 23, 2004 (Willful). 31 USC § 5321(a)(5) authorizes civil monetary penalty for any person who willfully violates (or willfully causes any violation of) § 5314 not to exceed the greater of: an amount equal to 50% of the balance in the account at the time of the violation; or $100,000. Note:
Delegated Authority. Even though the penalty imposed under 31 USC § 5321(a)(5) for failing to report these foreign financial interests (commonly called the FBAR penalty) is not a tax penalty, the IRS has been delegated to collect the penalty for the government. Delegation Order 4-35 effective January 15, 2004, authorizes bankruptcy specialists grade 9 and above to prepare and file proofs of claim for FBAR penalties and to take appropriate action to protect the government’s interest in bankruptcy, state and federal receiverships, and other state and federal insolvency actions. Systemic Tracking. FBARs are filed with the Detroit Computing Center (DCC) and information reported on FBARs is entered in a database known as the Currency and Banking Retrieval System (CBRS). FBAR penalties can only be checked by IRS personnel with passwords to CBRS. FBAR cases are not loaded onto AIS or IDRS because FBAR cases are not tax cases. Interagency Agreement. The IRS has entered into an agreement with FMS to prepare proofs of claim in cases when a debtor with an FBAR penalty assessment has filed bankruptcy. When debtors report FBAR penalties as debts in their bankruptcy petition and schedules, clerks of bankruptcy courts send notices to FMS in Birmingham, Alabama. FMS forwards bankruptcy notices to the DCC. DCC Duties. When the DCC receives bankruptcy notices, it inputs the bankruptcy indicator on CBRS. All FBAR penalty cases are processed by and assigned to the Los Angeles Field Insolvency office. DCC provides the following account information to the FBAR Penalty bankruptcy specialist in the Los Angeles Insolvency office: Debtor name Debtor address Debtor SSN Balance(s) due for both the penalty and statutory additions Assessment date CSED CSED. The government has a two-year period in which to file a civil action to recover an FBAR penalty beginning on the later of the date the penalty was assessed or the date any judgment becomes final in any criminal action under 31 USC § 5322 in connection with the same transaction with respect to which the civil penalty was assessed. Currently, IRS has no procedures for soliciting a waiver of this two-year statute of limitations. Filing a bankruptcy petition does not suspend the running of the collection statute expiration date. However, if the FBAR collection statute has not expired upon the date of filing of the bankruptcy petition, 11 USC § 108(c) extends the time to file an FBAR collection suit until the later of: the end of the two year collection period, or 30 days after notice of the termination or expiration of the stay under 11 USC §§ 362, 922, 1201, or 1301, as the case may be, with respect to the claim. Note: Insolvency's Duties. Insolvency specialists or advisors in Territory 14 must : verify the bar date has not expired verify the FBAR CSED has not expired prepare and distribute the proof of claim (Form B10) for FMS Creditor Name. IRS Insolvency prepares manual FBAR proofs of claim listing the creditor as the Financial Management Service at the following address: Caution: Claim Calculations. FBAR claims are always classified as unsecured general and include the FBAR penalty amount and interest. Insolvency may have to coordinate with FMS or the DCC to determine the appropriate interest to report on a claim, because the interest rate on these penalties is subject to change. Also, a late payment penalty may be assessed under Title 31, and collection costs may be assessed. Claim Distribution. The FBAR bankruptcy caseworker files the FBAR proof of claim with the bankruptcy court and must provide copies of the FBAR claim to the DCC, the Insolvency Territory Manager, FMS, the debtor, and debtor's counsel. In addition all FBAR cases must be referred to the local Counsel's office along with a copy of the proof of claim. FBAR Plan Review. Associate Area Counsel is responsible for reviewing bankruptcy plans as to the treatment of the unsecured general claim for the FBAR penalty. If the IRS is a creditor for unpaid federal taxes or statutory additions to taxes under the same docket number as the FBAR penalty, the Field Insolvency specialist or advisor assigned to that case will process the non-FBAR assessments following established procedures for the chapter under which the bankruptcy has been filed. Payments on FBAR Accounts. FBAR payments received from the bankruptcy proceedings must be mailed for processing to FMS at the address given in paragraph (11) above. FBAR Case Monitoring. The DCC will: record payments if the bankruptcy indicator is on the account; process abatements; process full payment of the debt; reverse the bankruptcy indicator; and return the account to regular collection status if appropriate. Dischargeability of the FBAR Penalty. The FBAR penalty is excepted from discharge under 11 USC § 523(a)(7). Counsel should be consulted if questions arise concerning the FBAR penalty and dischargeability. Exhibit 5.9.4-1 (05-13-2008) STEP ACTION Note: |
THOMAS F. DILULLO
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| PREPARATION IS THE KEY TO SUCCESS |
| DISCLAIMER Thomas F. DiLullo presents the materials and information contained in this Web site for informational purposes only and they do not constitute legal advice. All of the facts and circumstances of each case must be thoroughly examined before proper legal advice may be given. The materials are not represented to be complete or up-to-date. Accordingly, you should not act or rely on any information in this web site without seeking the advice of an attorney licensed to practice law in your jurisdiction. The materials contained in this Web site do not create and are not intended to create an attorney-client relationship between you and Thomas F. DiLullo. |
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