Purpose. This IRM section contains guidance on various topics Insolvency caseworkers may encounter during the course of a bankruptcy case.

Audience. Insolvency caseworkers and management in Specialty Collection Insolvency (SCI), Field Insolvency (FI) and Centralized Insolvency Operation (CIO) are the primary users of this IRM section. Advisors, Revenue Officers, and other SB/SE employees may also refer to these procedures. Employees in functions other than SB/SE may refer to this section when working with a taxpayer that has filed an insolvency proceeding.

Policy Owner. Director, Collection Policy, SB/SE, is the policy owner of this IRM.

Program Owner. The program owner is Collection Policy, Insolvency an organization within Small Business Self Employed (SBSE) division.

Primary Stakeholders. The primary stakeholders are Specialty Collection Insolvency, SB/SE Collection, Exam, Criminal Investigation, and Counsel.

Program Goals. The goal is to provide fundamental knowledge and procedural guidance for working insolvency cases. Following the guidance in this IRM will ensure cases are worked in accordance with bankruptcy laws and regulations.

The Bankruptcy Estate. The filing of the bankruptcy petition creates the bankruptcy estate. The estate consists of all of the debtor’s interests in any property at the time the case is filed (11 USC 541(a)(1)). It also encompasses the interest of the debtor and the non-debtor spouse in certain community property states. (See 11 USC 541(a)(2) and IRM 5.9.3.5.1.1, Community Property; IRM 5.9.10.8.1, Property of the Estate After Confirmation; IRM 5.9.6.14, Bankruptcy Estate Income Taxes – Separate Taxable Entity; and IRM 5.9.8.14, Internal Revenue Code 1398 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, Property of the Estate After Confirmation, gives additional information about the post-confirmation estate in a Chapter 13 bankruptcy.

Individual Chapter 11. As with Chapter 12 and 13 cases, property of the estate for individual Chapter 11 cases includes wages and other property acquired post-petition but before the case is closed or converted (11 USC 1115). Guidance on how to address the tax consequences is discussed in further detail in:

Counsel Guidance. Complex issues determine 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 5.9.17.5, Exempt, Abandoned or Excluded Property (EAEP), provides a full discussion of these property issues as they affect possible post-petition collection.

Automatic Statute Computations. Master file computes appropriate statute extensions for assessment and collection in most instances when a Transaction Code (TC) 521 posts and reverses the bankruptcy freeze code.

Assessment Statute Expiration Date (ASED) Suspension Time Frames. 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 Time Frames. The running of the statutory period for collection (CSED) is suspended for the period collection is prohibited by the reason of the bankruptcy case. Collection is so prohibited when:

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 un-reversed 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).

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 5.9.17.7, Joint Account and Non-Debtor Spouse.) When considering collection from a non-debtor spouse, MFT 31 mirroring prior to case closure may be appropriate; for example, if a CSED is imminent or when both spouses have filed individual bankruptcy petitions but joint income tax returns. IRM 5.9.17.22.4, Mirroring Process, provides procedures for the MFT 31 mirroring process. Protection of the CSED on a non-debtor spouse is unnecessary if prior to the CSED expiration:

Additional Considerations. The automatic stay will impact the ASED and CSED in various ways in different bankruptcy chapters, especially in Chapter 11 cases, where CSED expiration rules differ for individuals and non-individuals. See IRM 5.9.2.10(2), The Effect of Bankruptcy on Collection, Impact on Collection, IRM 5.9.3.5, Automatic Stay, IRM 5.9.5.6, Bankruptcy Freeze Code (TC 520), IRM 5.9.5.7, Serial Filers, and IRM 5.9.17.19, ASED/CSED Considerations.

Other Investigation (OI) Potential. If a case is assigned to an RO at the time that a bankruptcy petition is filed, 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, as well as lien priorities).

Examination Contacts to SCI. If a debtor is in bankruptcy and an examination is open on a pre-petition period, SCI would contact the Examination unit to determine if an additional assessment will be proposed. Exam contacts can be found on AIMS Assignee Code (AAC) Contact Listing when there is a TC 420 or AUR Coordinators when there is a TC 922. When an Examination employee discovers a taxpayer is in bankruptcy, the Examination employee will:

Exam's Suspense File. Examination maintains a suspense 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). The Examination Bankruptcy Coordinator will coordinate with SCI for any questions/issues that arise.

Insolvency Referrals to Exam. When SCI receives tax returns from debtors, and evidence exists that information provided by the debtor understates income or overstates deductions meeting the dollar criterion in IRM 4.27.1.7.1.1(2), a referral can be made to Planning and Special Programs (PSP). Procedures for preparing and forwarding referrals to Exam are provided in IRM 4.27.1.7.1.1, Returns Eligible for Review.

Abusive Tax Avoidance Transactions (ATAT). During the initial case review process, SCI caseworkers must determine if a TC 420 (-L freeze) is present with ATAT project codes. CIO cases will be reassigned to the designated FI caseworker if an ATAT code is identified. The FI caseworker must review the following to identify inconsistencies:

Employee Plans. SCI will advise the Employee Plan (EP) function of the Tax Exempt/ Government Entities (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 5.9.8.4.2(11), Notice to TEGE.)

SCI Follow–Up/Monitoring. Because confirmations take place quickly in some bankruptcies (notably in Chapter 13), monitoring methods must be established by FI for cases involving examination issues. (See Exhibit 5.9.4-1, Inputting Follow-Up Dates.) If a proof of claim needs to be filed, and research indicates one or more tax periods are being examined, and the assigned Examination function has not contacted the SCI group, SCI should contact that Examination unit to gather current information on the status of the audit.

Reminders - Assessment of Taxes. The IRS may, notwithstanding the automatic stay,:

Unagreed Deficiency Assessments. Post-petition assessments of unagreed deficiencies on pre-petition periods for which the statutory response time to file a Tax Court petition has not expired are violations of IRC 6213. Such assessments 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 by the bankruptcy. They must be reversed within two days of identification.

Documentation. SCI must accurately document all contacts with Examination functions in the AIS history at the time of contact. IRM 5.9.5.4, Automated Insolvency System (AIS) Documentation, provides guidance on required AIS documentation.

Authority of Right to Offset. The IRS has a right to offset credits owed to a taxpayer against debts the taxpayer owes to the IRS. The IRS has both a common law right to offset and a statutory right to offset that is codified at IRC 6402(a) and IRC 6411(b). The Bankruptcy Code preserves the IRS's non-bankruptcy rights to setoff in 11 USC 553.

Mutuality of Debts. Although 11 USC 553 expressly preserves the right to setoff only when both the credit and the debt occur pre-petition, the Bankruptcy Code does not prohibit the IRS's non-bankruptcy right to setoff. Thus, setoff may also be available when the credit or the debt occurs post-petition as long as the debts are mutual; meaning when the debt and the credit both belong to the taxpayer, regardless of tax type. (See IRM 5.9.4.5.2, Post-Petition Payments and Credits.)

BAPCPA Provision. BAPCPA allows pre-petition income tax refunds to be offset against pre-petition 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 pre-petition income tax refund until the validity of the liability is resolved.

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 SCI. (See IRM 5.9.13.4, Case Reviews.)

Refunds Not Offset but Retained by the IRS. The IRS may freeze refunds to protect its right of setoff. These refunds may be frozen whether they arise pre-petition or post-petition. IRS policy emphasizes making prompt decisions on how to treat refunds. Counsel advice may be needed when a refund will be frozen for a substantial length of time.

Time Frame. When SCI discovers refunds are being frozen, the SCI caseworker will begin the refund credit resolution process within 20 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 IRS to offset a credit generated during the pendency of the bankruptcy.

Refund Determination. SCI must make a refund determination within 20 calendar days of identification of the credit, to:

Guidelines for Refund Determination. SBSE Counsel has issued tolerance criteria for referrals of issues to Associate Area Counsel offices. IRM 5.9.4.15.4 #, Referral Tolerances. 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 5.9.4.5.1 (3), Table - Credits, Refunds, Offsets.

Chapter 13. After a Chapter 13 confirmation, CIO must make a prompt decision either to retain a refund, forward it to the debtor or the trustee, or if the refund arose post-petition, offset it against other post-petition liabilities.

Contacts to SCI. If an IRS employee (outside of SCI), 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 CIO for resolution. If the inquiry is received by phone, after disclosure verification, the caller can be directed to call CIO toll free at 800-973-0424. (See the "exception" below.) SCI 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, CIO will direct the initiating employee or the debtor to a FI caseworker to handle the issue.

Refund Considerations/Problems: SCI must consider issues surrounding potential refunds for accounts under bankruptcy protections such as the following:

Preparation of Manual Refunds. The Manual Refund screen on AIS shows IDRS overpayment information on cases in AIS and has options to generate the Form 5792, Request for IDRS Generated Refund, to be completed by the SCI caseworker. Form 3210, Document Transmittal, can also be generated from AIS to transmit Forms 5792 for processing. IRM 5.9.16.3, Manual Refunds, details steps to be taken by both FI and CIO in processing refund requests.

Motion to Sell. This subsection contains the procedures to follow when motions are received for the sale of property of the estate. Also see IRM 5.9.6.17, Subordination of Tax Liens, and IRM 5.9.6.18, Sale of Property by the Trustee.

Definition. 11 USC 547 allows a bankruptcy trustee to avoid and recover certain pre-petition transfers to creditors that benefit some creditors at the expense of other creditors.

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:

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. Pre-petition 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.

11 USC 505(a). As a general rule, 11 USC 505(a) permits the bankruptcy court to determine the amount or the legality of any tax, addition to tax, or tax penalty. This applies to tax liabilities of the debtor or of the estate whether or not previously assessed, paid, or contested.

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)).

Bankruptcy Court Authority. The bankruptcy court has the authority to determine the amount of any administrative taxes due upon the completion of the IRS examination per 11 USC 505(b).

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)).

Receiving Prompt Determination Requests. A trustee can submit a prompt determination request by:

Prompt Determination Review. CIO will review prompt determination requests for completeness, as specified in IRM 5.9.4.9.1 (3), Elements of a Request, below. Incomplete requests will be returned to the trustee for perfection. Complete requests will be sent to the appropriate function through a secured shared drive. Form 3210 will be attached to the file. Caseworkers should consult the Prompt Determination and Refund Processing chart in Exhibit 5.9.4-2, for proper routing procedures. If no signed Form 3210 acknowledgment is returned, CIO will contact the recipient to verify receipt.

Critical Time Frames. The government has 60 calendar days from the date the request is received in SCI to notify the trustee if 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.

Revenue Procedure 2010-27. The trustee or debtor-in-possession representing the bankruptcy estate of a debtor may request a prompt refund determination from the IRS under 11 USC 505(a). Rev. Proc. 2010-27 was issued on July 15, 2010 to update the procedures for requesting the tax refund. The revenue procedure clarifies that the procedure does not apply to applications for a tentative carryback or refund adjustment under IRC 6411. The bankruptcy court may not determine any right of the bankruptcy estate to a tax refund before the earlier of:

Prompt Refund Requests. A trustee or debtor-in-possession may request a tax refund from the IRS if the credit or refund of an overpayment was not claimed on a return previously filed by the debtor. The trustee may do so by filing the appropriate amended return or form. If:

Prompt Refund Review. CIO will review prompt refund requests for completeness, as specified in IRM 5.9.4.10.1 below. Incomplete requests will be returned to the requestor for perfection. Complete requests will be forwarded to the appropriate function via Form 3210. Caseworkers should consult the Prompt Determination and Refund Processing chart in Exhibit 5.9.4-2 for proper routing procedures. If no signed Form 3210 acknowledgment is returned, SCI will contact the recipient to verify receipt.

Critical Time Frames. The IRS will complete the examination and notify the trustee of the decision rendered within 120 days from the date of the filing of the appropriate amended return, Form 843, or original return filed by the trustee on an expedited basis.

Receiving Prompt Refund Requests. A trustee can submit a prompt determination request by:

Introduction. The Bankruptcy Code provides a means for balancing the interests of the taxpayer and the IRS, as does the administrative offer in compromise (OIC). An administrative OIC is one submitted in accordance with the guidelines and procedures set forth in Rev. Proc. 2003-71 and IRM 5.8, Offer in Compromise. Administrative and legal problems would be created if a tax liability were simultaneously the subject of a court-supervised bankruptcy case and the OIC process.

IRS Policy. When a taxpayer has filed for bankruptcy protection, IRS's policy is not to consider an OIC from a taxpayer in bankruptcy. Instead SCI considers payment proposals, usually in the form of plans filed by the debtor in the bankruptcy case, under guidelines set forth in IRM 5.9.8.17.1, The Plan of Reorganization, IRM 5.9.9.5, Chapter 12 Plans, and IRM 5.9.10.5, The Chapter 13 Plan, depending upon the type of bankruptcy case filed.

Rule. The rule to follow on OIC by the IRS:

Specific Bankruptcy Chapters. Listed below is the IRS's policy for specific bankruptcy chapters which clarify the IRS's position on the processing and consideration of an OIC in bankruptcy-related situations.

Consideration of an OIC. The IRS's decision to consider an OIC from debtors who have taken advantage of the relief offered under the Bankruptcy Code is limited to the situations described above. The IRS’ decision to accept an OIC falls within the discretion of the IRS.

Pre-Petition OIC Payments. When a debtor has submitted an OIC with a payment pre-petition, and they file bankruptcy while the OIC is pending, the IRS may generally retain the payment. A payment made within 90 days before the filing of a bankruptcy may qualify as a preferential transfer and be avoidable under 11 USC 547(b). However, the trustee has the burden of proving this payment is a preference. The IRS may retain this OIC payment until the trustee persuades the IRS 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.

Post-Petition OIC Payments. When a debtor submits an OIC with a payment post-petition, the payment should be treated in the following manner according to the bankruptcy chapter under which the debtor has filed for bankruptcy protection:

Bankruptcy Fraud Program. The IRS created the Bankruptcy Fraud Program to pursue alleged bankruptcy fraud (and related tax offenses) commonly encountered by Collection employees. Both Field Insolvency and Centralized Insolvency employees are charged with identifying cases of potential bankruptcy fraud, but FI is responsible for preparing and submitting evidence for fraud referrals.

Detection of Potential Bankruptcy Fraud. During the pendency of a bankruptcy case, SCI 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 SCI. If a FI caseworker submits a fraud referral to Criminal Investigation (CI), third party contact provisions under IRC 7602(c) apply until the actual referral is made to CI.

Development of Referral. The information SCI gathers may indicate offenses over which the IRS has jurisdiction under Title 26 of the Internal Revenue Code, for example, filing false tax returns, and Title 18 tax-related violations. Also, SCI caseworkers may discover "pure" Title 18 violations, over which the IRS does not have responsibility.

Bankruptcy Fraud Information. Information relating to bankruptcy fraud procedures is found in Document 9762, Desk Guide for Bankruptcy Tax Crime Referrals.

CI Controls. In the course of a bankruptcy proceeding, a debtor may contact SCI requesting assistance from the IRS (for example, asking about a delayed income tax refund). SCI, through case research or during a cursory review, may identify Criminal Investigation (CI) controls on the debtor's accounts (e.g., TC 914 or TC 916).

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 SCI caseworker must contact Counsel and CI immediately to determine the proper response. SCI must take no actions that might jeopardize an ongoing criminal investigation.

Prompt CI Contact. SCI 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.

Counsel Advice. If SCI 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 SCI and CI, SCI should seek Counsel's advice. (See IRM 5.9.13.16, Criminal Investigation Involvement.)

Provisions of IRC 6658.IRC 6658 provides no addition to tax shall be made for failure to make timely payment of tax during the pendency of a bankruptcy case, except for taxes which arise from the failure to pay or deposit a tax withheld or collected from others and required to be paid over to the United States (for example, trust fund taxes).

Penalties 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).

Court Appearances. Some cases require IRS representation in bankruptcy court, either to respond to actions or to initiate actions. FI is responsible for all referrals, since any case requiring action by Counsel or the U.S. Attorney is considered a complex issue. (See IRM 5.9.1.4(5), Complex Issues.) CIO will transfer cases to the appropriate FI office when a referral is needed. All such cases will be referred to one of the offices as listed in IRM 5.9.4.15.1, Direct Referral, below.

A Quality Referral. A quality referral by SCI contains the specifics of why representation in court is necessary. All helpful information must be provided to the IRS's legal representative. Such information and data must be attached to the referral to ensure the government's interests are protected. If complete data is not available at the time of the initial referral, the remainder should be sent as soon as possible for association with the referral.

Referral Form. To standardize referrals, Collection Policy, SBSE Division Counsel, and SCI have created a consolidated referral form to be used by Field Insolvency for referrals to SBSE Counsel and to the U.S. Attorney’s Office (USAO). The consolidated referral form has drop down menus for the caseworker to make a selection as to the reason for the referral. The caseworker can use the Additional remarks or other issues section to provide necessary information specific to a particular referral and provide information regarding NFTLs filed, unfiled returns, equity analysis, and other relevant information. The following form can be accessed in the Insolvency Knowledge Management site under Field Insolvency.Technical Resources Field Insolvency - Referrals – Bankruptcy Referral Form (irsnet.gov)

AIS Referral Screen. All referrals 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 Area Counsel or the USAO by the referral follow-up date, the assigned caseworker must contact Area Counsel or the USAO to learn the progress of the referral. If the issue surrounding the referral has not been resolved, the caseworker must ask Area Counsel or the USAO for a date by when a response can be expected. If a response is not received by the date specified, the caseworker should elevate the referral to the group manager to contact Area Counsel or the USAO.

Reassignment to CIO. FI must resolve all referral and follow-up actions prior to case reassignment to Centralized Insolvency. If there is an open referral or any type of litigation pending, the case may not be closed or transferred.

History Documentation. Caseworkers must document all actions taken regarding the referral in the AIS history. Employees should include the rationale behind any decisions made not to proceed with the filing of a motion when a referral was previously initiated.

Debtor Compliance.IRM 5.9.13.18.2, Addressing Unfiled Returns, provides in-depth procedures for securing and processing delinquent tax returns from debtors.

Valid Tax Return. For what constitutes a valid tax return in bankruptcy proceedings, see IRM 5.9.2.10.1.2, A Valid Tax Return, and IRM 5.9.17.8.1, Determining Dischargeability of Late Filed Returns in Which a SFR was Prepared.

Individuals. No bankruptcy code provision specifically prescribes a requirement for individuals to file post-petition tax returns . However, 11 USC 521(j)(1) provides that if a debtor in a Chapter 7, 11, 12 or 13 bankruptcy, fails to file tax returns that become due after the commencement of the case, the IRS may request the court to convert or dismiss the case.

Chapter 11. Debtors in Chapter 11 bankruptcies 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 a FI caseworker referring the case to the USAO to request the filing of a motion to convert or dismiss bankruptcies.

Requests for Innocent Spouse Relief and Bankruptcy. Innocent spouse requests are formally known as requests for "Relief from Joint and Several Liability on Joint Return" under IRC 6015. For the remainder of this IRM, the more familiar term "innocent spouse request" will be used. An innocent spouse request for relief may be pending when a bankruptcy petition is filed or may be raised after a bankruptcy petition has been filed. Instances arise when the joint Master File Tax (MFT) 30 modules appear with a bankruptcy freeze, and one spouse files an innocent spouse request. In some cases, especially where the spouse requesting innocent spouse relief is the debtor, a determination must be made whether the requesting spouse is entitled to relief under IRC 6015 during the pendency of the bankruptcy case. If the debtor is granted relief, the bankruptcy discharge would not prohibit the debtor from receiving any related overpayment/refund they would otherwise be entitled to under applicable law.

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.

Offsets. Consistent with the IRS’s policy not to take collection action when an innocent spouse claim is pending, the IRS generally will not make offsets while an innocent spouse claim is pending. (See IRM 25.15.3.1.4(1), Terms, Prohibited Collection Actions.) 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 IRS will claim secured status on its proof of claim based upon any offset rights it may have.

Mirroring of Joint MFT 30 modules. If the IRS 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. ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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:

Proof of Claim Preparation. A proof of claim (POC) 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 IRS’s proof of claim must be amended or withdrawn, as appropriate if a POC has been filed. SCI 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 SCI will reverse the bankruptcy freeze codes when applicable and take the following actions:

Monitoring. Coordination between functions is essential. CCISO should contact SCI when its actions have been completed.

Complete Documentation. CIO caseworkers 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. Master file is able to mirror MFT 30 to MFT 31s for both spouses. 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.

Definition. Under the Affordable Care Act (ACA), the Federal government, state governments, insurers, employers and individuals are given shared responsibility to reform and improve the availability, quality, and affordability of health insurance coverage in the United States.

Status 60.IRC 6159(a) allows the IRS to enter into installment agreements to facilitate the payment of a tax. When the IRS accepts an installment agreement from a taxpayer, IDRS status code 60 is entered on IDRS to reflect the agreement's validity.

Form 900, Tax Collection Waiver. Pursuant to IRC 6502(a), as amended by the IRS Restructuring and Reform Act of 1998 (RRA 98), the IRS can no longer obtain waivers of the statute of limitations (Form 900) for collection except in two situations: when in conjunction with a valid installment agreement, or a release of 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(e).) An installment agreement is considered to be suspended by a bankruptcy filing, not terminated.

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:

Payments on a Pre-Existing Installment Agreement. Individual debtors sometimes make voluntary post-petition payments (either by check or automatic debits from bank accounts or wages) for liabilities pursuant to an installment agreement that was entered into before the bankruptcy.

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 meet all criteria for reinstatement of the installment agreement (See IRM 5.14.11.5, Considerations after Default or Termination, Including Reinstatement.) Most types of installment agreements can be reinstated without paying a reinstatement fee. SCI 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, SCI 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 payment agreement (direct debit, payroll deduction, etc.), the periods included in the agreement, the date of monthly payment, and the monthly payment amount. Step-by-step instructions for SCI are found in Exhibit 5.9.17-2, Regular Installment Agreement Reinstatements; Exhibit 5.9.17-3, Reinstating Direct Debit or Payroll Deduction Agreements as a Regular Installment Agreement; and Exhibit 5.9.17-4, Procedures for Reinstating an Installment Agreement (IA) with an Open TDI (Del Ret).

SRP Liabilities and Reinstatement. Normally, when a taxpayer has incurred an additional liability that was not part of the original IA, the IA cannot be reinstated. However, an MFT 35 SRP (or its mirror) is not considered an additional liability for the purposes of IA reinstatements. Therefore, if a stand-alone SRP module is the only new liability for a taxpayer who is otherwise entitled to an IA reinstatement, the installment agreement should be reinstated. See IRM 5.9.17.24, Addressing Prior Installment Agreements When Closing a Case, for more information.

ESRP Liabilities and Reinstatement. When a taxpayer has incurred an additional liability that was not part of the original IA, the IA cannot be reinstated. An ESRP liability is considered an additional liability for the purposes of IA reinstatements. Therefore, if a debtor incurs an additional ESRP liability, the IA should not be reinstated. For more information, see IRM 5.9.17.24, Addressing Prior Installment Agreements When Closing a Case.

Protection of the Taxpayer's Rights. The IRS 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. Documentation must include the type of agreement (direct debit, payroll deduction, etc.), the periods included in the agreement, the date of monthly payment, and the monthly payment amount. AIS histories may become a part of the bankruptcy court litigation process, so it is important that they are thorough. IRM 5.9.5.4, AIS Documentation, provides guidance on required AIS documentation.

Reporting Requirement. Each U.S. person who has a financial interest in, or signature or other authority over, one or more foreign financial accounts that has an aggregate value greater than $10,000 at any time during a calendar year is required to report that financial interest in, or authority over, the foreign account on Schedule B of Form 1040, as well as on FinCEN Report 114, Report of Foreign Bank and Financial Accounts, on or before June 30 of the succeeding year (April 15th for calendar year 2016 and subsequent years). 31 USC 5314; 31 CFR 1010.350; Surface Transportation and Veterans Health Care Choice Improvement Act of 2014, Public Law 114-41. Each person who is required to report an interest in foreign financial accounts must also maintain adequate records of any accounts. Failure to maintain adequate records is an additional violation of 31 USC 5314.

Penalty for Violations. 31 USC 5321(a)(5)(A) authorizes a civil monetary penalty for any person who violates (or causes any violation of) 31 USC 5314.

Penalty Amount for Non- Willful Violations. Under 31 USC 5321(a)(5)(B) , for each non-willful violation, the penalty cannot exceed $10,000 and is waived for reasonable cause. For violations occurring after November 2, 2015, the $10,000 penalty limit is adjusted for inflation as set out in the penalty adjustment table in 31 CFR 1010.821.

Penalty Amount for Willful Violations. Under 31 USC 5321(a)(5)(C), for each willful violation, the penalty cannot exceed the greater of:

Delegated Authority. Even though the penalty imposed under 31 USC 5321(a)(5) for failing to report these foreign financial interests or violating the record keeping provisions (commonly called the FBAR penalty) is not a tax penalty, the IRS has been delegated authority to examine, assess, and collect the penalty for the government. Delegation Order 25-13 (Rev. 1) signed March 8, 2022, 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 electronically with the Financial Crimes Enforcement Network (FinCEN), and information reported on FBARs is entered into a database known as the FinCEN Query System (FCQ). FBAR penalties are maintained on a database in Currency Transaction Report (CTR) Operations and can only be checked by IRS personnel in Detroit. FBAR cases are not loaded onto AIS or IDRS because FBAR cases are not tax cases.

Notification. T Bankruptcy court clerks usually notify BFS in Birmingham, Alabama, when debtors include FBAR penalties as debts in their bankruptcy petition and schedules. . BFS then forwards these bankruptcy notices to CTR Operations.

CTR Operations Duties. When CTR Operations receives bankruptcy notices, it inputs the bankruptcy indicator on the FBAR penalty database. All FBAR bankruptcy penalty cases are processed by and assigned to the Dallas (Territory 3) Field Insolvency office. CTR Operations provides the following account information to the FBAR Penalty bankruptcy caseworker in the Dallas Insolvency office:

CASED. 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, the 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 CASED. However, if the CASED 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:

SCI's Duties. SCI caseworkers must :

Creditor Name. SCI prepares manual FBAR proofs of claim listing the IRS as the creditor.

Claim Calculations. FBAR claims are always classified as unsecured general and include the FBAR penalty amount and interest. SCI may have to coordinate with BFS or CTR Operations 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 FI caseworker files the FBAR proof of claim with the bankruptcy court and must provide copies of the FBAR claim to CTR Operations, the SCI Territory Manager, BFS, the debtor, and debtor's counsel. In addition, all FBAR cases must be referred to local Counsel along with a copy of the proof of claim.

FBAR Plan Review. 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 assigned FI caseworker 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 BFS at:

FBAR Case Monitoring. CTR Operations will:

Dischargeability of the FBAR Penalty. The FBAR penalty is excepted from discharge in individual Chapter 7 and 11 cases under 11 USC 523(a)(7). Counsel should be consulted if questions arise concerning the FBAR penalty and dischargeability.

For additional information on FBARs, see IRM 5.21.6, Foreign Financial Account Report, and IRM 4.26.17.5.4, Bankruptcy Procedures in FBAR Cases.

Background. When a party is convicted of a criminal tax violation or tax-related offense, the court may order them to pay restitution. This requirement will be contained in a document signed by the judge, called a Judgment and Commitment (J&C) Order. In 2010, Congress amended IRC 6201 to provide that the IRS shall assess and collect tax-related restitution in the same manner as if such amount were tax. This change in IRC 6201 applies to restitution in all J&C Orders entered after August 16, 2010.

Individual Assessments. Restitution assessments against individuals will be made on MFT 31 and can be identified by TC 971 AC 102. Restitution ordered in the case of an individual will be assessed with one of the following:

Business Assessments. Restitution assessments against business entities will be made on MFT 02, 06, 05, etc. TC 971 with action codes 180 through 189 will reflect the type of tax and tax periods for which the restitution is ordered.

Mirror Assessments. Restitution assessments will be a mirror assessment of (but not necessarily identical to) the tax liability assessed pursuant to a civil exam, creating two separate assessments. Although the restitution-based assessment and civil tax liability assessment are distinct, the IRS generally may not collect both in full for the same period because it would be double-collection. In these cases, any payments made to satisfy the restitution-based assessment must also be applied to the civil tax liability for the same tax periods.

SCI Actions. When a Revenue Officer (RO) or Advisory learns that a taxpayer against whom a restitution assessment has been made has filed bankruptcy, the RO or assigned Advisor will contact CIO and inform them that the bankruptcy involves a restitution assessment. The CIO caseworker must then input the “CRIMREST” case classification on AIS, and note the AIS history with any information provided by the RO or Advisor. The case should then be transferred to FI. These types of cases cannot be worked by CIO as they are deemed complex issues.

General Information. Section 965, as amended by the Tax Cuts and Jobs Act (TCJA) of 2017, requires certain taxpayers to pay a transition tax on the untaxed earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. A Section 965 liability is a one-time tax that could have been incurred in 2017 or 2018. A Section 965 liability is an increase in the taxpayer’s income tax for the year in which it is required to be included on the taxpayer income tax return (the “inclusion year”). Any liability resulting from Section 965 is therefore an income tax and should be treated as such in bankruptcy. Further, a section 965 liability arises when the rest of the income tax liability arises (at the end of the income tax year), because that is when all the events that give rise to the income tax have occurred. The fact that the taxpayer may elect to defer payment does not change when the tax claim arises for bankruptcy purposes because bankruptcy claims include amounts that may not be due at the time the bankruptcy case was filed. The caseworker should therefore include on their proof of claim the entire amount of an income tax for any tax year that ended before the petition date, whether the tax includes a Section 965 liability, and whether or not any payment has been deferred under Section 965. See IRM 21.1.1.3.3.2, Section 965 Transition Tax, and IRM 21.6.4.4.21, IRC 965 - Transition Tax on Untaxed Foreign Earnings, for more information.

Eligibility. Those potentially subject to the transition tax are:

Section 965(h) Election. The taxpayer may elect under IRC 965(h) to pay the transition tax liability in installments over an eight-year period as follows:

Section 965(i) Election. A taxpayer who is a shareholder in an S corporation that is a United States shareholder of a deferred foreign income corporation may elect under IRC 965(i) to defer its section 965(i) net tax liability until a triggering event occurs. No assessment is made until the triggering event. Once a triggering event occurs, with certain exceptions, the taxpayer may still elect to pay the transition tax liability in installments over an eight-year period as described above in paragraph (3).

References. See guidance below for more information on Section 965 transition tax:

Disaster Areas. When the president declares a federal disaster or emergency, taxpayers located in the affected area are eligible for disaster tax relief. See IRM 25.16.1, Disaster Assistance and Emergency Relief, Program Guidelines. There are two types of disaster freeze codes, -O freeze and the -S freeze. Both freezes are established systemically for a specific period and for location(s) identified by postal zip code(s).

Allowed Actions. In bankruptcy cases, caseworkers can continue to take the necessary steps regarding court-imposed deadlines such as:

Suspended Actions. For discretionary activities listed below, the IRS will suspend actions through the disaster expiration date, absent exigent circumstances which require managerial approval, on: