Principle of Bankruptcy - The general underlying principle of bankruptcy is to provide a debtor an avenue to pay what the debtor can afford while receiving forgiveness for debt that cannot be satisfied. Bankruptcy law has three primary objectives:

Automatic Stay - Prior to October 17, 2005, when a debtor filed a petition in bankruptcy court, a stay of collection actions went into effect in every case and immediately stopped ongoing and future (during the pendency of the bankruptcy) attempts by creditors to collect pre-petition debts owed by the debtor or otherwise exercise control over property of the estate or the debtor (11 USC § 362). This essential feature of bankruptcy law created what is known as the automatic stay. For most debtors, the automatic stay remains in effect during the pendency of the bankruptcy. But, for debtors who file bankruptcy on or after October 17, 2005 and have had one or more bankruptcy cases dismissed within the preceding twelve-month period, the automatic stay may either terminate within 30 days with respect to the debtor and the debtor's property that is not property of the bankruptcy estate, or not go into effect at all. See IRM 5.9.5.7, Serial Filers, for more information.

Debtor - Most bankruptcy cases begin when the debtor files a petition in bankruptcy court seeking financial relief from creditors. Individuals, corporations, partnerships, LLCs, railroads, municipalities, and other forms of government have the right to file bankruptcy. There are six types of bankruptcies which can be filed, Chapters 7, 9, 11, 12, 13 and 15. Refer to IRM 5.9.2.4, Chapters in Bankruptcy, for definitions of each bankruptcy chapter.

Advantages to Debtors - When negotiations with creditors to pay debts fail, debtors may be faced with immediate garnishment of salaries and repossession of their assets. Business debtors may have their businesses closed through repossession or foreclosure. Bankruptcy is attractive to debtors because it can offer:

Creditor - Creditors include persons and entities who have claims against the debtor, usually for debts incurred before the bankruptcy was filed (pre-petition debts). Because bankruptcy estates may continue to incur debts after the bankruptcy petition date, entities can also hold post-petition administrative expense claims against the bankruptcy estate. In certain circumstances, creditors can force debtors into bankruptcy by involuntary means.

Advantages to Creditors - Bankruptcy offers advantages to creditors, such as the following:

Authority - The U.S. Constitution grants Congress authority to enact federal bankruptcy laws. The Bankruptcy Act of 1898 formed the basis of federal bankruptcy law until 1979, when enactment of the Bankruptcy Code (11 USC) repealed the old law and codified procedures making the bankruptcy process less burdensome for the debtor. The Bankruptcy Reform Act of 1994 (BRA 94) brought about a major amendment to the Bankruptcy Code affecting the government's treatment of debtors, notably granting permission to assess taxes while the debtor is under the protection of the automatic stay. For additional information about federal bankruptcy laws, refer to IRM 5.9.1.2, Federal Bankruptcy Law.

Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) - On April 20, 2005, the BAPCPA was signed into law. Most of the provisions of this act became effective October 17, 2005, although some provisions, such as those dealing with Chapter 12 bankruptcies, were effective upon the date of enactment.

Bankruptcy Code - The Bankruptcy Code provides an orderly method for the debtor's financial rehabilitation (Chapters 11, 12, and 13) or the liquidation and distribution of a debtor's assets (Chapter 7). This federal law is intended to be applied uniformly among all states and possessions.

Jurisdiction - Bankruptcy courts generally have jurisdiction over all matters concerning payment of a debtor's financial obligations under the Bankruptcy Code and administration of the bankruptcy estate. Bankruptcy court jurisdiction includes the authority to determine the amount of tax due by the debtor or estate and what taxes will be discharged, meaning the debtor no longer will be personally liable. The bankruptcy court also has jurisdiction over any matters concerning collection of tax debts at issue in the bankruptcy case or collection from any property of the estate.

Bankruptcy Judges - Bankruptcy judges are appointed by the appellate circuit courts for a term of 14 years, as provided under Article I of the U.S. Constitution.

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

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

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

Periodic program reviews are conducted by FESP to:

The following table lists commonly used acronyms and command codes with their definitions as used throughout this IRM:

The following table lists commonly used terms and associated definitions as referenced throughout this IRM:

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

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

Document 13219, Automated Insolvency System - User Guide.

Knowledge Management Bankruptcy Webpage.

Insolvency National Field/Centralized Site Directory.

Examiners must consider collectibility during the pre-planning phase and throughout the examination. Refer to IRM 4.20, Examination Collectibility. If you decide to survey the return, please advise Insolvency.

In order to better comprehend bankruptcy law and effectively examine bankruptcy cases, familiarity with bankruptcy terminology is essential. See IRM Exhibit 5.9.1-1, Glossary of Common Insolvency Terms, for common bankruptcy definitions and concepts. For commonly used acronyms, refer to IRM Exhibit 5.9.1-2, Acronyms and Abbreviations.

The following table contains related IRMs which cover additional procedures that examiners may use in cases involving bankruptcy and are referenced throughout this IRM:

All cases which meet the referral criteria listed in IRM 5.9.4.15.3, Significant Bankruptcy Case Referrals, should be immediately referred to Associate Area Counsel. This is for the purpose of permitting identification of those cases that may require coordination on a more expedited or more extensive basis. The referral criteria should be applied to all taxable years of the taxpayer that have ended prior to the petition date and any known tax transactions that have occurred in the current year but prior to the petition date. It is not mandatory that every tax year be opened and included in the examination. Normal examination criteria should be used to determine which tax year will be included in the audit.

The following types of cases should be referred to Area Counsel immediately:

Special care must be taken when only part of a consolidated corporate taxpayer files for protection under the reorganization provisions of the Bankruptcy Code. Members of the group are severally liable; therefore, referral should be based on an analysis of the consolidated corporate taxpayer and not just the debtor company.

The identification of particular taxpayers using the referral criteria is not intended to make these cases subject to mandatory examinations. However, Examination should give due consideration to the views of Counsel about whether to survey or audit the taxpayer and should consider the finality of a decision not to survey or audit a taxpayer’s recent tax years before the claim’s bar date.

The employee responsible for the case at the time the bankruptcy proceeding is identified will prepare the referral, and forward it to Associate Area Counsel through the Examination Bankruptcy Coordinator in Technical Services, as soon as one or more of the above criteria are found to be present. The referral should be in writing, such as a memorandum, and labeled "Significant Corporate Bankruptcy Referral."

The Examination Bankruptcy Coordinator in Technical Services will ensure that the referral is forwarded to the Associate Area Counsel, with a copy sent to Insolvency, in order for a timely proof of claim to be filed with the Bankruptcy Court.

Within 3 days, Counsel will provide Examination with a written response as to whether the facts and circumstances warrant expedited examination procedures.

If Counsel confirms that a case warrants expedited examination procedures, a meeting will be held with all Service personnel involved in the case to review Counsel’s written response, discuss the case, and establish an action plan.

If in the course of the examination, issues are addressed which have a tax effect on subsequent year returns, copies of Form 906, Closing Agreement on Final Determination Covering Specific Matters, or other agreements and relevant workpapers should be sent by the examiner or Appeals Officer to the Area PSP Manager before the case is closed. This information should be processed using Form 5346, Examination Information Report. Any future audit issues identified by Counsel should be similarly processed through the Area PSP Manager, and followed-up by an appropriate survey and/or audit of the former debtor’s future tax year returns when filed.

The Examination Bankruptcy Coordinator in Technical Services will review DOJ Bankruptcy referrals.

If the Examination Bankruptcy Coordinator determines an examination is not warranted, they will advise DOJ of their decision.

If the Examination Bankruptcy Coordinator determines an examination may be warranted, they will make a referral to PSP. The referral will be made using Form 5346, Examination Information Report, and notate the bar date or any other response date needed at the top of the form.

Technical Services will advise DOJ of PSP decision.

Some returns submitted to Insolvency by debtors are questionable. For instance, they may not reflect the income showing on the debtor's schedules, the information presented in his/her statement of financial affairs, or data on master file sources such as IRPTR.

Insolvency needs to have these questionable returns reviewed by Examination so an accurate proof of claim can be filed with the court in a timely manner.

PSP will establish the return(s) on AIMS.

PSP will provide Insolvency with an estimated deficiency within 15 days of the bar date.

If the referral is a result of internally available source documentation, such as IRP reports, PSP will forward the case to Technical Services.

PSP will assign the case to an examination group if the referral involves issues that require further development.

PSP may determine at any time during the review process that the return should be surveyed before assignment.

A Technical Services reviewer will determine if there is adequate documentation to issue a SNOD.

If there is not adequate documentation to support issuance of a SNOD, the reviewer will return the case to PSP advising that the case needs further development.

The reviewer will issue a SNOD and provide a copy to Insolvency if there is adequate documentation.

A 30-day letter does not need to be issued prior to the issuance of a SNOD with regard to the tax return situations addressed above. Luhring v. Glotzbach, 304 F.2d 560, 565 (4th Cir. 1962) and Rosenberg v. Commissioner, 450 F.2d 529, 533 (10th Cir. 1971).

It is imperative that Insolvency be provided deficiency or estimated deficiency amounts for returns under examination at least 30 days prior to the bar date. All communication should stipulate the bar date because of its importance.

When a return is warehoused at a campus waiting for classification or assignment, Area PSP will instruct the campus holding the return to forward the return immediately to the Area PSP.

If a return is in a status below 10, Area PSP, Campus Exam, or Centralized Files & Scheduling (whomever is assigned the return) will take one of the following actions:

If a return is assigned to an exam group, the group must notify Insolvency of the disposition of the case. Your Examination Bankruptcy Coordinator in Technical Services will provide the name of the Insolvency Bankruptcy Specialist.

If a SNOD is issued to a bankrupt taxpayer, Technical Services will provide Insolvency with a copy of the SNOD.

Most unagreed cases should be forwarded to Technical Services for closure to Appeals or issuance of a SNOD, depending on the response to the preliminary letter issued in accordance with IRM 4.27.1.8.1.2, Unagreed Closures with Automatic Stay. The following types of cases may be forwarded for assessment and/or closure without review after Insolvency has been notified of the final audit results:

Taxpayers, who disagree with the deficiency determination, including penalties and interest, may file a written protest and request an appeals conference.

Rev. Proc. 2006-24, 2006-22 I.R.B. 943 (as modified by Announcement 2011-77) provides the procedures a trustee or debtor-in-possession representing a bankruptcy estate must follow to request a prompt determination by the Service of any unpaid tax liability of the estate.

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

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

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

A return cannot be surveyed after PSP issues Letter 5531, Prompt Determination of Tax Liability. If a determination is made not to examine the return, the examiner must follow the procedures in IRM 4.10.8.3, No Change and No Liability Cases, to no change the return.

The trustee or debtor-in-possession must be notified of any tax due within 180 days of receipt of the request for prompt determination. As soon as the examination report is prepared, the examiner should forward a copy of the report to the appropriate Field Insolvency Office so an Administrative Claim can be filed and an immediate assessment of any resulting tax deficiency may be considered pursuant to IRC 6871(b), Immediate assessment with respect to certain title 11 cases.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This notice also provides guidance for: