Purpose: Internal Revenue Manual (IRM) 5.9.1 is the introductory insolvency IRM for insolvency case processing.

Audience: Insolvency caseworkers and management in Specialty Collection Insolvency (SCI), which consists of Field Insolvency (FI) and the Centralized Insolvency Operations (CIO), are the primary users of this IRM section. Advisors, revenue officers, and other Small Business/Self-Employed (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: The Director of Collection Policy is responsible for issuing policy for the insolvency program.

Program Owner: The program owner is Collection Policy, Insolvency, an organization within the SB/SE division.

Primary Stakeholders: The primary stakeholders are SCI and SB/SE Collection.

Program Goals: The goal of this IRM 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.

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Act of 1898 formed the basis of federal bankruptcy law until 1979, when enactment of the Bankruptcy Code (11 USC) repealed the old law and codified procedures making the bankruptcy process less burdensome for the debtor.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.

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA): On April 20, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (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.

Principle of Bankruptcy: The general underlying principle of bankruptcy is to give a debtor a “fresh start” by providing the debtor an avenue to pay what the debtor can afford while receiving forgiveness for certain debts that cannot be satisfied.

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.)

Debtor: Most bankruptcy proceedings begin when the debtor files a petition in bankruptcy court seeking financial relief from creditors. Individuals, corporations, partnerships, limited liability companies (LLCs), railroads, municipalities, and other forms of government have the right to file bankruptcy. Exhibit 5.9.1-1, Glossary of Common Insolvency Terms, defines "person" as it relates to bankruptcy.

Advantages to Debtors: When negotiations with creditors to pay debts fail, debtors may be faced with immediate garnishment of their 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 people 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:

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 Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights. For additional information about the TBOR, see https://www.irs.gov/taxpayer-bill-of-rights.

Balancing the Interests of the Debtor and the Government: Insolvency must follow established procedures to ensure debtors are afforded protections guaranteed to them under the Bankruptcy Code. Insolvency caseworkers are responsible for processing bankruptcy cases fairly and efficiently. Caseworkers must balance the interests of the debtor with the interests of the government while attempting to collect the proper amount of tax.

Bankruptcy Law: Bankruptcy law is the prevailing authority when a taxpayer files bankruptcy. Bankruptcy laws are separate from tax laws, and coordination is necessary to comply with both. SCI, a part of the Collection function in the SB/SE Operating Division of the IRS, is responsible for administering that coordination.

Insolvency Organization: SCI is divided into field operations (FI), consisting of more than 80 posts of duty geographically distributed throughout the country, and a single campus operation (CIO) in Philadelphia.

Insolvency Telephone Contact: Customers can contact SCI via telephone with questions. Both the CIO and FI functions handle customer contact.

Complex and Non-Complex Issues Worked by FI: Regardless of chapter or dollar amount, some cases must be handled by FI. Cases with the following criteria are required to be worked by FI:

Insolvency Responsibilities: Together, the two Insolvency operations handle all bankruptcy cases and are primarily responsible for the IRS bankruptcy program.

Cessation of Collection Actions: Filing bankruptcy usually gives a debtor immediate relief from all demands for payment and collection enforcement actions. Upon learning of a bankruptcy, IRS employees should generally cease all demands and enforcement actions directed against the bankrupt taxpayer (debtor), and take prompt and appropriate corrective actions unless the court determines the automatic stay is not in effect. Revenue officers in the midst of a seizure when a bankruptcy is filed should work with Insolvency and Counsel before proceeding. Failure to observe an automatic stay may result in the IRS being sued for damages and attorney fees, although punitive damages cannot be awarded.

Coordination with Other Functions: Insolvency is charged with processing bankruptcy cases involving the IRS, as well as coordinating the activities of other functions on all bankruptcy cases. Insolvency caseworkers, leads, and managers must assist other IRS employees when bankruptcy-related case issues arise, and elevate the more complicated and significant issues to Counsel.

Redacted Taxpayer Identification Numbers (TIN): To protect taxpayers' privacy, documents submitted to the court cannot provide the full social security number (SSN) or the full employer identification number (EIN) of the debtor. Only redacted TINs, giving the last four numbers of the SSN or EIN, are allowed.

Avoiding Litigation: In most cases, Insolvency caseworkers should negotiate with debtors or their representatives to arrive at a mutually agreeable solution to avoid unnecessary litigation when disputes arise between a debtor and the IRS. Negotiations should take place before resorting to a referral to Counsel. Caseworkers must exercise expertise and tact during the negotiation process, dealing with debtors according to the provisions of the Bankruptcy Code.

Justification for Counsel Referral: If a case is referred to Counsel without the caseworker negotiating with the debtor or the debtor's representative, justification for doing so must be entered in the AIS history.

Deadlines/Referrals: Insolvency employees must analyze pending litigation issues and meet strict deadlines. When necessary, FI caseworkers prepare referrals to Counsel so that the government can prepare a timely and effective case position. In bankruptcy matters involving Chapter 13 cases, Insolvency must work efficiently to meet the short time frames between petition dates and confirmation hearings.

First Meeting of Creditors: FI caseworkers or revenue officers may attend the first meeting of creditors (341 meeting) to question the debtor. (See IRM 5.9.2.5, First Meeting of Creditors).

Expert Witness: FI caseworkers testify in bankruptcy court as expert witnesses on behalf of the IRS. This duty requires intensive preparation. The employee must understand the issues in dispute and capably provide expert testimony to protect the government's interests.

Other Government Agencies: Frequently, governmental departments and agencies, other than the Department of Treasury, have an interest in a pending bankruptcy proceeding. Their interest may result from:

IRS Cooperation: The IRS has a responsibility to cooperate and assist in collecting debts due the United States which arise from activities of any other department or agency. However, after the debtor files for protection of the bankruptcy court, the collection of those debts may be prohibited by the automatic stay. In these and similar situations, it will sometimes be necessary to deal with other departments or agencies of the government.

Refund Setoffs – Other Agencies: A debtor might not owe federal taxes and be due a federal tax refund. A department or agency might seek to recover the amount owed to them from the tax refund due to the debtor. While such setoffs are prohibited once a bankruptcy is filed because of the automatic stay (except those for domestic support in cases filed on or after October 17, 2005), the other agency may be able to obtain relief from the stay to allow setoff. Before disclosing or acknowledging the existence of a tax refund and making it available for setoff to another government agency (other than for domestic support), disclosure consent must be obtained from the taxpayer. Guidance from Counsel should be obtained whenever the IRS is asked to freeze a debtor's tax refund so it may be setoff against another agency's debt.

Counsel Guidance: When coordination with other government agencies or departments (except Treasury) becomes necessary in a pending or actual bankruptcy proceeding, any problems and/or recommendations should be presented to Counsel. IRM 5.9.4.5.3, Offsets to Other Agencies, and IRM 5.9.4.5.4, Federal Payment Levy Program (FPLP), provide additional information.