Internal Revenue Manual (IRM) 5.9, Bankruptcy and Other Insolvencies, contains the IRS’s position, procedures, information, instructions, guidance, and references concerning bankruptcy cases, stockbroker insolvencies, receiverships, assignments for the benefit of creditors, corporate dissolutions, and bulk sales.

This IRM specifically addresses the IRS’s position, procedures, information, instructions, guidance, and references on filing proofs of claim.

The Insolvency program operates within the guidelines of the Bankruptcy Code (11 USC) and the Federal Rules of Bankruptcy Procedure.

The United States Code (USC) authorities referenced in this IRM are:

The Internal Revenue Code (IRC) section authorities referenced in this IRM:

The Director, Specialty Collection Insolvency is responsible for program oversight.

Territory and Frontline managers are responsible for ensuring reviews are completed as required per IRM 1.4.51.17.2, Operational Review,IRM 1.4.51.16.2, EQ Consistency Reviews, and IRM 1.4.51.5.2, Reviews.

Employees are responsible for following the provided guidance to process cases.

Program Reports. Reports housed on the Business Objects system are used to support the insolvency program. The required AIS reports are described in IRM 5.9.12, Insolvency Automated Processes, IRM 5.9.16, Insolvency Case Monitoring, and in IRM 1.4.51.8.3, Case Management Tools.

Program Effectiveness.

Insolvency managers are required to follow program management procedures and controls addressed in IRM 1.4.51.5.2, Reviews (Overview), IRM 1.4.51.15, Controls, and IRM 1.4.51.16, Quality.

Caseworkers and managers utilize the Automated Insolvency System (AIS) for case management, assignment and documentation of insolvency and non-bankruptcy insolvency cases. See IRM 5.9.3.2, Automated Insolvency System (AIS). IRM 1.4.51.8.3, Case Management Tools, contains reports for managing and controlling inventory. AIS users have various levels of authorized access based on their assigned roles.

A glossary of terms used in this IRM can be found in Exhibit 5.9.1-1, Glossary of Common Insolvency Terms.

Common acronyms acceptable for use in the AIS history are listed in Exhibit 5.9.1-2, Acronyms and Abbreviations.

Additional acceptable acronyms and abbreviations are found in the ReferenceNet Acronym Database, which may be viewed at: http://rnet.web.irs.gov/Resources/Acronymdb.aspx.

Acronyms used specifically in this IRM section are listed below:

AIS Insolvency System (AIS) User Guide, Document 13219.

Automated Proof of Claim User Guide, Document 13163.

Insolvency Knowledge Base Home Page https://portal.ds.irsnet.gov/sites/vl114/pages/default.aspx

Taxpayer Bill of Rights, Pub 5170, and Taxpayer Bill of Rights page https://www.irs.gov/taxpayer-bill-of-rights

Resource Gathering. As part of any review and in preparation for working proof of claim issues, case resource materials should be gathered to perform a quality case analysis. Some of the materials that may be used include:

341 Meeting Review. The first meeting of creditors, also known as the 341 meeting, will usually occur soon after the commencement of the bankruptcy. Caseworkers should conduct a timely initial case review, allowing ample time to determine if an IRS presence is needed at the hearing. IRM 5.9.2.5, First Meeting of Creditors, provides more information on 341 meetings. The case history should address whether or not attending the 341 meeting is necessary, and include a discussion that clearly and fully documents any of the following that apply:

Plan Review. Field Insolvency caseworkers should evaluate bankruptcy plans or plan summaries prior to the confirmation date. Ample time should be allowed for a referral to Counsel should an objection to the plan be required. Area Counsel can advise Field Insolvency of lead time needed for effective referral preparation.

Stay Violation Review. When initially reviewing cases, caseworkers should access IDRS to determine if stay violations have occurred. (See IRM 5.9.3.5, Automatic Stay.) For individual Chapter 7, 11, and 13 cases filed on or after October 17, 2005, this review should include checking for previously filed bankruptcies that may affect the imposition of the stay. (See IRM 5.9.5.7, Serial Filers.)

Review for Nondischargeability. If the requisite time between previous bankruptcy discharges and a current bankruptcy filed on or after October 17, 2005, has not elapsed, the debtor may not be allowed a discharge in the current proceeding. (See Exhibit 5.9.5-3, Allowable Elapsed Time Between Bankruptcy Filings, and IRM 5.9.5.7.1(5), Discharge Limitations.)

Lien Information. IRM guidance regarding liens, NFTLs, and refiling for cases in bankruptcy is found in IRM 5.9.6.11.1, Initial Case Review of Large Dollar 7 No Asset (7N) Reassignments by FI, IRM 5.9.6.11.2, Initial Case Review of the 7A Individual Case by FI, IRM 5.9.8.4, Initial Case Review for Chapter 11, IRM 5.9.10.3, Initial Case Review for Chapter 13 Bankruptcy, IRM 5.9.5.9.1, NFTL Filing after Bankruptcy Filing, IRM 5.9.5.9.2, Refiling Notices of Federal Tax Lien (NFTLs), and IRM 5.9.17.18(10), Lien Release Revocation and Refile.

Late Claim May Not Be Allowed or Paid. Except in Chapter 7 cases, a late claim may be disallowed under 11 USC 502(b)(9) and may not be paid. If the IRS did not receive notice of the bankruptcy case in order to file a timely claim, caseworkers should follow the procedures outlined in paragraph (6) below.

Chapter 7 Late Claim Allowed. For Chapter 7 cases filed prior to October 17, 2005, if a claim was untimely filed, the IRS can still receive full payment of priority tax claims as long as the claim is filed before the trustee begins distribution (11 USC 726). For Chapter 7 cases filed on or after October 17, 2005, late filed priority claims are to be paid with timely filed priority claims (11 USC 726(a)(1)) if they are filed by the earlier of:

Chapter 13 Caution. When a liability is discovered after the governmental bar date in a Chapter 13 proceeding and SCI cannot cite special circumstances for its tardiness (for example, the IRS was not given timely notice of the bankruptcy filing), the late claim may be disallowed unless the IRS can justify it as an amendment to a timely filed proof of claim.

Considerations for Late Filing. If a proof of claim is not filed prior to the bar date, SCI must decide if a late filed claim is warranted. If a claim was not filed because the IRS did not receive sufficient notice for a timely claim to be filed, the procedures in paragraph (6) below should be followed. A decision to file a proof of claim after the bar date has passed should be based on:

Counsel Review. Generally, Counsel should be consulted after SCI determines a late claim should be filed to add a tax debt, exceptions being for claim filing changes cited previously in this IRM section for cases commencing on or after October 17, 2005. Bankruptcy courts are more likely to consider late filed claims in some bankruptcy chapters and in some jurisdictions than in others.

Notice Received with Insufficient Time to File A Timely Proof of Claim. 11 USC 523(a)(3) states that an individual debtor is not discharged of a debt if the creditor does not receive notice in time to file a timely proof of claim because the debtor failed to include the creditor on the schedules and statements. This provision does not apply if the creditor otherwise has timely notice or actual knowledge of the case.

Proof of Claim. Include the following liabilities on a proof of claim in the LLC's bankruptcy:

Disregarded Entity Employment Taxes. A proof of claim will generally not be filed in the LLC's bankruptcy when the LLC is a disregarded entity for employment tax periods ended before January 1, 2009. However, even if an LLC is presently a disregarded entity, it may still be liable for taxes that arose out of periods when it was not a disregarded entity or when an entity of which the LLC is the successor was not disregarded. When a disregarded LLC is liable for taxes that arose out of periods when it was not a disregarded entity or when an entity of which the LLC is the successor was not disregarded, a proof of claim should be filed.

Collection Against SMO. When a single member disregarded entity LLC files bankruptcy, but the SMO does not, collection action may continue for employment tax liabilities owed by the SMO that were reported in the name and EIN of the LLC for wages paid prior to January 1, 2009. The liability is owed by the SMO rather than by the LLC in bankruptcy. In this case a TC 520 cc 84 should be input on the applicable modules under the LLC EIN as an alert to Field Collection to contact SCI before taking enforcement action. Upon contact, the revenue officer will be advised by SCI to pursue collection from the SMO and not the LLC.

Protective Claim. If the tax status of the LLC cannot be determined prior to the bar date, SCI should file a protective proof of claim with an annotation explaining the IRS has not been able to ascertain if the debtor is the entity liable for the tax. A protective proof of claim could also be filed when SCI is still investigating if the LLC is liable for taxes that arose out of periods when it was not a disregarded entity or when an entity of which the LLC is the successor was not disregarded.

Counsel Guidance. To ensure the government's interests are protected, Area Counsel may be consulted when issues arise related to claims against LLCs that cannot be easily resolved.

Proof of Claim. Include the following liabilities on a proof of claim when the owner of an LLC files bankruptcy:

Determining Liable Party. When a single member owner is the bankruptcy petitioner, SCI may not be aware of a liability arising from the activities of a disregarded LLC. IDRS and CFOL do not identify if LLCs are disregarded, nor do they cross-reference LLC EINs to the single member's SSN. The debtor's bankruptcy plan or schedules may identify the debtor's ownership of an LLC and if it is a disregarded entity for tax purposes. If the plan or schedules do not identify whether an LLC is a disregarded entity, and the LLC's classification cannot be determined by checking internal sources identified in IRM 5.1.21, Collecting from Limited Liability Companies, the caseworker should consider questioning the debtor at the 341 meeting or directing an OI to a revenue officer to obtain this information. If the caseworker cannot determine the status of the LLC by following these avenues, the caseworker may consider referring the case to Area Counsel to pursue a Bankruptcy Rule 2004 examination of the debtor to obtain this information.

Protective Claim. If the tax status of the LLC cannot be determined prior to the bar date, a protective proof of claim should be filed with an annotation explaining the IRS has not been able to ascertain if the debtor is the person liable for the tax.

Counsel Guidance. To ensure the government's interests are protected, Area Counsel may be consulted when issues arise in determining liabilities that cannot be easily resolved.

Protecting the Government’s Interests. By meeting the bar date time frame, an "unassessed" (estimated) proof of claim protects the government’s interests before the exact liability is determined.

Combining Assessed and Unassessed Amounts. One proof of claim form can include both assessed (i.e., the exact amount owing has been determined) and unassessed amounts.

Factual Basis. The IRS’s unassessed claim must have a factual basis and cannot be inflated. The unassessed tax liability must be based on as much information as possible.

Base on Resources Available. The resources SCI may use to obtain a factual tax basis include, but are not limited to:

Liability on Last Filed Return (LFR) for IMF. In preparing a manual proof of claim, if the caseworker is relying on the LFR as a basis for estimating unfiled returns, the caseworker should use the LFR total of assessed tax transaction codes (TC 150, 290, 300, etc.) less any credits (TC 640, 650, 660, 670, etc.) appearing on the tax module being estimated in calculating the total tax due. To the LFR figure, the caseworker must increase the total tax due 5% on an annual basis to allow for inflation.

Liability on LFR for BMF. Business tax returns are based on quarterly filings (such as Form 941), calendar year filings (such as Form 940 or Form 944), or fiscal year filings (some Forms 1120). As such, manual calculations of estimated BMF tax are more involved than IMF calculations.

Penalties and Interest. All applicable pre-petition penalties and interest for filed returns with pending assessments should be computed and claimed. If unassessed liabilities are listed for unfiled returns, penalties and/or interest do not have to be computed unless required by local guidelines.

IRC 6020(b) Returns. Periods for which tax returns are prepared by the IRS under authority of IRC 6020(b) should be considered to be unassessed (estimated) liabilities if the 30–day period for the taxpayer to respond to a proposed assessment is still open, and the taxpayer has yet to respond.

Tax Subject to Deficiency Procedures. Taxes subject to deficiency procedures remain estimates unless the taxpayer signs a consent to assessment or the liability is determined by the Tax Court. If the taxpayer disagrees with the proposed assessment or fails to respond within the 30 day period, the IRS must then issue a statutory notice of deficiency which allows the taxpayer to file a Tax Court petition. The automatic stay does not prevent the IRS from issuing the notice of deficiency. However, the stay prevents the individual taxpayer from filing a petition with the Tax Court during bankruptcy for pre-petition deficiencies. The stay prevents a corporate debtor from petitioning the Tax Court for a taxable period the bankruptcy court may determine, which includes pre-petition and post-petition periods.

Closing Codes (cc). When an estimated claim is filed, the closing code assigned to the TC 520 freeze on the estimated period should be cc 60 or cc 61 to prevent erroneous refunds. IRM 5.9.5.6.1, Closing Codes, explains the conditions for each closing code.

AIS Statements. The proof of claim should include a statement identifying the reason for the unassessed liability. A support file in AIS contains allowable standardized statements.

Liability Not Pursued. After a proof of claim has been filed with unassessed (estimated) amounts, and a determination is made the estimated liability has no factual basis and will not be pursued (for example, by examination process or underreporter unit) or a return is filed showing little or no tax due, the proof of claim should be amended or withdrawn, as appropriate. If a claim is withdrawn, any trustee payments received must be refunded to the trustee. If trustee payments have been applied to periods that are no longer being pursued, the payments need to be moved to other balance due periods, or refunded to the trustee, whichever action is appropriate.

Zero Amendment. The Electronic Proofs of Claim (EPOC) system does not allow for electronic withdrawal of claims. Because of this, for most courts a claim is withdrawn by filing an amended claim for $0.00. When amending a claim to $0.00, the caseworker must select the appropriate POC statement to indicate the claim is being withdrawn.

Delinquent Return Limits. Standard IRS practice usually limits the pursuit of unfiled returns to the prior six years. In certain instances the IRS may find it advantageous to require filing of delinquent returns going back eight years. (See IRM 5.9.14.2.10, Case Compliance.) Pursuit of unfiled returns for periods preceding the prior six years requires managerial approval. (See IRM 5.1.11.7.1, Enforcement Determination.)

Publication 1. If a debtor has unfiled returns, but has no current assessed tax liabilities, the SCI caseworker must provide them with a copy of IRS Publication 1 upon initial contact to secure those returns whether that contact is made by phone, letter, or attendance at a 341 hearing or other in-person meeting.

1714 Letters. When a caseworker's initial review or APOC processing indicates a debtor is responsible for unfiled returns with tax potential, the caseworker usually should send AIS Letter 1714, Request for Returns or Return Information, to the debtor with a courtesy copy to the debtor’s attorney. Caseworkers may follow local practice in sending courtesy copies to the trustee, and may choose not to send them where the trustee has indicated they are not of assistance. While most AIS letters do not require previous actions, a caseworker cannot generate and print AIS Letter 1714 unless a claim has been prepared which reflects an unassessed liability. This liability will be shown on the claim as estimated condition #1," Estimated - SEE NOTE - LIABILITY IS ESTIMATED BASED ON AVAILABLE INFORMATION BECAUSE THE RETURN HAS NOT BEEN FILED. THIS CLAIM MAY BE AMENDED AS NECESSARY AFTER THE DEBTOR FILES THE RETURN OR OTHER REQUIRED INFORMATION" . Letter 1714 is generated systemically when APOC computes a claim for an unassessed pre-petition liability. The letter is then available on AIS for printing.

Letter 1714 Follow-up. A 15- day follow-up date will be set on all cases where Letter 1714 is issued, including individual debtors and streamlined cases. (See Exhibit 5.9.4-1, Inputting Follow-up Dates, for steps in setting a follow-up date.) Upon follow-up, the caseworker must review the case to verify if the requested returns have been filed or if the debtor has provided pertinent information regarding the filing or non-filing of the delinquent returns.

Reply to Letter 1714. Responses to the 1714 letter may be written or telephonic. Written replies may contain copies of returns or original returns. The following table explains actions required for potential replies to Letter 1714.

No Reply to Letter 1714. In some cases, the debtor will not respond to Letter 1714. In those cases, the caseworker must contact the debtor or debtor’s attorney by phone to secure returns or return information. If contact with the debtor or the debtor’s attorney by phone does not bring the debtor into compliance, the caseworker should consider the appropriate next action which may include:

Securing Unfiled Returns at the 341 Hearing. For cases filed on or after October 17, 2005:

Unfiled Returns Below the Required Criteria. Where returns are due and yet remain unfiled, and the caseworker has determined the aggregate liability of unfiled returns and assessed liability does not exceed the amount noted within Exhibit 5.9.13-1, Threshold for Claims, criteria, no proof of claim need be prepared. The case worker will:

No Longer Required to File Return. If the caseworker determines the debtor is no longer required to file or is no longer in business, the caseworker should request to close the filing requirements and request the appropriate TC 590/591 to satisfy the module. See IRM 5.1.11.8.3, No Return Secured Taxpayer Not Required to File for This Period, and IRM 5.1.11.8.4, No Return Secured Taxpayer No Longer Required to File (Final). The history should be documented to explain why filing is not required and the research conducted or information provided, to verify the business is closed.

No Claims Required Below Tolerance Criteria. If completion of the initial review reveals all required pre-petition returns are filed and the liability does not exceed the claim tolerance criteria outlined in Exhibit 5.9.13-1, Threshold for Claims, no claim is required. However, SCI must maintain the bankruptcy freeze on the account. The caseworker will take the following steps:

Delinquent Returns Not Filed. If the debtor does not respond to the IRS’s request for unfiled returns and potential liabilities exist, the caseworker should take the actions in the table below.

SCI Responsibilities. Although the trustee can move for dismissal or conversion if tax returns remain unfiled, Field SCI must assume the responsibility for filing a motion to dismiss on the grounds of non-compliance. If missing tax returns are not filed or the debtor does not give a credible explanation as to why the debtor is not liable for those returns by the deadline given on the 1714 letter, caseworkers should consult Exhibit 5.9.13-1, Threshold for Claims, and IRM 5.9.4.15.4, Referral Tolerances, to determine if the IRS should move for dismissal or conversion. Appropriate administrative actions (see paragraph (6) above) must be pursued, time permitting, before making a referral to Counsel for dismissal based on unfiled returns.

State Credit Adjustment.IRC 3302 reduces the federal credit taken on a Federal Unemployment Tax Act (FUTA) return if the employer has made late payments to the state unemployment fund. Although it might be presumed the IRS can include this reduction in the FUTA credit on its proof of claim, 11 USC 502(b)(8) alters the ability of the IRS to file claims for these credits. In short, state credit adjustments to pre-petition FUTA accounts (MFT 10) that result in an additional liability to the debtor generally cannot be included on the IRS's proof of claim.

Exceptions. The disallowance of claims under 502(b)(8) for the reduction of the FUTA credit for state unemployment payments only applies to pre-petition payments of wages, salaries or commissions. If a trustee fails to make timely payment of state unemployment taxes, the IRS may assert an administrative claim for the reduction in the FUTA credit. If, however, the trustee is without fault for the failure to make a FUTA tax payment by the required date, the full state credit may be allowed to the debtor (IRC 3302(a)(5)) .

Identifying State Adjustments. A FUTA adjustment resulting from a state's reduction of the FUTA credit can be identified on an IDRS TXMODA for tax Form 940 by a TC 290 which is not preceded by an amended tax return identifier (usually TC 97X). Along with an extract number and the dollar amount a "T" (for "tax" ) will appear followed by the two letter state abbreviation, e.g., TFL. The amount of this TC 290 cannot be included on the IRS's proof of claim.

APOC Update. At this time APOC is not programmed to omit TC 290 assessments resulting from a reduction of a state credit on FUTA returns. Therefore, MFT 10 claims must be reviewed manually and adjusted if necessary prior to mailing or electronically transmitting the claims to the court.

Mirror Modules (MFT 31 and MFT 65) and NMF Modules. All of a debtor’s tax liabilities accrued as of the petition date should be included on the proof of claim. This includes MFT 31 and MFT 65 mirror modules and modules on the non master file (NMF). The claim procedures for an MFT 31 or MFT 65 mirror or NMF module are the same as for an MFT 30 module. The caseworker must determine:

Duplicate Spousal MFT 31, MFT 65, and Trust Fund Recovery Penalty (TFRP) Assessments. A proof of claim may list two MFT 31, two MFT 65, or two TFRP modules for the same period when a married couple files a joint bankruptcy. The amounts of the assessments for the same period may be identical, or one may be larger than the other. When AIS computes the total amount of a claim on Form B410, the sum includes the amounts of each module. The total amount computed by AIS cannot be systemically overridden, so when both spouses have duplicate MFT 31, MFT 65, and/or TFRP assessments, the amount of the claim on Form B410 is overstated. Caseworkers should determine whether the assessments are for the same liabilities. If so, the claim should be filed according to local procedures in one of two ways.

Restitution Assessments on APOC. Restitution based assessments can be identified as using MFT 31 and having TC 971 AC 102 on the module(s). For purposes of a bankruptcy case, a restitution assessment is classified in the same manner as the tax module to which it relates. The Automated Proof of Claim (APOC) system will recognize the assessment and classify it based on the tax module. No flag will be raised solely due to the fact that the assessment is for restitution.

Manual Proof of Claim Preparation. If it is necessary for a caseworker to create a proof of claim manually, caseworkers should follow the regular classification rules for the type of tax for which restitution is to be made. Interest on the restitution assessment will have the same classification as the tax assessment. If the failure to pay penalty accrued on the restitution assessment, it will either be secured or general unsecured.

Mirror Assessments. A mirror assessment of the restitution-based assessment for the same type of tax is created based on a return filed, an assessment made after an audit, or the creation of a 6020(b) return. The caseworker must determine:

IRC 5000A - Individual Shared Responsibility Provision.

ACA Provision Section 9008 - Annual Fee on Branded Prescription Pharmaceutical Manufacturers and Importers (Branded Prescription Drug Fee or BPD Fee)

IRC 4980H – Employer Shared Responsibility Provision.

Classification. Section 965 requires certain taxpayers to pay a transition tax on untaxed earnings of certain specified foreign corporations. See IRM 5.9.4.23, Section 965 Transition Tax, for more information. A Section 965 tax liability is an increase in the taxpayer’s income tax liability for the year in which it was required to be included on the debtor’s income tax return (generally, 2017 and/or 2018). It is classified in the same manner as the income tax period of the inclusion year, even if the payment is not yet due because of an election under section 965(h) or 965(i).

Inclusion Year. The tax generally should have been reported on a U.S. shareholder’s 2017 tax return if the specified foreign corporation’s last taxable year beginning before January 1, 2018 ended on December 31, 2017 (i.e., for calendar year specified foreign corporations). If the foreign corporation’s last tax year beginning before January 1, 2018 ended after January 1, 2018 (i.e., for non-calendar year specified foreign corporations), the tax generally would be included on the U.S. shareholder’s 2018 tax return. In certain circumstances, due to the presence of one or more domestic pass-through entities, the tax may be reported on a U.S. shareholder’s 2019 or later tax return.

Identifying Section 965 Tax. The debtor is required to report their Section 965 tax on their income tax return. For the 2017 tax year, the debtor was also required to file a Section 965 Transition Tax Statement; for tax years 2018 and subsequent, the debtor is required to file Form 965, Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System, for the year of the inclusion. When a debtor reports a Section 965 tax, a TC 971 Action Code (AC) 114 will post with the return. The Miscellaneous (MISC) Field will show the total amount of the Section 965 tax as shown on the return and it will be included in the TC 150.

Identifying Section 965(h). If the debtor elects to pay the tax over 8 years, IDRS will show:

Section 965(h) Transfer Elections. Section 965(h) net tax liabilities can be transferred to another person if certain requirements are met. When a Section 965(h) net tax liability is transferred, both the transferor (if still in existence) and the transferee become jointly and severally liable for payment of the liability (like a trust fund recovery penalty). The transferee will be assessed under a new MFT 82 (individual) or MFT 83 (non-individual) account. These transferee assessments will start to be assessed under MFT 82 and MFT 83 in 2020. The transferor accounts will have a TC 971 AC 507 to reflect the cross referenced TIN.

Identifying Section 965(i). If the debtor made a deferral election under Section 965(i), no assessment will be made. A taxpayer with a Section 965(i) election, will show a TC 971 AC 114 reflecting zeros in the MISC field. In the future, the TC 971 AC 114 will be replaced by a TC 971 165, which will have the amount of the Section 965 liability in the MISC field.

Proof of Claim. The caseworker is required to add the total Section 965 liability on the claim.

General Information. Section 2302 of the CARES Act allows employers to defer the deposit and payment of the employer's portion of Social Security taxes and certain railroad retirement taxes. Employers are still responsible for timely payment of the employee's share of FICA tax, full amount of Medicare tax, and total withheld income tax. The payroll tax deferral period is 3/27/2020 – 12/31/2020. Impacted tax forms include:

Payments. Employers must timely deposit 50 percent of the eligible deferred amount of the tax by 12/31/2021 and deposit the remaining amount by 12/31/2022.

Identifying Deferred Amount. If the debtor elects to defer the deposit and payment of the employer's portion of Social Security taxes and certain railroad retirement taxes, IDRS will show a TC 766 Credit Reference Number (CRN) 280 with the deferred amount. When the debtor makes a payment towards the deferred amount, IDRS will show the transaction code of the payment and a TC 767 CRN 280 with amount of the payment to reverse the false credit.

Proof of Claim. The full amount owed for the tax period needs to be included on the proof of claim. Caseworkers are required to manually review all 2020 periods that qualify for this deferment and calculate the total amount owed for the tax period. Use the following chart to calculate the amount of tax to add to the claim :

Interest and Penalties. The debtor is required to pay the deferred tax in two equal payments that are due on 12/31/2021 and 12/31/2022, respectively. Interest and penalties do not accrue on the deferred tax unless the debtor defaults on making the required payments. If the debtor defaults on the making a payment, the false credit will be reversed for that payment only and the tax will show on INTSTB.

Three Categories. The three basic types of debt are secured, priority, and unsecured general. Tax debts on a proof of claim are designated as being within one of these three categories. A claim is secured when a valid NFTL was filed prior to the bankruptcy and there is equity to secure the lien, or there is an amount subject to setoff. A priority claim is not secured, but is entitled to priority treatment in the bankruptcy case before certain other creditors according to the payment schemes set out in the Bankruptcy Code. An unsecured general claim is not secured and is not entitled to priority treatment. Absent APOC, the caseworker must determine if the debt is to be claimed as secured, unsecured priority, or unsecured general. Balances due on a module may be split among these categories on a proof of claim.

Counsel Guidance. If the claim classification of a tax liability cannot be easily determined, Counsel can offer advice. Exceptions and special circumstances may govern how taxes are classified from one judicial district to another.

Secured. The IRS may assert a secured claim for taxes, penalties, and interest under IRC 6321. A tax debt is secured by an NFTL or by setoff.

Notice of Federal Tax Lien. A valid pre-petition NFTL attaches to debtor’s property, whether real or personal, and includes exempt/abandoned property listed in the debtor’s schedules filed with the court.

Tenancy by the Entirety. The Supreme Court has ruled state law cannot preclude the attachment of a federal tax lien to property held as tenancy by the entirety in states permitting this form of ownership. When determining the value of the IRS's secured interest on a proof of claim when only one spouse has filed bankruptcy, 50% of the equity in property held as tenancy by the entirety generally can be used. See United States v. Craft, 535 U.S. 274 (2002)

Secured Setoffs. A pre-petition setoff exists when the IRS holds a pre-petition credit for a debtor who owes the IRS a pre-petition debt. The POC is secured to the extent of the amount subject to setoff. Both the credit due to the debtor and the debit due to the IRS are considered mutual debts. The Bankruptcy Code preserves the right of setoff of mutual debts (11 USC 553). It is not necessary for the IRS to have filed a NFTL to be secured for the amount of the setoff.

Setoffs under BAPCPA. 11 USC 362(b)(26) allows the IRS to setoff a pre-petition income tax refund to a pre-petition income tax liability without a lift of the automatic stay. This section applies to pre-petition income taxes only. It does not apply to:

Setoffs in the Government's Best Interest. The IRS has the right to allocate the secured status from setoffs in its own interest.

Oversecured. When equity in a debtor’s property exceeds the amount of the IRS claim, the IRS is fully secured (oversecured) and is entitled to post-petition interest. (See 11 USC 506(b).) The interest rate equals the statutory IRS rate effective during the calendar month of confirmation. In cases where the IRS is entitled to post-petition interest, the caseworker must annotate the AIS plan screen accordingly.

Undersecured. If the IRS is undersecured, the claim amount not covered by equity in the debtor’s property may be reclassified as a priority claim if it qualifies. Otherwise, it must be relegated to unsecured general claim status.

Unsecured. Tax debts that cannot be secured by a pre-petition NFTL attaching to equity in assets or those debts that cannot be secured by setoff are determined to be unsecured debt. The unsecured debt is therefore classified and claimed as either unsecured priority debt or unsecured general debt.

Unable to Determine Value of Secured Claim. On rare occasions, caseworkers may not be able to determine the equity in the debtor's property, either because it is not possible to determine the extent of the property owned by the debtor, or the value of the property cannot be estimated. In these situations, it may be necessary to file the claim showing the periods for which NFTLs have been filed as fully secured until a determination of the debtor's property is made by the bankruptcy court. Caseworkers should consult Area Counsel in these situations.

Creditor's Option. The existence of a valid NFTL does not obligate the IRS to file a secured claim if the government's interest can best be served by filing a priority claim.

Converted Cases. It is not uncommon for a case to convert from one chapter to another, and caseworkers frequently review converted cases to see if an amended claim is needed. Regardless of the status of the NFTL at the time of the review of the converted case, caseworkers should continue to treat a claim as secured when IRS was secured on the petition date.

Priority Classification. USC 11 507(a)(8) defines pre-petition taxes entitled to priority status. See the following table.

The Concept of Tolling. Tolling interrupts the running of a statute of limitations in certain situations. Tolling can occur due to statutory provisions providing for tolling or equitable tolling created by the courts. In bankruptcy cases, tolling applies to the periods used to determine priority and dischargeability of taxes. Tolling in bankruptcy occurs as a result of Bankruptcy Code provisions and Supreme Court decision in the case of Young v. United States, 535 U.S. 43, 122 S. Ct. 1036 (2002).

Pre-BAPCPA Tolling. The Supreme Court confirmed the three-year lookback period of 11 USC 507(a)(8)(A)(i) is a limitations period subject to traditional notions of equitable tolling with their decision in Young v. US, 535 US 43, 122 S. Ct. 1036 (2002). In light of the rationale used by the Court in Young, the IRS no longer takes the position that it is entitled to an additional six months based upon IRC 6503(h).

BAPCPA Tolling. For cases filed on or after October 17, 2005, BAPCPA tolls the "look back" priority periods in 11 USC 507(a)(8):

Unsecured General Claims. The term "unsecured general" does not appear in the Bankruptcy Code. Liabilities classified as unsecured general claims do not fall into either secured or priority status. These include all penalties where the IRS did not suffer an actual loss (also referred to as "non-pecuniary loss" penalties) and any interest associated with that penalty. The following chart can aid in determining claim status.

Failure to Pay Penalties. IRM 5.9.4.14, Failure to Pay Tax Penalty and Failure to Pay Estimated Income Tax Penalty, discusses when failure to pay penalties are included on a proof of claim for pre-petition tax liabilities.