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Part 4. Examining Process

Chapter 27. Bankruptcy

Section 2. Examiner Responsibilities

4.27.2  Examiner Responsibilities

4.27.2.1  (05-25-1999)
Overview

  1. This section details the procedural requirements for which an examiner is notified of a bankruptcy proceeding and subsequent actions required.

4.27.2.2  (05-25-1999)
Notification of Bankruptcy Proceedings

  1. Insolvency Support will institute procedures to timely inform Examination of bankruptcy petitions filed within the area. These procedures may include the use of Form 2552, or automated systems already in place.

  2. Examination will ensure that this information is matched with AIMS to identify open examination controls. The examination or appeals function will then be notified of the following:

    1. The name and TIN of the taxpayer in bankruptcy;

    2. Date the bankruptcy petition was filed;

    3. The chapter the bankruptcy petition is filed under;

    4. Name of the appointed trustee (if applicable);

    5. Asset v. no asset classification; and

    6. Bar date by which a proof of claim must be filed.

  3. Not less than 30 days before the bar date, the assigned Examination/Appeals function will ensure that Insolvency Support is notified of any potential assessment or refund which is not yet reflected on AIMS so that a proof of claim may be timely filed with the Bankruptcy Court. If a final determination of tax, pre-petition interest, and penalties is not made by this date, as good an estimate as possible of these amounts, based upon all the facts, should be given. Upon completion of the examination action, Insolvency Support should be notified of the correct final determination and may then file an amended claim. However, some bankruptcy courts will not permit claims to be amended to list larger liabilities after a bar date and/or confirmation has passed. See IRM 5.9.6.7 through 5.9.6.8.2.

  4. If the case meets the definition of a Large Bankruptcy Case (IRM 4.27), Coordinated Examination Program procedures must be followed to ensure the coordination of examination issues on a more expedited basis.

  5. Examination employees who become aware of bankruptcy proceedings through avenues other than the Collection notification provided in paragraph (1) (such as AIMS freeze codes, AIMS weekly updates, taxpayer notifications) must also follow the procedures in paragraphs (3) and (4) above, so that the collection of any pending tax is protected by a proof of claim timely filed in the Bankruptcy Court. If a bar date is unknown, the examiner should contact Examination, PSP Support, or Insolvency Support.

4.27.2.3  (05-25-1999)
Group Procedures

  1. Before initiating an extensive income tax examination of a corporation which has filed an "asset" Chapter 7 bankruptcy case where all the debtor corporations assets will be liquidated, examiners should consider (with Insolvency Support's assistance) the collectibility of the income tax deficiencies as a result of the examination. This is because a corporate debtor would, for all practical purposes, cease to exist at the conclusion of a Chapter 7 bankruptcy and secured claims are generally paid before unsecured priority tax claims. Of course, sources other than the corporate debtor or its scheduled assets may exist for the Service to later collect taxes determined to be due, as in the cases of trust fund taxes, consolidated group income taxes, controlled group pension excise taxes, undisclosed potential tax refunds or overpayments, amounts due the debtor from other federal government agencies for which "offsets" may be allowed, and potential transferee assessments.

  2. If applicable, bankruptcy project codes should be updated on AIMS as soon as possible after notification of the bankruptcy proceeding is received. See IRM 4.27 for the list of applicable project codes.

  3. At the time of notification of the bankruptcy proceeding, the responsible examination function will verify via IDRS commands TSUMY and AMDISA that the bankrupt taxpayer is not an investor in a TEFRA proceeding. If the taxpayer is an investor in a TEFRA proceeding, the filing of a bankruptcy petition begins the running of the one year statute of limitations provided in IRC sec. 6229(f). If it is determined that the IRC sec. 6229(f) one year statute applies, steps must be taken to assure that a statutory notice of deficiency is issued for tax deficiencies resulting from the key case related issues.

  4. The normal three year statute of limitations provided by IRC sec. 6501 should be protected at the examination group level, regardless of suspense provisions detailed in IRM 4.27. The responsible examination personnel should solicit a consent to extend the statutory period of limitations before the expiration of the IRC sec. 6501 date. In the case of a joint return where only one spouse has petitioned for bankruptcy, separate consents should be solicited for each spouse. If a trustee has been appointed in the bankruptcy proceeding, Area Counsel should be consulted for an opinion as to whether the bankrupt taxpayer and/or the trustee should sign the consent. Section 6501(c)(4) provides that the Service must give notice to taxpayers of their right to refuse to extend the period of limitations, or to limit the extension to particular issues.

  5. If an examiner uncovers evidence of bankruptcy fraud, whether or not it would result in any tax consequences, Compliance’s Bankruptcy Tax Crime Coordinator or Criminal Investigation should be consulted for assistance in preparing a referral to the appropriate function or agency.

4.27.2.4  (05-25-1999)
Closing Procedures

  1. Before closing the case, the examiner should verify whether the bankruptcy automatic stay is still in effect, and, in the case of a joint return, whether one or both spouses are in bankruptcy. See EXHIBIT 4.27.1–1(6), Bankruptcy Definitions and Concepts, for more detailed information concerning the automatic stay. See IRM 4.27 on how to determine the bankruptcy status.

  2. If the automatic stay has been lifted, no special handling procedures will apply and the case should be closed in a normal manner. The procedure outlined in paragraph (6) below should be followed to ensure that examination controls have been posted. In such instances and before closing the case, it may also be appropriate for the examiner to seek advice from Insolvency Support or Area Counsel about the scope of the individual debtor’s superdischarge of taxes in a Chapter 13 bankruptcy case or when a corporation has executed a confirmed Chapter 11 plan.

  3. If a trustee has been appointed in the bankruptcy proceeding, Area Counsel should be consulted for an opinion as to whether the trustee should sign the final examination report in addition to the taxpayer.

  4. If the automatic stay is still in place, the Service is prohibited by Bankruptcy Code (BC) Sec. 362 from making any attempt to collect pre-petition tax liabilities and post-petition tax liabilities incurred by the debtor’s bankruptcy estate. For this reason, the following procedures should be followed to assure that the Service does not violate the automatic stay:

    1. Advance payments and installment agreements may not be solicited.

    2. In unagreed income tax cases, see the procedures detailed in IRM 2.4.1 below.

    3. Partially agreed cases should be processed using standard procedures, in conjunction with the procedures outlined above. This will identify the taxpayer(s) in bankruptcy and will ensure the appropriate waivers and letters are issued and consent secured. A Special Handling Notice (Form 3198) should be attached to the top of the case file before the file is sent to the Case Processing Support for partial assessment. It should identify the specific taxpayer in bankruptcy and whether the bankruptcy petition date is before or after October 22, 1994, in order to prevent assessments made in violation of the automatic stay.

    4. If the taxpayer agrees to the proposed changes, follow procedures as provided in IRM 4.27, Acceptance of Waivers.

    5. If the taxpayer disagrees with the proposed changes and does not request an appeals hearing, follow procedures provided in IRM 4.27, Preparation, Review, and Issuance of Bankruptcy Notice of Deficiency.

  5. If the automatic stay is still in place, the Special Handling Notice (Form 3198) must identify the specific taxpayer in bankruptcy and whether the bankruptcy petition was filed before or after October 22, 1994, to prevent assessments made in violation of the automatic stay.

  6. AMDISA(s) must be secured for each case in which a taxpayer is in bankruptcy in order to determine if controls are fully established. If they are not, CFOL commands should be utilized to determine if there is any bankruptcy freeze in place that prevents the controls from establishing. In those instances where controls cannot be fully established at the group level, Non-Masterfile controls should be set up and used to close the case to Case Processing Support. Form 3198 should note that the case was closed on Non-Masterfile.

4.27.2.4.1  (05-25-1999)
Closing Procedures—Unagreed Cases with Automatic Stay

  1. Taxpayers under the automatic stay protection will be furnished a copy of the examination report and advised of their appeal rights. A bankruptcy preliminary (30-Day) letter (Letter 915–B(DO), 950–B(DO), or 525–B(SC)) is used for this purpose and explains rights unique to a taxpayer in bankruptcy proceedings.

  2. The bankruptcy preliminary letters will be expeditiously prepared and issued at the group level for all unagreed bankruptcy cases. The case will then be included in the group’s 30-day suspense file. Management will ensure adequate group controls on cases in 30-day status. Bankruptcy preliminary letters will be sent by regular mail, except when it is necessary to use certified mail. If certified mail is used, return receipts will be requested.

  3. If both spouses on a joint return have filed a bankruptcy petition but with separate residences, a duplicate original of the preliminary bankruptcy letter will be mailed to each spouse. The duplicate letters will be accompanied by those items listed in (vi) below. The administrative file should include the documentation of the separate residences as well as being noted on Form 3198, Special Handling Notice.

  4. If only one spouse on a joint return has petitioned the Bankruptcy Court, a regular 30-day letter (Letter 915, 950 or 525) should be issued to the non-petitioning spouse. The spouse who is in bankruptcy proceedings will be issued a bankruptcy preliminary letter.

  5. A copy of the bankruptcy preliminary letter with enclosures should be mailed to the taxpayer’s representative if so indicated in the administrative file.

  6. Bankruptcy preliminary letters will be accompanied by the following:

    1. A copy of the examination report. Taxpayer’s copy should not include transmittal letters or other reports of confidential nature.

    2. An appropriate waiver form.

    3. Publication 5, Appeal Rights and Preparation of Protests for Unagreed Cases.

  7. When prepayment credits shown on the return are changed, the examination report accompanying a bankruptcy preliminary letter will disclose separately the increase or decrease in income tax liability and the adjustment to prepayment credits. The accompanying waiver will show the full deficiency amount before any adjustments due to change in prepayment credits. A statement attached to the waiver will show the adjustment to the prepayment credits with the net amount due.


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