This section addresses situations where referrals to Area Counsel are required and procedures for certain requests by the bankruptcy trustee.

All cases which meet the referral criteria listed below, and in IRM 5.9.4.12, Significant Bankruptcy Cases processing Procedures, should be immediately referred to 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.

Refer the case when one or more of the following circumstances exist in a case in which the taxpayer has filed for bankruptcy:

Special care must be taken when only part of a consolidated corporate taxpayer files for protection under the reorganization provisions of the Bankruptcy Code. The tax liability is joint and several among the consolidated group. 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 Area 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 claims bar date.

The employee responsible for the case at the time the bankruptcy proceeding is identified will prepare the referral, and forward it to Area Counsel through the Area Bankruptcy Coordinator, 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 Area Bankruptcy Coordinator will ensure that the referral is forwarded to Area Counsel, with a copy sent to Insolvency Support , in order for a timely proof of claim to be filed with the Bankruptcy Court.

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

If Area Counsel confirms that a case warrants expedited examination procedures, a meeting will be held with all Service personnel involved in the case to review the Area 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 or other agreements and relevant workpapers should be sent by the examiner or Appeals Officer to PSP Support Manager, before the case is closed. This information should be processed using Form 5346, Examination Information Report. Any future audit issues identified by Area Counsel should be similarly processed through PSP Support Manager, and followed-up by an appropriate survey and/or audit of the former debtor’s future tax year returns when filed.

The trustee or debtor-in-possession is required to file tax returns during the administration of an individual bankruptcy estate as defined in IRC sec. 1398, or in the case where a trustee or debtor-in-possession holds title to all or substantially all property of a business or a corporation in a Bankruptcy case under Chapter 7 or 11. (See IRC sec. 6012(b)(3) and (4)). Under BC sec. 505(b), the trustee or debtor-in-possession may request a prompt determination of any unpaid liability of the estate for any tax incurred in the administration of the bankruptcy estate. The estate should file all federal tax returns which would include Form 1041 for an individual, and Forms 1120, 1120S, 941, and 940 for a business entity. If prompt determination is requested on returns which are not tax returns but information returns (such as Form 1065 returns but not Form 1120S returns), the request is not valid as such returns are not eligible for a prompt determination of any unpaid tax liability incurred during the administration of the bankruptcy estate as provided under BC sec. 505(b). This is distinguished from returns which report zero tax liability due to income being below the threshold taxable amount or as the result of a net operating loss. If a prompt determination is requested on a Form 1041 or 1120S showing no tax liability, the request should be honored as an examination of the return may disclose unpaid tax liability. See Exhibit 4.27.5–3 for an example (pattern letter) to be used in responding to a prompt determination request for a partnership return.

As stated in Revenue Procedure 81–17, the request should be mailed to the Insolvency Support . It will stamp the request with the date received and forward it within three work days to PSP Support Manager designated employee, or bankruptcy processing unit.

Within 60 days from the date the letter is received by the Internal Revenue Service, BC sec. 505(b) and Revenue Procedure 81–17 provide that the trustee or debtor-in-possession must be notified if the Service has selected the return for audit. The notice should indicate receipt of the prompt determination request and whether the request is rejected as not valid, the return is accepted as filed, or the return is selected for examination. If the return is accepted as filed, the trustee or the debtor-in-possession must also be notified of any amounts owing on the accounts specified, including interest and penalties. If the 60-day time frame to notify the trustee or debtor-in-possession is not met, amounts owed the Internal Revenue Service in excess of tax shown on the return and paid with the return will be discharged as against the trustee, debtor, or a successor to the debtor except under specific circumstances such as misrepresentation or fraud. The Service will be prohibited from collecting any additional amounts owed from the debtor or its successor. However, even if the deadline is missed, it is still possible for the Service to collect a deficiency from undistributed funds held by the estate. Where the trustee has properly requested a prompt determination, the debtor or its successor will be discharged of the tax liability upon:

If the return is selected for examination, the audit must be conducted and the trustee or the debtor-in-possession notified of any deficiency within 180 days from the date of the request (or within any period of extension granted by the court). If the 180-day period (or period of extension, if applicable) is not met, all amounts owed the Internal Revenue Service in excess of the tax shown on the return that is paid with the return will be discharged as against the trustee, debtor, or a successor to the debtor except under specified circumstances such as misrepresentation or fraud. The Service will be prohibited from collecting any amounts owed from the debtor or its successor. However, even if the deadline is missed, it is still possible for the Service to collect a deficiency from undistributed funds held by the estate.

PSP Support Manager, will be responsible for the proper monitoring of 60 and 180 days from the date of original receipt by the Internal Revenue Service to ensure the appropriate responses are made within these time frames (see paragraphs (3) and (4) above). Instructions on extending the time for reply by court order are in paragraph 13(a).

Requests should be screened to determine if they are valid requests. Prompt determinations are only available for estates created by Bankruptcy Chapters 7 or 11, to determine the tax liability of the estate (which excludes Form 1065 returns but does not exclude Form 1120S returns) incurred during the administration of the estate. The returns submitted should be an exact copy of the original submitted to the Service Center and should contain sufficient information to determine the tax liability incurred during the taxable period during the administration of the bankruptcy estate. Additional information/documents needed to determine whether a return should be examined in response to the prompt determination request should be requested immediately from the trustee or the debtor-in-possession. Failure to provide the information may be a basis for selecting the return for examination depending on the facts and circumstances but is not a legal basis for rejecting the 505(b) request. In addition, lack of cooperation should be documented and discussed promptly with Area Counsel for appropriate actions. If the 505(b) request is not valid, it should be returned to the individual submitting the request with a cover letter explaining the reasons for rejection.

All valid requests for a 505(b) prompt determination should be controlled by entering the following for each taxable period on AIMS:

Research should be completed to prepare the request for screening using IDRS and CFOL commands. For a worksheet specifying research for each type of return see Exhibit 4.27.5–2. The research required includes the following:

The requests must be screened at least monthly to ensure a timely response and to allow the maximum time to examine the return if selected. The screener should use the research mentioned in paragraph (7) above, other internal data, or should contact the trustee or debtor-in-possession in order to resolve questions as early as possible. For the returns accepted as filed, the screener should also determine all amounts due and owing to be stated in the letter to the trustee or debtor-in-possession.

If the return is accepted as filed, secure an RTVUE/BRTVUE print, and close the case with disposal code 20 to indicate that it was accepted as filed by Classification. The closing letter mailed to the trustee or debtor-in-possession should identify the taxpayer, federal tax return form number, and taxable period. Copies of all correspondence with the trustee or debtor-in-possession, computations of tax, interest and penalties, contact records, and other workpapers should be attached to the back of the return at the time the case is closed (and/or forwarded to the Service Center for association with the return).

If the return is selected for examination the examiner should be familiar with IRC sec. 1398 (Rules relating to Individuals’ Title 11 Cases), and IRC sec. 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 Forms 1040 of the individual debtor.

If the return is selected for examination the trustee or debtor-in-possession must be notified of any tax due within 180 days of the request for prompt determination. As soon as the Examination Report is prepared, a copy should be forwarded to the Insolvency Support function so that an Administrative Claim can be filed and so that immediate assessment of any resulting tax deficiency may be considered pursuant to IRC sec. 6871 (b) (Immediate Assessment with Respect to Certain Title 11 Cases).

In the event that 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 Area Counsel. The examiner should initiate this process in writing through the manager at least 30 days prior to the end of the 180-day period, requesting Area Counsel to file a motion for an extension with the Bankruptcy Court and specifying the extension period sought. It should allow for sufficient time and contingencies to complete all work on the case. It is at the discretion of the Bankruptcy Court whether to grant a motion to extend the 180-day period.

If the 180-day period (or period of extension, if applicable) is not met, all amounts owed the Internal Revenue Service in excess of the tax shown on the return that is paid by the debtor will be discharged as against the trustee, debtor, or its successor except under specified circumstances such as misrepresentation or fraud. The Service will be prohibited from collecting any amounts owed from the debtor or its successor. However, even if the deadline is missed, it is still possible for the Service to collect a deficiency from undistributed funds held by the estate.

The administrative tax returns and examination adjustments to the bankruptcy estate returns are not affected by the automatic stay. They are immediately assessable under IRC sec. 6871 (b). If the cases are agreed, they can be closed and assessed using normal procedures. If unagreed, Letter 1005(DO) should be issued covering deficiencies determined on returns of income of the bankruptcy estate.

If the trustee or debtor-in-possession requests a refund, the applicable refund procedures will apply except that, under BC sec. 505(a)(2)(B) the Bankruptcy Court has the jurisdiction to determine the refund amount 120 days after the trustee’s request. This procedure is applicable to all chapters of bankruptcy except Chapter 9, Municipal Debt Adjustment cases. The expedited audit procedures used for prompt determination requests (as outlined above) should be used to monitor and control the requests for refund filed by the trustee or debtor-in-possession, substituting 120-day for the prompt determination’s 180-day time frame for notification of examination results. However, 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.

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

As provided in Revenue Procedure 81–18, the request should be mailed to the Insolvency Support and marked "DO NOT OPEN IN MAILROOM" . The request should be date stamped with the date received by Insolvency Support function and forwarded within three work days of its receipt in the area to PSP Support Manager, designated employee, or bankruptcy processing unit. PSP Support Manager, is responsible for ensuring the 120-day time frame is met through appropriate monitoring system.

If the request for refund is selected for examination, the trustee or debtor-in-possession should be notified within 120 days as to whether the request for 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 Area Counsel, but no motion to extend the 120-day time period would be appropriate or necessary.