By following Rev. Proc. 2006-24, 2006-22 I.R.B. 943, http://www.irs.gov/irb/2006-22_IRB/ar12.html
, the bankruptcy trustee may request a determination of any unpaid tax liability incurred by the bankruptcy estate during the administration of the case by filing a tax return and a request for such a determination with the IRS. For cases filed after October 16, 2005, unless the return is fraudulent or contains a material misrepresentation, the estate, trustee, debtor, and any successor to the debtor are discharged from liability for the tax upon payment of the tax:
- As determined by the IRS,
- As determined by the bankruptcy court, after the completion of the IRS examination, or
- As shown on the return, if the IRS does not:
- Notify the trustee within 60 days after the request for the determination that the return has been selected for examination, or
- Complete the examination and notify the trustee of any tax due within 180 days after the request (or any additional time permitted by the bankruptcy court).
For cases filed before October 17, 2005, the same rules apply, except that the bankruptcy estate is not discharged from the liability.
As detailed in Rev. Proc. 2006-24, to request a prompt determination of any unpaid tax liability of the estate, the trustee must file a signed written request, in duplicate, with the Centralized Insolvency Operation, P.O. Box 21126, Philadelphia, PA 19114 (marked "Request for Prompt Determination"). The request must be submitted in duplicate and must be executed under penalties of perjury. In addition, the trustee must submit with the request an exact copy of the return(s) filed by the trustee with the IRS for a completed tax period and must contain the following information:
- A statement indicating that it is a request for prompt determination of tax liability and specifying the type of return and tax period for each return being filed.
- The name and location of the office where the return was filed.
- The name of the debtor.
- Debtor's social security number, TIN, or EIN.
- Type of bankruptcy estate.
- Bankruptcy case number.
- Court where the bankruptcy is pending.
The copy of the return(s) submitted with the request must be an exact copy of a valid return. A request for prompt determination will be considered incomplete and returned to the trustee if it is filed with a copy of a document that does not qualify as a valid return. A document that does not qualify as a valid return includes a return form filed by the trustee with the jurat stricken, deleted, or modified. A return must be signed under penalties of perjury to qualify as a return.
The IRS examination function will notify the trustee within 60 days from receipt of the request whether the return filed by the trustee has been selected for examination or has been accepted as filed. If the return is selected for examination, it will be examined as soon as possible. The examination function will notify the trustee of any tax due within 180 days from receipt of the application or within any additional time permitted by the bankruptcy court.
If a prompt determination request is incomplete, all the documents received will be returned to the trustee by the Field Insolvency office assigned the request with an explanation identifying the missing item(s) and asking that the request be refiled once corrected. An incomplete request includes one submitted with a copy of a return form, the original of which does not qualify as a valid return. Once corrected, the request must be filed with the IRS at the Field Insolvency address specified in the correspondence accompanying the incomplete request being returned. In the case of an incomplete request submitted with a copy of an invalid return document, the trustee must file a valid original return with the appropriate IRS office and submit a copy of that return with the corrected request when the request is refiled.
The 60-day period for notifying the trustee whether the return filed by the trustee is being selected for examination or is being accepted as filed does not begin to run until a complete request package is received by the IRS. If the IRS receives an incomplete request, the 60-day period for notifying the trustee whether the return filed by the trustee is being selected for examination or is being accepted as filed does not begin to run until a complete request is received by the Field Insolvency office specified by the IRS in its correspondence returning the incomplete request.
If the IRS does select the estate's return for examination, properly informs the trustee as explained above, and redetermines the tax shown on the return, the trustee may contest the IRS's determination in bankruptcy court. See Bankruptcy court jurisdiction, next.taxmap/pubs/p908-004.htm#en_us_publink1000154119
Generally, the bankruptcy court has authority to determine the amount or legality of any tax imposed on the debtor or the estate, including any fine, penalty, or addition to tax, whether or not the tax was previously assessed or paid. taxmap/pubs/p908-004.htm#en_us_publink1000154120
- to determine the amount or legality of a tax, fine, penalty, or addition to tax that was contested before and adjudicated by a court or administrative tribunal of competent jurisdiction before the date of filing the bankruptcy petition, or
- to decide the right of the bankruptcy estate to a tax refund until the trustee properly requests the refund from the IRS and either:
- The IRS makes a determination about the refund,
- 120 days have passed since the date of the trustee's request, or
- A determination has been made by a governmental unit of such requests.
If the debtor has already claimed a refund or credit for an overpayment of tax on a properly filed return or claim for refund, the trustee may rely on that claim. Otherwise, if the credit or refund was not claimed by the debtor, the trustee may make the request, on behalf of the bankruptcy estate, by filing the appropriate original or amended return or form with the Advisory Group Manager within the Advisory, Insolvency, and Quality (AIQ) Office of the IRS area office having jurisdiction over the person for whom the trustee is acting.
The appropriate form for the trustee to use in making the claim for refund is as follows:
- For income taxes for which an individual debtor had filed a Form 1040, Form 1040A, or Form 1040EZ, the trustee should use a Form 1040X.
- For income taxes for which a corporate debtor had filed a Form 1120, the trustee should use a Form 1120X, Amended U.S. Corporation Income Tax Return.
- For income taxes for which a debtor had filed a form other than Form 1040, Form 1040A, Form 1040EZ, or Form 1120, the trustee should use the same type of form that the debtor had originally filed, and write "Amended Return" at the top of the form.
- For taxes other than certain excise taxes or income taxes for which the debtor had filed a return, the trustee should use a Form 843, Claim for Refund and Request for Abatement, attaching an exact copy of any return that is the subject of the claim along with a statement of the name and location of the office where the return was filed.
- For excise taxes you reported on Forms 720, 730, or 2290, the trustee should use Form 8849, Claim for Refund of Excise Taxes, or Form 720X, Amended Quarterly Federal Excise Tax Return, whichever is appropriate.
- For overpayment of taxes of the bankruptcy estate incurred during the administration of the case, the trustee may use a properly executed tax return (for income taxes, a Form 1041) as a claim for refund or credit.
Once the IRS examination function receives the trustee's claim for refund, it will examine the refund claim on an expedited basis and notify the trustee of its decision within 120 days from the date of the filing of the claim. If the trustee disagrees with the IRS's decision or does not receive a decision from the IRS within 120 days of filing the claim, the trustee may ask the bankruptcy court to determine the estate's right to the refund. taxmap/pubs/p908-004.htm#en_us_publink1000154122
The filing of a bankruptcy petition automatically results in a stay against the commencement or continuation of certain Tax Court proceedings concerning the debtor. For bankruptcy cases begun before October 17, 2005, the scope of the stay varies depending on whether the debtor is an individual or a corporation. If the debtor is an individual and the bankruptcy case was filed after October 16, 2005, the scope of the stay varies depending on whether the debtor is an individual or a corporation. If the debtor is an individual and the bankruptcy case was filed after October 16, 2005, the stay prohibits the commencement of a Tax Court case concerning liabilities of the debtor for tax periods that ended before the bankruptcy order for relief (the date of the filing of the bankruptcy petition in voluntary cases). If the debtor is a corporation in a case filed after October 16, 2005, the stay prohibits the commencement or continuation of a Tax Court proceeding concerning any liabilities for tax periods of the debtor that may be determined by the bankruptcy court; in chapter 11 cases of corporations, therefore, the bankruptcy court may generally determine the debtor corporation's tax liabilities for tax periods ending before the date a plan of reorganization is confirmed.
Because the bankruptcy court has the power to lift the stay and allow the debtor to begin or continue a Tax Court case, the bankruptcy court has, in effect, during the pendency of the stay, the sole authority to determine whether the tax issue is decided in bankruptcy court or in Tax Court. taxmap/pubs/p908-004.htm#en_us_publink1000154123
In any bankruptcy case, the 90-day period for filing a Tax Court petition, after the issuance of the statutory notice of deficiency, is suspended for the time the debtor is prevented from filing the petition because of the bankruptcy case, and for an additional 60 days thereafter. This means that if the statutory notice was issued before the bankruptcy petition was filed, and the 90-day period had not expired, the running of the 90-day period will be suspended while the stay prevents the commencement of the Tax Court case. The 90-day period will begin to run again 60 days after the stay against filing the petition ends. The suspension exists if any part of the 90-day period remained at the date the bankruptcy petition was filed. The 90-day period for filing a Tax Court petition after issuance of a Notice of Determination in an innocent spouse case, however, is not suspended by the filing of a bankruptcy petition. Thus, if the IRS issues a final notice of determination denying the debtor's request for innocent spouse relief during the bankruptcy case, the debtor is prohibited from petitioning the Tax Court while the automatic stay is in effect. However, the 90-day period for petitioning the Tax Court is not suspended. The debtor must ask the bankruptcy court to lift the automatic stay before petitioning the Tax Court.taxmap/pubs/p908-004.htm#en_us_publink1000154124
The trustee of a bankruptcy estate in any title 11 bankruptcy case may intervene, on behalf of the estate, in any proceeding in the Tax Court to which the debtor is a party. taxmap/pubs/p908-004.htm#en_us_publink1000154125
Generally, the automatic stay rules prevent a creditor from taking actions to collect prepetition debts. However, the automatic stay does not apply to:
- An audit to determine tax liability,
- A demand for tax returns,
- The issuance of a notice of deficiency to the debtor, or
- The making of an assessment for any tax and the sending of a notice and demand for payment of the tax assessed (for bankruptcy cases filed after August 17, 2005).
Any tax lien that attaches to the estate's property because of an assessment described above can only take effect when the property (or its proceeds) is transferred back to the debtor. Also, the tax must be the debtor's debt that will not be discharged in the case.taxmap/pubs/p908-004.htm#en_us_publink1000154126
In bankruptcy cases other than those of individuals filing under chapter 7 or 11, current and earlier returns of the debtor are, upon written request, open to inspection by or disclosure to the trustee or receiver, but only if the IRS finds that the trustee has a material interest that will be affected by information on the return. Material interest is generally defined as a financial or monetary interest. Material interest is not limited to the trustee's responsibility to file a return on behalf of the bankruptcy estate.taxmap/pubs/p908-004.htm#en_us_publink1000137382
After the filing of a bankruptcy petition and during the period the debtor's assets or those of the bankruptcy estate are under the jurisdiction of the bankruptcy court, assets in the bankruptcy estate are not subject to levy. The IRS may file a proof of claim in the bankruptcy court the same way as other creditors. This claim may be filed in the bankruptcy court even though the taxes have not yet been assessed or are subject to a Tax Court proceeding. taxmap/pubs/p908-004.htm#en_us_publink1000137383
If the IRS filed a notice of federal tax lien before the bankruptcy petition was filed, the IRS will have a secured claim to the extent the lien attached to equity in the debtor's assets and will be treated as such in the bankruptcy case. In chapter 7 cases, the trustee may be able to subordinate the tax lien to some extent to pay certain non-tax priority claims. For chapter 11 cases filed after October 16, 2005, if the secured claim would otherwise have been entitled to treatment as a priority claim, the chapter 11 plan must provide for the secured tax claim in the same manner and over the same period as an unsecured eighth priority tax claim.taxmap/pubs/p908-004.htm#en_us_publink1000137384
In bankruptcy, the debtor's debts are assigned priorities for payment. Certain tax debts that arose before the bankruptcy case was filed are classified as eighth priority claims.
The following federal taxes, if unsecured, are eighth priority taxes of the government:
- Income taxes on or measured by income or gross receipts for a tax year ending on or before the date of the filing of the petition for which a return, if required, is last due, including extensions, after 3 years before the date of the filing of the bankruptcy petition.
- Income taxes on or measured by income or gross receipts assessed within 240 days before the date of the filing of the petition. The 240-day period is exclusive of any time during which an offer in compromise for that tax was pending or in effect during that 240-day period plus 30 days, and exclusive of any time during which a stay of proceedings against collections was in effect in a prior case during the 240-day period plus 90 days.
- Income taxes that were not assessed before the bankruptcy petition date, but were assessable as of the petition date, unless these taxes were still assessable solely because no return was filed, a late return was filed within 2 years of the filing of the bankruptcy petition, a fraudulent return was filed, or because the debtor willfully attempted to evade or defeat the tax.
- Withholding taxes that were incurred in any capacity.
- Employer's share of employment taxes on wages, salaries, or commissions (including vacation, severance, and sick leave pay) paid as priority claims under 11 U.S.C. 507(a)(4), or for which a return was last due within 3 years of the filing of the bankruptcy petition, including a return for which an extension of the filing date was obtained.
- Excise taxes on transactions occurring before the date of filing the bankruptcy petition, for which a return, if required, is last due (including extensions) within 3 years of the filing of the bankruptcy petition. If a return is not required, these excise taxes include only those on transactions occurring during the 3 years immediately before the date of filing the petition.
For a chapter 7 case, the preceding eighth priority taxes may be paid out of the assets of the bankruptcy estate to the extent there are assets remaining after paying the claims of secured creditors and other creditors having higher priority claims.
Different rules apply to payment of eighth priority prepetition taxes under chapters 11, 12, and 13:
- For chapter 11 cases filed before October 17, 2005, a chapter 11 plan can provide for payment of these taxes, with post-confirmation interest, over a period of 6 years from the date the taxes were assessed. For chapter 11 cases filed after October 16, 2005, a chapter 11 plan can provide for payment of these taxes, with post-confirmation interest, over a period of 5 years from the date of the bankruptcy order for relief (the bankruptcy petition date in voluntary cases), in a manner not less favorable than the most favored non-priority claims (except for convenience claims under section 1122(b) of the Bankruptcy Code).
- In chapter 12, the debtor can pay such tax claims in deferred cash payments over time, except that for cases filed on or after April 20, 2005, certain priority taxes may be paid as general unsecured claims if they result from the disposition of a farm asset if the debtor receives discharge, and
- In chapter 13, the debtor can pay such taxes over 3 years (or over 5 years with court approval).
Certain taxes are assigned a higher priority for payment. Taxes incurred during administration by the bankruptcy estate are given second priority treatment, as administrative expenses. Taxes arising in the ordinary course of your business or financial affairs in an involuntary bankruptcy case, after the filing of the bankruptcy petition but before the earlier of the appointment of a trustee or the order for relief, are included in the third priority payment category. If you have employees, your employees' portion of employment taxes on the first $10,950 (this amount adjusted every 3 years) of wages that they earned during the 180-day period before the date of your bankruptcy filing or the cessation of your business (whichever occurs first) is given fourth priority treatment. Your portion of the employment taxes on these wages, as the employer, is given eighth priority treatment.taxmap/pubs/p908-004.htm#en_us_publink1000137386
A penalty for failure to pay tax, including failure to pay estimated tax, will not be imposed for any period during which a bankruptcy case is pending, under the following conditions. If the tax was incurred by the bankruptcy estate, the penalty will not be imposed if the failure to pay resulted from an order of the court finding probable insufficiency of funds of the estate to pay administrative expenses. If the tax was incurred by you as the debtor, the penalty will not be imposed if:
- The tax was incurred before the earlier of the order for relief or (in an involuntary case) the appointment of a trustee, and
- The bankruptcy petition was filed before the due date for the tax return (including extensions) or the date for imposing the penalty occurs on or after the day the bankruptcy petition was filed.
This relief from the failure-to-pay penalty does not apply to any penalty for failure to pay or deposit tax withheld or collected from others and required to be paid over to the U.S. government. Nor does it apply to any penalty for failure to timely file a return. taxmap/pubs/p908-004.htm#en_us_publink1000137387
An employer is generally allowed a credit against FUTA for contributions made to a state unemployment fund, if the contributions are paid by the last day for filing an unemployment tax return for the tax year. If the contributions to the state fund are paid after that date, the credit shall not exceed 90% of the otherwise allowable credit that may be taken against FUTA.
However, for any unemployment tax on wages paid by the trustee of a title 11 bankruptcy estate, if the failure to pay the state unemployment contributions on time was without fault by the trustee, 100% of the credit is allowed. taxmap/pubs/p908-004.htm#en_us_publink1000137388
In a bankruptcy case, the period of limitations for collection of tax (generally, 10 years from the date of assessment) is suspended for the period during which the IRS is prohibited from collecting, plus 6 months thereafter. taxmap/pubs/p908-004.htm#en_us_publink1000137389
If you are a debtor in a bankruptcy case, the bankruptcy court may enter an order providing you with a discharge of debts. However, not all of your debts may be discharged. The scope of the bankruptcy discharge depends on the chapter you are in and the nature of the debt. Many tax debts are excepted from the bankruptcy discharge.
If you are an individual under chapter 7, the following tax debts, including interest, are not subject to discharge: taxes entitled to eighth priority, taxes for which no return was filed, taxes for which a return was filed late after 2 years before the bankruptcy petition was filed, taxes for which a fraudulent return was filed, and taxes that you willfully attempted to evade or defeat. Penalties in a chapter 7 case are dischargeable unless the event that gave rise to the penalty occurred within 3 years of the bankruptcy and the penalty relates to a tax that is not discharged. Corporations and other entities that are not individuals do not receive a discharge in chapter 7 cases.
The same exceptions to discharge that apply to individuals in chapter 7 cases apply to individuals in chapter 11 cases. Different rules apply for corporations. A corporation in chapter 11 may receive a broad discharge when the plan is confirmed, but secured and priority claims must be satisfied under the plan and there is an exception to discharge for taxes for which the debtor filed a fraudulent return or willfully attempted to evade or defeat, for bankruptcy cases filed after October 16, 2005.
There are two types of discharge for individuals in chapter 13. A debtor who completes payments under the chapter 13 plan may receive a broad chapter 13 discharge of the debts provided for in the plan. However, priority tax claims must be paid in full under the chapter 13 plan, and for chapter 13 cases filed after October 16, 2005, the following taxes are excepted from the broad chapter 13 discharge: withholding taxes for which you are liable in any capacity, taxes for which no return was filed, taxes for which a return was filed late after 2 years before the bankruptcy petition was filed, taxes for which a fraudulent return was filed, and taxes that the debtor willfully attempted to evade or defeat. Further, for cases filed after October 16, 2005, there is an exception from discharge for debts where the creditor, including the IRS, did not receive notice of the chapter 13 case in time to file a claim.
A debtor that does not complete payment under a chapter 13 plan may, in some cases, be entitled to a discharge, but all the exceptions to discharge for individuals in chapter 7 cases would apply. The chapter 7 discharge exceptions also apply to individuals in chapter 12. The discharge for non-individuals in chapter 12 is similar to the pre-October 17, 2005, broad discharge an individual receives in chapter 13.
If a tax is discharged, the discharged tax may still be collectable from the debtor's pre-bankruptcy property if the IRS filed a Notice of Federal Tax Lien before the bankruptcy petition was filed. This is because perfected liens generally pass through bankruptcy unaffected, even if the debtor's personal liability for the debt is discharged. If the IRS did not file a Notice of Federal Tax Lien before the bankruptcy petition was filed, the tax lien will generally be removed from the debtor's pre-bankruptcy property as a result of the bankruptcy, even if the debtor exempted the property out of the bankruptcy estate. However, the tax lien that arises when a tax is assessed may not be removed if the property was excluded from the bankruptcy estate, even if a Notice of Federal Tax Lien was not filed, and never became estate property.