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Publication 908
taxmap/pubs/p908-006.htm#en_us_publink1000273402

Federal Tax Claims(p24)

rule
taxmap/pubs/p908-006.htm#en_us_publink1000273541

Proof of claim.(p24)

rule
Upon filing a bankruptcy petition, as a result of the automatic stay, the debtor's assets in the bankruptcy estate under the jurisdiction of the bankruptcy court are not subject to levy. However, creditors may file a "proof of claim" with the bankruptcy court to protect their rights. The IRS may file a proof of claim with the bankruptcy court in the same manner as other creditors. This claim may be filed with the bankruptcy court even though taxes have not been assessed or are subject to a Tax Court proceeding.
taxmap/pubs/p908-006.htm#en_us_publink1000273542

Secured tax claims.(p24)

rule
If the IRS filed a Notice of Federal Tax Lien (NFTL) before the bankruptcy petition was filed, the IRS will have a secured claim in the bankruptcy case to the extent the lien attached to equity in the debtor's assets. In chapter 7 cases, in certain circumstances, the trustee may be able to subordinate the tax lien in order to pay certain non-tax priority claims. In chapter 11 cases, 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, over the same period, as an unsecured eighth priority tax claim.
taxmap/pubs/p908-006.htm#en_us_publink1000274305

Unsecured Tax Claims(p24)

rule
taxmap/pubs/p908-006.htm#en_us_publink1000274302

Eighth priority taxes.(p24)

rule
In general, certain unsecured debts are given priority for payment purposes. Certain tax debts arising 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:
  1. 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.
  2. 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.
  3. 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.
  4. Withholding taxes that were incurred in any capacity.
  5. Employer's share of employment taxes on wages, salaries, or commissions (including vacation, severance, and sick leave pay) paid as priority claims under title 11 U.S.C. section 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.
  6. 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.
taxmap/pubs/p908-006.htm#en_us_publink1000277202

Payment of Tax Claims(p25)

rule
taxmap/pubs/p908-006.htm#en_us_publink1000289307

Chapter 7 cases.(p25)

rule
In a chapter 7 case, eighth priority taxes may be paid out of the assets of the bankruptcy estate to the extent assets remain after paying the claims of secured creditors and other creditors with higher priority claims.
taxmap/pubs/p908-006.htm#en_us_publink1000289308

Chapter 11, 12, and 13 cases.(p25)

rule
Different rules apply to payment of eighth priority pre-petition taxes under chapters 11, 12, and 13:
  1. 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 order for relief issued by the bankruptcy court (this is 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).
  2. In a chapter 12 case, the debtor can pay such tax claims in deferred cash payments over time. However, certain priority taxes may be paid as general unsecured claims if they result from the disposition of a farm asset, but only in cases where the debtor receives discharge, and
  3. In a chapter 13 case, the debtor can pay such taxes over 3 years (or over 5 years with court approval).
taxmap/pubs/p908-006.htm#en_us_publink1000277205

Higher priority taxes.(p25)

rule
Certain taxes are assigned a higher priority for payment. Taxes incurred by the bankruptcy estate are given second priority treatment, as administrative expenses. In an involuntary bankruptcy case, taxes arising in the ordinary course of business or the debtor's financial affairs (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 the debtor has employees, the employees' portion of employment taxes on the first $11,725 (this amount adjusted every 3 years) of wages that they earned during the 180-day period before the date of the bankruptcy filing or the cessation of the business (whichever occurs first) is given fourth priority treatment. However, the debtor's portion of the employment taxes on these wages, as the employer, is given eighth priority treatment.
taxmap/pubs/p908-006.htm#en_us_publink1000277206

Penalties.(p25)

rule
A tax penalty which is punitive in nature, that is, not for actual pecuniary loss (monetary), is payable as a general unsecured claim.
taxmap/pubs/p908-006.htm#en_us_publink1000277207
Relief from certain penalties.(p25)
A penalty for failure to pay tax, including failure to pay estimated tax, will not be imposed if the tax was incurred by the bankruptcy estate as a result of an order of the court finding probable insufficiency of funds of the bankruptcy estate to pay administrative expenses.
If the tax was incurred by the debtor, the penalty will not be imposed if:
  1. The tax was incurred before the earlier of the order for relief or (in an involuntary case) the appointment of a trustee, and
  2. 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.
Note.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 which is required to be paid over to the U.S. government. Nor does it apply to any penalty for failure to file a timely return.
taxmap/pubs/p908-006.htm#en_us_publink1000277209
FUTA credit.(p25)
Employers are 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 a federal unemployment tax return for the tax year.
If contributions are paid to the state fund after such date, the allowable credit shall not exceed 90% of the otherwise allowable credit that may be taken against FUTA. However, in the case of wages paid by the trustee of a title 11 bankruptcy estate where the failure to timely pay state unemployment contributions was without fault by the trustee, 100% of the credit is allowed. An employer may also receive an additional credit against FUTA contributions. See Publication 15 (Circular E), Employer's Tax Guide, for additional information.
taxmap/pubs/p908-006.htm#en_us_publink1000273582

Discharge of Unpaid Tax(p25)

rule
The bankruptcy court may enter an order discharging the debtor from personal liability for certain debts, including taxes. The order for discharge is a permanent order of the court prohibiting the creditors from taking action against the debtor personally to collect the debt. However, secured creditors with valid pre-bankruptcy liens may enforce them to recover property secured by the lien.
Not all debts are dischargeable. Many tax debts are excepted from the bankruptcy discharge. The scope of the bankruptcy discharge depends on the chapter under which the case was filed and the nature of the debt. Chapter 7 debtors do not have an absolute right to a discharge; objections may be filed by creditors. Chapters 12 and 13 debtors are generally entitled to discharge upon completion of all payments under the bankruptcy plan.
taxmap/pubs/p908-006.htm#en_us_publink1000273574

Chapter 7 cases.(p25)

rule
For individuals in chapter 7 cases, 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 the debtor 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. Only individuals may receive a discharge in chapter 7 cases; corporations and other entities do not.
taxmap/pubs/p908-006.htm#en_us_publink1000273575

Chapter 11 cases.(p25)

rule
The same exceptions to discharge that apply to individuals in chapter 7 cases also apply to individuals in chapter 11 cases. However, different rules apply to corporations. A corporation in a chapter 11 case may receive a broad discharge when the reorganization plan is confirmed; however, secured and priority claims must be satisfied under the plan. There is an exception to discharge for taxes for which the debtor filed a fraudulent return or willfully attempted to evade or defeat.
taxmap/pubs/p908-006.htm#en_us_publink1000273576

Chapter 13 cases.(p25)

rule
A debtor who completes all payments under the chapter 13 plan shall receive a broad discharge of all debts provided for by the plan. However, priority tax claims must be paid in full under the chapter 13 plan. The following taxes are excepted from the broad chapter 13 discharge: withholding taxes for which the debtor is 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. Also, there is an exception from discharge for debts where the creditor, including the IRS, did not receive notice of the chapter 13 bankruptcy case in time to file a claim.
taxmap/pubs/p908-006.htm#en_us_publink1000273577
Chapter 13 "Hardship Discharge".(p25)
In cases where the failure to complete all payments under the chapter 13 plan was due to circumstances for which the debtor should not be held accountable, the bankruptcy court may grant a "hardship discharge". However, all unsecured claims must be paid an amount not less than they would have received in a chapter 7 liquidation.
Note. Debts that would be excepted under an individual chapter 7 discharge are also excepted from the chapter 13 hardship discharge.
taxmap/pubs/p908-006.htm#en_us_publink1000277210

Chapter 12 cases.(p25)

rule
The same tax debts that are excepted from discharge in chapter 7 cases of individuals are excepted from discharge in chapter 12 cases of individuals. The exceptions do not apply to chapter 12 cases of non-individuals. As in chapter 13 cases, the debtor may be granted a hardship discharge if appropriate.
taxmap/pubs/p908-006.htm#en_us_publink1000273579

Federal Tax Liens.(p25)

rule
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 (NFTL) before the bankruptcy petition was filed. Perfected liens generally pass through bankruptcy proceedings 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, a tax lien that arises when a tax is assessed may not be removed from the property upon discharge if the property was excluded from the bankruptcy estate, even if a Notice of Federal Tax Lien was not filed.