Yvette Brooks-Williams: Again, welcome. We are glad you've joined us for today's webinar. Andbefore we move along with our session, let me make sure you're in the right place. Today'swebinar is Bankruptcy and the IRS and the webinar is scheduled for approximately 120 minutes.
And let me introduce to you today's speakers. So Alan Chu is the Insolvency Group Manager for LosAngeles, Laguna Niguel, San Bernardino and San Diego. He has been with the Internal RevenueService close to 22 years and has worked in field collection and specialty insolvency. We alsohave Anthony Liburd. He is the Insolvency Group Manager for Las Vegas and Salt Lake City. He hasbeen with the Internal Revenue Service for 17 years and has worked in insolvency since 2013. Nextwe have Sabina Makarov, and she is the Insolvency Acting Territory Manager from Oakland,California. Sabina's experience includes general collection and specialized bankruptcy knowledge.
But before we turn it over to Alan to start the presentation, I'd also like to introduce to youRichard Goldstein. Richard is the Internal Revenue Service Acting Director of SpecialtyCollection Insolvency for the Small Business/Self-Employed division. Richard has more than 30years of government service and has been with the Internal Revenue Service for more than 28years. Richard is a 1987 graduate of the College of William &; Mary, earned his Bachelor of Artsdegree in Economics and Government. Richard obtained his Juris Doctor degree from the GeorgetownUniversity Law Center in 1992. Richard, the floor is yours. Richard Goldstein: Thank you, Yvette.
I'm excited to see so many individuals who have joined our webinar on Bankruptcy and the IRS.
Specialty Collection Insolvency is proud of our record of providing exceptional service todebtors, practitioners, trustees, and others impacted by bankruptcy proceedings on theapplication of the tax law in these proceedings. Today's presentation is a continuation of ourmission to help taxpayers understand the role of the tax law in bankruptcy. Welcome, and pleaseenjoy our presentation. I'll now turn it over to our panel of experts. Alan? Alan Chu: Thank you,Richard. Good morning or good afternoon, depending on where you are located. I am Alan Chu. Thankyou for joining our webinar on Bankruptcy and the IRS. In today's webinar, we will share whatare exceptions to discharge, effects of Automatic Stay, secured Notice of Federal Tax Lien alsoknown by its abbreviation NFTL, debts accrued during filing year, unfiled pre-petition returns,individual liability for corporate tax liability, plan feasibility, and technological advances.
At the beginning of every bankruptcy filing, the debtors that plan to file bankruptcy need toknow the type of taxes, the reason for the tax assessments, tax assessment dates, and when thedeadlines of the filing of these tax returns. It's very important debtors need to know and complywith pre-petition filing compliance with requirements. It is very important that the returns arefiled by the deadline prior to filing bankruptcy plan that has an impact on taxesdischargeability in bankruptcy. The debtor usually receives a discharge of taxes. Now however,certain tax liabilities are exempt from discharge. We will identify five of the most commonexceptions to discharge. The first one is trust fund taxes are not dischargeable. The trust fundtaxes are employees Federal Tax Withholding, Social Security taxes, Medicare taxes that anemployer withheld from their wage. The IRS conducts a Trust Fund Recovery Penalty investigation,also known by this abbreviation TFRP for the unpaid Trust Fund taxes to reimburse and compensatethe government for the loss of employer failure to turn over these funds to the IRS. A secondexception to discharge is taxes based on fraudulent returns are not dischargeable. You ask whatis a fraudulent tax return? Well, a filing of a tax return that is a willful attempt to evadeor defeat the tax. An example of a fraudulent tax return is when a return is filed with falseinformation, such as inflated personal expenses or inflated business expense, false deduction,unallowed credit, or excess exemptions. Another exception to discharge are priority taxes, which wehave four different subcategories of priority tax. The first category of priority tax is theliability that are not dischargeable in a three year rule, when tax debt is due within threeyears of a bankruptcy filing petition date. Our second sub-category is the two year rule. Taxliability is not dischargeable when an income tax return is filed within two years beforebankruptcy petition date whereas to meet a dischargeable requirement, the income tax return mustbe filed by the taxpayer more than two years before the filing for bankruptcy, regardless of anextension filing or not. Moving on to the 240 day rule, the tax must be assessed at least 240days prior to filing for bankruptcy, or exceptions to discharge. Our fourth subcategory onexceptions to discharge is the concept of tolling, which interprets the running of a statute oflimitation in certain situations. Tolling can occur during statutory provision, providing fortolling or equitable tolling created by Supreme Court decision on the case of Young v. UnitedStates 535 USC subsection 43. In this case, the petitioner's tax return was due more than threeyears before their Chapter 7 filing, but less than three years before their Chapter 13 filing.
Holding that the look back period is tolled during the prior bankruptcy petitions of the Chapter 13filing, the court concluded the 1992 debt had not been discharged when petitioners were granteda discharge under Chapter 7, which was filed after the Chapter 13 filing. In conclusion, theSupreme Court sided with the IRS that the 1992 income tax was due. A fourth common category forexception to discharge is taxes that are due on an unfiled tax return. There is filing prior tobankruptcy petition filing is important, as stated early. IRS estimates the tax liability ondelinquent tax returns to include into the proof of claim. Now, when IRS is not properly notifiedof a bankruptcy or the IRS receives a late notice of a bankruptcy, this could affect thedischargeability of the bankruptcy. A timely bankruptcy filing notice to the service is veryimportant for receiving a discharge at the end of the case. In some cases, penalties may be dischargedwhile tax is not dischargeable. Oh no, you let, let's do our first poll question. YvetteBrooks-Williams: Sure thing, Alan. Audience, here's our first polling question. Which situationis not an exception to discharge? Is it, a, fraudulently filed return; b, Trust Fund RecoveryPenalty assessment; c, unfiled return; or, d, correctly filed Form 1040 received more than threeyears prior to the current bankruptcy petition date? Now, take a moment, click on the radiobutton that best answers the question which situation is not an exception to discharge? So I'mgoing to give you a few more seconds to make your selection. Okay, we're going to stop thepolling now. And let's share the correct answer on the next slide. And the correct response is D.
Correctly file Form 1040 received more than three years prior to the current bankruptcy petitiondate. Now, let's see how well you all did with this question. I see that 56% of you respondedcorrectly. Maybe we might need a little clarification. Alan, can you provide a little more detailof why D is the correct answer? Alan Chu: Yes, Yvette. Well, the correct answer is D for thefiling of the Form 1040 received more than three years prior to the backwards petition date. Theanswer is correct based on the three year priority tax rule, which the Form 1040 filing was priorto the three year priority rule as stated in the Exceptions to Discharge. Thank you, Yvette.
Yvette Brooks-Williams: Thank you. Thank you so much. I'm going to turn it back over to you tomove on, Alan. Thank you. Alan Chu: All right, great. Let's discuss how bankruptcy filing impactscollection activity. An Automatic Stay is an injunction that arises by operation of theBankruptcy Law, when a bankruptcy petition is filed under 11 USC subsection 362. When there isfiled bankruptcy, the debtor usually wants an immediate relief from collection enforcementactivities on all demands for payment. The Automatic Stay goes into effect on the same day ofthe bankruptcy petition filing. Now, there are some exempted situations in which IRS may pursuecollection activity. The first one is post-petition and post confirmation tax liabilities arenot covered by the Automatic Stay. So collection activity may be pursued. post-petition refers totaxes that are incurred after the filing of the bankruptcy petition. The Automatic Stay does notcover collection of taxes that are incurred in post-petition. Collection may be pursued if thebankruptcy plan is defaulted and if collection is not otherwise prohibited. Collection activitymay continue when a motion to lift the Automatic Stay is filed and approved by the court. Suchmotion can be filed by any creditor, including the IRS. The IRS can pursue Exempt, Abandoned, orExcluded Property, also known by its abbreviation EAEP, to collect this chargeable liabilities inany bankruptcy chapter. Now for pre-petition, it is the time before the bankruptcy petition wasfiled. Pre-petition tax is incurred prior to the filing of bankruptcy petition. Income taxes areincurred on the last day of the income tax year. If the IRS bankruptcy specialist and/orbankruptcy advisors become aware of Automatic Stay violations, they will work on correcting thestay violation as soon as they learn about it. Debtors and authorized representative can contactthe assigned bankruptcy specialist or bankruptcy advisor or the field's Centralized Insolvency tobring the Service's attention to a possible violation. Matter of fact, that brings me to a phonemessage I just received recently. A bankruptcy attorney paralegal left a voicemail for me toinform me that they believe the IRS went ahead and filed a Notice of Federal Tax Lien in postpetition. We reviewed the case. I verified, indeed, that's what happened when the fieldcollection revenue officer requested for a Notice of Federal Tax Lien filing on the debtor. Thebankruptcy specialist immediately requested a withdrawal of Notice of Federal Tax Lien. Now, thebankruptcy specialists and advisors can also identify a potential violation doing case analysisand we will work on resolving it. Just like this example I provided. Continuing with effect ofAutomatic Stay, the Automatic Stay does not prevent IRS in performing tax assessment in somesituations, as we will describe in the next few slides. IRS continues to conduct a Trust FundRecovery Penalty investigation and tax assessment. Trust Fund Recovery Penalty assessed againstindividuals responsible for failure to turn over employment withholding and the IRS bankruptcyspecialist prepares a government's proof of claim including any trust fund tax assessment orpending assessment, IRS can file un-assessed claim. Now while Automatic Stay is in effect,IRS examination can perform audits, but they cannot request audit assessment on the debtorsaccount, unless debtor agree with the audit findings. IRS will send the proposed audit findingsto the debtors in bankruptcy. The IRS cannot record the audit assessment because a debtor doesnot have appeal rights in bankruptcy. In bankruptcy proceeding, debtors can provide unfiled taxreturns for filing compliance or provide tax returns to amend the previous filing. Debtors can makea remittance payment with the unfiled tax returns. The remittance payment is considered as avoluntary payment. During Automatic Stay is in effect, the IRS is permitted to make accuraterelated adjustments on debtors account based on tax returns filed by the debtor. Now, IRS also ispermitted to make tax assessments for unfiled returns by default when the response to the IRSnotice or the debtor agreed with the proposed tax assessment. This is known as a substitute forreturn process. If IRS accepted an Offer In Compromise prior to the bankruptcy petition filingdate, date the IRS will honor the terms of this agreement in the bankruptcy plan. Now, however,if a new Offer In Compromise is submitted, it cannot be considered since the Offer In Compromisewas submitted after the bankruptcy petition filing date. This is considered a post-petitionsubmittal in Automatic Stay. Generally, bankruptcy procedures supersede an Offer In Compromise.
All right, in the next slide, we have some situation where Automatic Stay will not prevent IRSin performing. IRS will process an Innocent Spouse and/or an Injured Spouse claim as requiredthrough normal procedures and update the changes to reflect on to an amended proof of claim filed forbankruptcy case. When a debtor has an Installment Agreement in place, prior to bankruptcypetition filing date, the installment agreement will be suspended. Once the bankruptcy case isclosed, the prior installment agreement will be reinstated with the same terms of the agreementwithout charging the debtor a reinstate fee, if the user fee was paid prior to bankruptcy filingpetition date. The installment agreement could be terminated if additional tax liabilities wereincluded in the bankruptcy. These additional taxes were not included in the installment agreementprior to filing bankruptcy. Hi, Yvette, how about another poll question? Yvette Brooks-Williams:I think that's an excellent idea, Alan. Audience, time for our next polling question. Which oneof these does an Automatic Stay prohibit? Is it, a, trust fund recovery penalty investigation;b, record a Notice of Federal Tax Lien; c, audit examination; or d, pursue unfiled returns? So asdone before, just take a moment and click the radio button that best answers the question, whichone of these does an Automatic Stay prohibit? So I'm going to give you a few more seconds to makeyour selection. Okay, we're going to stop the polling now and let's share the correct answer onthe next slide. Okay. And the correct response is B, recording of a Notice of Federal Tax Lien.
So let's see how well you all did with this question. All right, I see that 53% of you respondedcorrectly. All right, Alan, I think we're going to need some more clarification. Can you providea little more detail for it? Alan Chu: Yes, I'll be happy to. Well, the correct answer is, b, aNotice of Federal Tax Lien, also known by this abbreviation NFTL, recorded after the bankruptcypetition filings date, which is the post-petition date, is an a enforcement activity and aviolation of the Automatic Stay. The IRS must act quickly to withdraw the Notice of Federal TaxLien recording, as the example that I have provided earlier. Great, all right. YvetteBrooks-Williams: Thank you for the explanation. Yeah, I appreciate that explanation, Alan. Sowe're going to turn it back over to you again. Alan Chu: Okay. It is important to know if IRSrecorded a pre-petition NFTL to determine if the IRS has a secure claim. A NFTL attaches to allreal and personal property and the rights of the debtor under 11 USC subsection 506(a), the IRShas the secured claim when it has properly filed a pre-petition NFTL. It has a tax claim that issubject to setoff under 11 USC subsection 553. For purposes of determining the IRS's securedclaim, the Notice of Federal Tax Lien or NFTL attaches to the debtor's property that became theestate property, including property exempted under 11 USC subsection 522(c)(2)(B). The Federal TaxLien also attaches to property exempt from federal tax levy. In the case, United States versusRon Pair Enterprises, Inc. 489 USC subsection 235, IRS is entitled to receive post-petitioninterest on allowed and over-secured claim. Now, one might wonder how does the IRS determine thevalue of an asset in a real property for a secured claim with NFTL recording? Well,the IRS caseworkers analyze the fair market value of the assets, what the encumbrances againstthe assets, and the priority of the IRS Notice of Federal Tax Lien recording date. Well, look,Yvette, I think it's a good time for us to have another poll question. Yvette Brooks-Williams:Okay, Alan. Here we are audience. Here's our third polling question. When can the IRS re-file aNotice of Federal Tax Lien during ongoing bankruptcy case? Is it a, tax liabilities listed onthe original pre-petition Notice of Federal Tax Lien; b, this will be a stay violation; c, forpost-petition liabilities; or d, when debtor moves to a new address? Now, take a moment andclick on the radio button that best answers the question. When can the IRS re-file notice thefederal tax lien during ongoing bankruptcy case? So, I'll give you a few seconds to make yourselection. Okay, we're going to stop the polling now. And let's share the correct answer on thenext slide. And the correct response is, a, tax liabilities listed on the original pre-petitionNotice of Federal Tax Lien. So let's see how well you are a bit with this question. All right, Isee that 34% of you responded correctly. So Alan, we're going to need some clarification and needyou to provide more detail. So, let's see if we can help the audience understand what you'vejust gone for. Alan Chu: Well, it's my pleasure to provide a response to this answer. The correctanswer is A. We re-filing a Notice of Federal Tax Lien by itself is not considered a violation ofAutomatic Stay under 11 USC subsection 362 because the Notice of Federal Tax Lien is not beingcreated, rather the Notice of Federal Tax Lien is being preserved, since the Notice of FederalTax Lien was filed prior to the bankruptcy filing date. The tax period on the Notice of FederalTax Lien must be made the same on the re-file as the original Notice of Federal Tax Lien filingprior to the bankruptcy filing period date. So, for instance, if the Notice of Federal Tax Lienin pre-petition was filed for the 10/4/2016 and 2017 tax year, the IRS can re-file a Lien topreserve its place for 2016 and 2017 but if during bankruptcy the debtor includes 2020 taxes,okay, that is post-petition liability. The IRS cannot re-file that Lien for the 2020 taxreturn. Hope that provides a better explanation for our audience. Yvette Brooks-Williams: Yeah,thank you for the explanation. So I just want to clarify. So the reason that b was not correct isbecause recording a Notice of Federal Tax Lien after the bankruptcy petition filing date is aviolation of the Automatic Stay. Is that correct? Alan Chu: Yes, that's correct, Yvette. YvetteBrooks-Williams: Okay, and let me just clarify for c, the Notice of Federal Tax Lien filing on apost-petition tax liability is an Automatic Stay violation and that the term post-petitionrefers to after the bankruptcy petition filing date. Alan Chu: Yes, that's correct. Apost-petition tax liability is a violation of Automatic Stay for filing a new NFTL. YvetteBrooks-Williams: And one last thing, the IRS cannot update the new address on a Notice of FederalTax Lien recording. Is that true? Alan Chu: That is correct. Yes, the Notice of Federal Tax Lienfiled prior to bankruptcy already have a address on there. If the debtor moves to new address, wecannot file a new NFTL with that new address. It must be the same address prior to bankruptcypetition. Yvette Brooks-Williams: Okay, thanks, Alan. Yeah, thanks for explaining. I hope thatreally helps our audience. It looks like we're going to turn it over to Anthony next to discussthe next topic. Anthony, I'm going to turn this virtual floor over to you. Anthony Liburd: Thanksfor that. So before I get started, I'd like to first thank everyone for your attendance today.
Now the next topic that we discussed will be debt accrued during the filing year. Now, dependingon the date of your bankruptcy filing, a situation that may come up in the beginning of thetaxpayer case is that an individual can terminate the tax year. Now, I'm talking about anindividual debtor in a Chapter 7 or a Chapter 11 case that may elect to close the debtor's taxyear for the year in which the bankruptcy petition is filed and that is as of the day before thedate of the bankruptcy case. Although this is not a common practice, individuals may elect toterminate their tax year when the bankruptcy petition is filed. Now if the election is made, thetax year is terminated as of the day before the bankruptcy filing, which will result in thedebtors filing two short year returns. Now this election is made by filing the first short yearreturn on or before the due date, which is the 15th day of the fourth month, following the closeof the first short year. If the election is made, the debtor's federal income tax liability forthe first short year becomes an allowable claim against the bankruptcy estate arising before thebankruptcy filing. Also, the tax liability for the first short year isn't subject to dischargeunder the bankruptcy code. Now the debtor must write at the top of the first short year returnSECTION 1398 ELECTION and at the top of that second year, return the debtor must write SECONDYEAR SHORT YEAR RETURN AFTER SECTION 1398 ELECTION. Now, I'm making note here that theelection can also be made by filing an extension to file on or before the due date of thisreturn. Now let's talk about the corporate debtors' pre-petition and post-petition taxliability. So corporate debtors usually run into situations where the taxpayer has filedbankruptcy petition in the middle of a tax period. Now for debtors who owe employment taxes andfile bankruptcy during the quarter, the employment taxes are attributable to wages earnedprepetition, it should be included on a proof of claim as a pre-petition priority tax. Now forbankruptcy purposes, an employer's liability for employment taxes accrues when the wages inquestion are earned. Now, the amount may need to be estimated until the employment tax return isactually filed. So you might find out that IRS proof of claim shows estimate. Now, when it comesto something like this, you will just work with the bankruptcy specialist assigned to your caseand something that you may see that we see that sometimes seems to be a problem deals with, ofcourse, those administrative post-petition or 1305 claims by the post-petition liability, wherethe taxpayer is not using the bankruptcy as a fresh start, but as another pattern of additional tax liability. Now, if the debtor does not bring that filing compliance current, then the IRSmay proceed with the objection for plan confirmation, and possibly also seek case dismissalon the grounds for non-compliance. Now, I have a couple of notes for you. Now, when you'retalking about current and post-petition compliance and why it's important and if the debtor wishto remain in a bankruptcy, the debtor, of course, cannot, I repeat cannot, continue to accruetax liabilities once they've filed a bankruptcy. And also, when we're talking about the debtor, the debtorcannot make a short year election if there is no assets other than exempt property that are inthe bankruptcy estate. Now the next topic I'd like to discuss is those unfiled pre-petitionreturns. Now so we all know, of course, the Chapter 13 debtors are all required to file thosereturns for tax periods in their four year period ending an on the petition date. Now, thesereturns maybe individual tax returns or employment taxes for sole proprietorships. So, in thebeginning of your client's case, it's very important to determine if the taxpayer was incompliance pre-petition filing. As one of those indicators you'll see is that the IRS willactually file that proof of claim prior to their first meeting of creditors or the 341 meeting, and youwill see those listed as estimated liabilities with no assessment date next to those amounts.
Now, it's important for the debtors, of course, to file those missing returns for the trustee toof course to recommend that plan confirmation. Now, those estimated liabilities may, ofcourse, also impact the plan feasibility. So the bankruptcy specialist of course, working yourcase will address those pre-petition compliance at the first meeting of creditors or the 341 oralso by issuing a Letter 1714 notice of unfiled returns. Now, as the attorney of record, youwill also receive a copy of this Letter 1714 that's issued to the debtor requesting thosedelinquent returns to be filed and that letter will provide the list of missing returns. It willalso provide the type of returns, what years are missing, and/or if there is any quarter that ismissing. Now, these delinquent returns should be mailed or sent to the assigned bankruptcyspecialists whose name and email address are listed on the IRS proof of claim. Now, of course,makes sure when those returns are sent, they must be signed and dated and, of course, they mustbe accurate. Then, of course now, once we receive those returns, the IRS will amend a proof ofclaim once those delinquent returns are assessed or if the debtor provides credible informationexplaining why the debtor was not liable to file a delinquent return. Now case we're talkingabout communication with insolvency and responding to those letters, it's very important toprevent further litigation, or, of course, the IRS may proceed with filing those returns underIRSC 6020(b). Now, if the debtor does not bring filing compliance current, IRS may also proceedwith the objection to plan confirmation, or possibly also seek a case dismissal on the groundsfor non-compliance. Now, later in this presentation, I will also provide you a new secure IRStool that will help you to send those requested information to your assigned bankruptcyspecialist. Now, all the information I just discussed, of course, about unfiled returns can alsobe verified if the debtor or you as the attorney of record, reviewed a debtors' IRS accounttranscript. Now, if the debtors need to know of course the amounts of liabilities prior to theIRS proof of claim being filed, the debtors and the attorneys may find tax transcripts helpfulAlso, we could provide information regarding discharge determination and information for in determining the amount of unpaid liabilities and also verification if returns have been filed.resolving other issues. Now, the tax transcripts will also indicate if the IRS has a Notice ofFederal Tax Lien that was previously filed. You do also have a few options on how copies ofthose transcripts can be received. First is online or second is by mail. So let's talk about thefirst option. We're talking about online that can be requested by going toIRS.gov/individuals/get-transcript. Now, your second option is to get those tax returns and taxaccount transcripts which are going to be limited to the current and prior three years when usingthat Get Transcripts by mail or if you need older tax account, you would have to submit a Form4506-T. Also, their next best option is that the debtor and the attorney can call 800-908-9946.
And I'll give you that number again, it's 800-908-9946. Now, we also have the Transcript DeliverySystem or TDS system. And the IRS, of course, has changed the format and distribution policy forthose tax transcripts and the authorized tax practitioners can access the Transcript DeliverySystem or request client transcripts be sent to the e-services mailbox, now, where they will beavailable, of course for retrieval but I just want to give you a quick reminder that if you viewthose transcripts in that e-services mailbox, it will only be available for three days. Now ifyou received the transcripts, but you have not viewed them, they will be available for 30 daysand of course those transcripts provide the best information and is located at IRS.gov and youcan search for Transcripts. Now of course, let's talk about the e-services. The e-services is asuite of web-based tools that allow tax professionals or reporting agents or mortgage industrypayers and others to complete transactions online with the IRS. Now all e-services users mustaccept the user agreement in order to access the account. So for online Power of Attorneys andTax information Authorization, you would use of course a Tax Pro Account or you would Submit aForm 2848, which is a power of attorney and declaration of representative or Form 8821, which isfor Tax Information Authorization. Now upon your successful registration, you will have theoption to continue and get the transcripts online. Now it will ask you the reason for that youneed transcripts to determine which type may be best for you. Now on the Get Transcripts online,it will provide access to all transcript type and years available for you to view, print ordownload from our browser. And just a special note here, you can get transcripts by mail andit's also available in Spanish. So if you get it by mail, it can be in Spanish. However, we havetranslated the Get Transcript webpage into five foreign languages to help users before they tryto verify their identity and get the transcripts online, which is available only in English. I'lljust say that again, you can get in mail, it's available in Spanish, but it's only available inEnglish after you verify your identity. Now, in the course of preparation, of course, you mayfind out that your Trust Fund Recovery Penalty was assessed against your client or there'scurrently an investigation for your client. Now Trust Fund taxes are taxes required to bewithheld or collected by a third party, usually employer, and paid over to the government andthat Trust Fund Recovery Penalty allows the IRS to assess against those responsible parties whenthe trust fund taxes are not paid over to the government. Now the party assessed the Trust FundRecovery Penalty and of course their duty and authority and the status to direct collection andmade a decision to not pay over that account for the tax. Now the penalty facilitates thecollection of trust fund taxes and enhances, of course, voluntary compliance. Now most Trust FundRecovery Penalties relate to employment taxes due from businesses and those are usually based onForm 941, Form 943, Form 944, or Form 945, or it can be a Form 1042 or a CT-1. We also do havemiscellaneous excise taxes that are considered Trust Fund taxes and are reported on Form 720.
Now the Trust Fund Recovery Penalties is assessed and collected in the same manner as tax. Soit's a one-time collection. Withheld income and employment taxes are collected, ofcourse, as excise taxes, but they are only collected once. Now whether it's from the businessand/or from one or more of its responsible parties, the proof of claim will state that. Ofcourse, if there's pre-petition Trust Fund quarters and in any trust fund recovery penaltyaccruing on tax periods ending before the bankruptcy petition is filed, it constitutes apre-petition tax liability, even if the trust fund recovery penalty assessment was not madebefore the bankruptcy was filed. Now preparation of that claim, the government proof of claim,will include the full amount of any Trust Fund tax pending. If an as accurate amount is not knownat the time of the proof of claim is prepared, the case worker can file it un-assessedestimated claim and of course amended once the Trust Fund taxes has been set. Now Trust Fundrecovery penalty is an important taxes individual who's responsible again for business Trust Fundtaxes that were paid and who willfully failed to do so. Trust Fund Recovery Penalty taxliabilities are not dischargeable in all individual bankruptcy cases, even if the IRS does notfile a claim for those liabilities. So, if a potentially responsible person has filed bankruptcyand a Trust Fund Recovery Penalty has not yet been assessed, and an investigation is pending, thefield insolvency case workers should be notified so that the liability can be included on theproof of claim prior to the bar date or by confirmation date. If necessary, of course, insolvencyworkers should be provided with an accurate an estimate as possible of that Trust Fund RecoveryPenalty, so it can be included in a timely proof of claim. An amended IRS proof of claimwill be prepared later when those exact amount assessments are made. Next I'd like to discussplan feasibility and some of the things that will prompt an IRS objection to confirmation. Nowwe're talking about when a case worker has analyzed the case and the case fails to meet therequirements, for example, the priority and secured claims will not be paid in full, it is notfeasible given a debtors current income, expenses, and future tax obligations, as proposes to abank balloon payment, it discriminates against the IRS by treating the service claimsdifferently and other creditors in the same classification or it proposes payments outside theplan with an exception for cases with, of course, restitution assessment. Also, it could containlanguage discharging liabilities that are non-dischargeable part of the bankruptcy code or itcontains language that would require the release of lien or non-dischargeable liability, or thatwould require you to release of lien from property that was excluded from the bankruptcy estate.
Now the next topic we discuss, of course, will be resolving issues with the IRS. Now I want toencourage debtors and their attorneys representative to contact your bankruptcy specialists orthe centralized insolvency to address issues or questions that the debtors or attorney may have.
Now a lot of situations can be resolved without litigation by contacting the assigned bankruptcyspecialist who will advise on how to proceed in order to resolve those issues. So for example,let's say your client has unfiled returns, so the IRS proof of claim shows estimate. This issuecan be resolved by calling the bankruptcy specialist instead of filing a objection to the proofof claim and of course there are a couple of ways to find that specialist information. Now thefirst of course is to contact the bankruptcy specialist assigned to your case, you can find thatspecialist name at the bottom of the IRS proof of claim. Now, your second option, of course, thenit will be to contact the centralized insolvency operations and they can be contacted at800-973-0424, if a proof of claim has not yet been filed. So just as a wrap up this slide, yourbest resource resolving questions about the IRS proof of claim and other issues such as unfiledreturns, plan payment, refunds, estimated liabilities, is to contact the assigned bankruptcyspecialist. And just to note that, due to how cases are assigned, your bankruptcy specialist maynot be located in your local area often. And depending on older cases, that bankruptcy specialistcould have retired. So if the name is no longer valid on the proof of claim, your best option isstill to contact in centralized insolvency operations at 800-973-0424. Now, before I provideinformation about proper bankruptcy notifications for the IRS, I want to share the IRS insolvencycomposition where the insolvency unit that handles bankruptcy cases, of course, compositionincludes two parts. Insolvency consists of a field operation and that part the fieldoperation has offices geographically distributed throughout the United States throughout thenation. Now when we talk about centralized insolvency operations that is located inPhiladelphia, and those bankruptcy specialists in the CIO are notified of the bankruptcy filing,they process certain payments from trustees, and they handle phone calls from our 800 number,which again is 800-973-0424. Now the specialist from CIO and field insolvency, do continuouslycommunicate with one another in order to resolve cases related to issues and, of course, tocase processing. Now, next, you know how insolvency is composed and there are multipleoffices, it's very important to remember how to notify the IRS of a bankruptcy filing. So thecorrect way to notify the IRS of a bankruptcy filing or provide a notice regarding any otherongoing case action is to mail document to the address you see on the slide and thosenotifications must be mailed to the Philadelphia CIO office at the address Internal RevenueService, PO Box 7346, Philadelphia, PA 19101-7346. We also like to ask that you please provideand verify that your legal services you may use for noticing is also provided the address I justprovided. The reason I bring this up is due to recent issues of notices being sent to specificbankruptcy specialists. Now the reason that is very important is of course that we notify thecorrect office is because CIO ensures by starting a process that freezes inputs on those taxaccounts when notification of the bankruptcy filing is received. So because the sooner the IRS isnotified properly, the faster the bankruptcy specialist can ensure that collection has stopped,if appropriate. And I believe we now have time for a polling question, right, Yvette. YvetteBrooks-Williams: We sure do. Audience, it is time for the fourth polling question. What is thecorrect address to mail bankruptcy notifications to the Internal Revenue Service? It is a, IRSP.O. Box 7346 in Philadelphia; b, IRS Mail Room 1111 Constitution Avenue in Washington, DC; c,IRS Insolvency in Oakland, California; or d, you can just mail it to any IRS office. So, take amoment, click the radio button that best answers the question, what is the correct address tomail bankruptcy notification to the Internal Revenue Service? So, I will give you a few moreseconds to make your selection. Okay, we are going to stop the polling now and let's share thecorrect answer on the next slide. And the correct response is, a ,IRSC, PO Box 7346,Philadelphia. Now let's see how well you all did with this question. All right, I see thatgive me one second. Sorry, trying to calculate your awesome response, I see that 90% of youresponded correctly. Great job. Anthony, so far, so good, So let's turn it back over to you.
Anthony Liburd: Thank you. Then I see that you were paying attention to where to properly sent, and I appreciate that. Now, of course, the next topic I want to discuss will be ElectronicFederal Tax Payment System or, of course, we have an acronym EFTPS for trustee payments. So whatthis system is? It's for individual, businesses and trustees that can electronically deposit andpay those federal taxes using the Electronic Federal Tax Payment System. Now, there's a few stepsyou will need to complete before you can make those payments using EFTPS. Now, for a Chapter 13Trustee, you must submit completed Form 14781 Electronic Federal Tax Payment System - InsolvencyRegistration PDF. You will then receive your EFTPS registration number and then you would needto work with your software provider and bank to set up the electronic funds transfer for makingthose EFTPS claim payments via ACH. Now, if you're a new business that indicated a likelyfederal tax deposit liability when you applied for your EIN, you are pre-enrolled. Now youshould have received the letter with your four digit EFTPS PIN but if you didn't, you can call800-555-4477 and when you call that number, you will give the agent your EIN and then he or shecan provide your PIN. Now this is the only situation in which PINs are given over the phone andit's only because you haven't yet added your banking information to your enrollment. Now ofcourse they activate your enrollment, so you can make those payments using this service. You willhave to call 800-555-3453, you will be asked to enter your EIN, your PIN, your bankinginformation, and a contact phone number. You receive your 18 digit enrollment number, which canbe used in creating your internet password. Now as soon as you finish your call successfully,you can begin scheduling those payments. Now if you want to make payments as an individualtaxpayer or for a business that wasn't pre-enrolled, you would then need to click on enrollmentand follow the instruction. So in five to seven days after you submit that enrollment, you willreceive your pin and enrollment number via the US Mail. Now if you need to schedule a paymentbefore you receive your pin, you can call 805-555-4477, two business days after completing yourenrollment, and if the information you provide match the IRS records, an agent can then takeyour payment. Now for security reasons, the agent will not be able to give you the PIN over thephone. Now of course I want to provide what are those benefits of using the EFTPS system. Nowyou can submit those claim payments securely. You can use eftps.gov 24/7 and it eliminatesprinting and mailing costs of paper payment and you'll receive, of course, that immediateconfirmation of payment. You also have access to 60 months of payment history, and you canschedule payments in advance. Now next, I'd like to introduce you to a new secure tool that theIRS has implemented to better assist with taxpayers and attorneys providing requireddocumentations requested by a bankruptcy specialist working your case. Now, the new tool goes bythe acronym DUT or the Document Upload Tool. Now this is a new tool that's part of the IRStechnology advancement to provide taxpayers and attorneys with quality service and the right toconfidentiality. Now, the first step to use the DUT will require that the bankruptcy specialistsworking your case to secure and provide the taxpayers or their representative with a unique codeand it's a one-time use code that of course is going to only be valid for 70 days. You will alsoget with that code a corresponding link to IRS.gov/sendmyreply to upload the required document.
So here is how the steps would process or would work. So let's say the bankruptcy specialistworking your case has requested some document, or let's say the taxpayer or the attorney has somedocuments they would like to provide to the IRS. Now the bankruptcy specialist will request theform DUT a unique code and, of course, as a reminder, that code is only valid for 70 days, thenthe taxpayer or your attorney will then use that link at www.IRS.gov/sendmyreply to upload therequired document. Now you will have a couple of privacy statement questions to answer, then youwill be asked for that unique code. Once you enter that code and continue with the processof uploading the document, you will be providing to the IRS. I do want to provide a note, ofcourse, that you remember, there is a limitation but that unique code is only valid for 70 daysand also when you are uploading or you can upload scanned photos or digital copies in the form ofjpg, png or pdf. Now it is with a maximum file size of 15 megabytes per file up to 40 files andit provides 120 page limit per file. This can of course be done from your phone or on a computer.
Now all those required documents must be uploaded before you press the submit button. But don'tworry, if that doesn't happen, it will just require that the taxpayer or the attorney needs tothen contact their bankruptcy specialist caseworker to request a new unique code. So one thing Ijust want to make a note is that on this unique code is that if you have documents that's goingto be over 120 pages, then you would submit the 120 pages in the first unique code and thenrequest that second code from the specialist and then you can submit the rest of your document.
Now I believe it's time for another poll question right, Yvette? Yvette Brooks-Williams: Yes, itis Anthony. Audience, it's time for our last polling question. I can hardly believe it. DUT isused to transmit the following, with the exception of, a, financial documents; b, Proof ofFederal Tax Deposit or Estimated Payment; c, signed original and copies of tax returns; or d,notice of bankruptcy filing to the Internal Revenue Service. So let's take a moment and click theradio buttons that best answers the question, DUT is used to transmit all the following, except.
So, while you're thinking about that, I'll give you a few more seconds to make your selection.
Okay, we're going to stop the polling now and let's share the correct answer on the next slide.
And the correct response is d, notice of bankruptcy filing to the Internal Revenue Service. Solet's see how well you all did with this question. Then I see that 47% of you respondedcorrectly. So maybe we need a little clarification, Anthony. Can you provide a little more detailfor us? Anthony Liburd: Sure, not a problem. Now, on this question, we're talking about DUT, thenew tool, right, and we're talking about what it's used to be to transmit. And I know the answershows, Notice of Federal Tax Lien and that's the exception, right. So I just want you to rememberearlier in your presentation, I provided a Philadelphia address for where you would send thosenotices of bankruptcy filing. So with the DUT or Document Upload Tool, remember, you're uploadingdocuments such as you can upload the financial document, or proof of tax deposit, or thoseoriginal signed returns or copies of tax returns, you can upload that to the specialists thatrequested it. But when we're talking about the notice, your initial notice of that bankruptcyfiling, remember, it needs to go to CIO or the Philadelphia office that I provided the addressearlier. So, Yvette, that I hope that explains it a little bit more. Thank you. YvetteBrooks-Williams: Yeah, that was a great explanation and thank you for that clarification.
Audience, I hope that helped you because it really helped me. Sabina, let me hand that off toyou now. Let's see what you have to say to our audience. Sabina Makarov: Thank you, Yvette. Sobefore we conclude this webinar, I want to provide you with the following IRS resources that arealways available in multiple languages. The resources can be found at IRS.gov, search usingkeywords bankruptcy, will provide you access to 208 items right at your fingertips. So nowremember that information is general and it may not cover your case-specific question, but someuseful information to start with will be included in the search. Another resource is publication908, Bankruptcy Tax Guide, which was just revised in February of this year. It explains the basic federal income tax aspects in bankruptcies such as the Bankruptcy Court requires Chapter 13debtors to file all required returns for five years ending within four years of the debtorsbankruptcy filing, or as requested. All five federal tax returns must be filed with the IRSbefore the date first set for the first meeting of creditors. For the debtor, filing bankruptcyunder all chapters, which are Chapter 7, 11, 12, and 13, the Bankruptcy Court provides that ifthe debtor does not file a tax return that becomes due after the commencement of the bankruptcy case, the taxing authority may request that the Bankruptcy Court either dismisses the case orconverts the case to a chapter under the Bankruptcy Court under another chapter to anotherchapter. If the debtor does not file the required return within 90 days after the request ismade, the Bankruptcy Court must dismiss or convert the case. Publication 908 will provideguidance about tax returns and payments of taxes in Chapter 11. The Bankruptcy Court providesthat a Chapter 11 debtor's failure to timely file tax returns and pay taxes owed after the date ofthe order for the relief or bankruptcy petition date in voluntary basis is a cause for dismissalof the Chapter 11 case, conversion to Chapter 7 case or appointment of a Chapter 11 trustee.
Failure to timely file the returns and present confirmation of a Chapter 13 plan andresults in either dismissal of Chapter 13 case or conversion to a Chapter 7. IRS offers anotherpublication, Publication 5082, What You Should Know about Chapter 13 Bankruptcy and Taxes, whichwas revised in September of 2022. This publication provides answers to common questions aboutChapter 13 bankruptcy. So this is also some basic information that you should consider providingto your clients who are filing Chapter 13 cases. And last but not least resource is the InternalRevenue Manual, Part 5.9. And now I hope that we have some questions. Yvette I'm turning it backover to you. Yvette Brooks-Williams: Thank you, Sabina. Hello again, it's me, Yvette Brooks-Williamsand I will be moderating the Q&;A session. But before we start the Q&;A session, I dowant to thank everyone for attending today's presentations, Bankruptcy and the Internal RevenueService. Now earlier, I mentioned that we want to know what questions you have for ourpresenters, so here's your opportunity. Now, if you haven't input your questions, there's stilltime so go ahead and click on the drop down arrow next to the ask question field, type in yourquestion and click send. Now today, we have the pleasure of being joined by Subject MatterExperts, Kim Wheelock and Jerome Turner, who are on with us to answer your question. And onething before we start, we may not have time to answer all of the questions submitted, but wewill answer as many as time allows, so let's get started so we can get to as many of yourquestions as possible. Jerome, the first question is going to be for you. What are the exceptionsto the Automatic stay? Jerome Turner: Hi, Yvette. Thank you so much. That's a great question.
Now generally, Federal law prohibits the IRS from pursuing collection for liabilities covered bythe bankruptcy. Now there are exceptions in which the IRS may pursue collection on taxliabilities and that would consist of post-petition and post confirmation liabilities that arenot covered by the Automatic Stay, or upon plan default, if not otherwise prohibited wheninstances when a motion to lift the Automatic Stay is filed and approved. Yvette Brooks-Williams:Thank you so much, Jerome. Kim, I shoot it over to you. Does bankruptcy eliminate debt owed tothe Internal Revenue Service? Kim Wheelock: Thank you, Yvette. Hi, this is Kim Wheelock. Andeliminating debt owed to the IRS is evaluated on a case by case basis. Some debts arenon-dischargeable under Bankruptcy Code and will remain on the account even after the discharge.
Some examples of these non-dischargeable debts are Trust Fund taxes, taxes based on fraudulentreturns, or a willful attempt to evade or defeat tax, unfiled tax return, taxes due on returnsfiled late and within two years before the petition date. So, discharge may be granted toindividuals in Chapter 7, 11, 12, or 13, and discharge may also be granted to corporations,partnerships, and LLCs that reorganize in a Chapter 11 or 12. Discharges are not granted tocorporation, partnership and LLC that file a Chapter 7 bankruptcies, discharges are also notgranted in a liquidating Chapter 11 case. It is important to note that if only one person filefor bankruptcy who is married and has a married filing joint tax returns with taxliabilities, the non-petitioning spouse will still owe any unpaid portion of the liability. Theexception to this is in community property states and those states include Arizona, California,Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and Puerto Rico, and Alaskaalso has the option to elect community property. Yvette Brooks-Williams: Thank you, Kim. Jerome,so what are the tax compliance requirements under Chapter 13? Jerome Turner: Now the taxcompliance requirements under Chapter 13, the Bankruptcy Code requires Chapter 13 debtors to fileall required tax returns for taxpayers ending within four years of the debtors' bankruptcypetition. All such federal tax returns must be filed with the IRS before the initial date set forthe first meeting of creditors and that's also known as the 341 Meeting. The debtor may requestthe trustee to hold the meeting open for an additional 120 days to enable the debtor to filethose tax returns. After notice and hearing, the bankruptcy court may extend the period foranother 30 days. Failure to timely file the returns can prevent confirmation of a Chapter 13 planand result in either dismissal of the Chapter 13 case or conversion to a Chapter 7 case. YvetteBrooks-Williams: Oh, sorry, I was talking to a mute. I was looking at all these questions andgetting so excited. Kim, the audience has asked some really great questions, so I was justreading through. If a taxpayer is in Chapter 13 bankruptcy and filed a current year return for arefund, will it be offset or will it be released? Kim Wheelock: That is actually an excellentquestion. And I have an answer to that. The IRS does have the right to offset pre-petitionrefunds towards pre-petition tax liabilities. If the refund period is a post-petition period, therefund will be released so long as the debtor has no other post-petition liabilities. However,the refund may still be subject to offset to other non-IRS debt such as state taxes or child support justto name a couple. Yvette Brooks-Williams: Okay. Jerome, yeah, they picked this one especiallyfor you. What are the tax responsibilities after the bankruptcy filing, including post-petitionfiling requirements? And Jerome, before you answer, could you just give a quick definition onwhat post-petition is because I saw some of that in our questions, in our conversations. JeromeTurner: So once the bankruptcy filing has been submitted to the Bankruptcy Codes, we look at thatat the petition date. So anything that occurs after that initial bankruptcy filing would beconsidered post-petition. So that's a great intro to this, so to kind of just a review what thequestion was, what are the tax responsibilities after the bankruptcy filing including postpetition filing requirements, so for debtors filing bankruptcy, under all chapters, which includeChapter 7, Chapter 11, Chapter 12 and 13, the Bankruptcy Code provides that if the debtor does notfile a tax return that becomes due after the commencement of the bankruptcy case, or obtain anextension for filing the return before the due date, the IRS or trustee may request that theBankruptcy Code either dismiss the case or convert the case to a case under another chapter ofthe Bankruptcy Code. If the debtor does not file the required return or obtain an extensionwithin 90 days after the request is made, the Bankruptcy Code must dismiss or convert the case.
All post-petition tax debt should be paid on the due date of the return prior to any extension.
Tax returns and payments of taxes in Chapter 11 cases, the Bankruptcy Code provides that achapter 11 debtors failure to timely file tax returns and pay taxes owed after the date of thebankruptcy petition is cause for dismissal of the Chapter 11 case or conversion to a Chapter 7case or an appointment of a Chapter 11 Trustee. Yvette Brooks-Williams: Thank you for such agreat explanation of that. Kim, let's see what question can I find. This is a good one for you,Kim. Does filing a bankruptcy terminate an active installment agreement? Kim Wheelock: That is agood one. An installment agreement is considered to be suspended by a taxpayer filing forbankruptcy or bankruptcy filing, but it's not terminated. After an installment agreement becomeseffective, the Internal Revenue Code limits the conditions terminating such an agreement, abankruptcy petition is not one of them. It is important to note though a termination of aninstallment agreement while a taxpayer is in bankruptcy could be viewed as an act to collect theunderlying tax liabilities, therefore a violation of the Bankruptcy Automatic Stay. Uponcompletion of the bankruptcy, the IRS would look to reinstate the installment agreement on anypre-petition non-dischargeable debt. If the taxpayer has incurred any post-petition taxliabilities, the installment agreement cannot be reinstated and the purpose for that is beforefiling for bankruptcy, there were certain tax liabilities included in that installment agreementand those post-petition they were not included in there, and therefore it cannot automatically bereinstated, they would need to have a new installment agreement. Yvette Brooks-Williams: Thankyou for the additional explanation. That was helpful. Jerome, back to you. Let's see. Well, Ithink this might be a good one. What are bankruptcy estate tax return filing requirements? JeromeTurner: And I'm glad you asked that one because I saw a couple of those come up in the questionand answer in the chat. So the filing threshold if the bankruptcy estate has gross income thatmeets or exceeds the minimum amount required for filing, the trustee or the debtor in possessionmust file an income tax return on Form 1040. Now this amount is equal to the basic standarddeduction for married filing individually, who's filing separately. The accounting period for thebankruptcy estate may have a fiscal year, however, the period cannot be longer than 12 months.
For 2022, the threshold file amount for a bankruptcy estate is $12,950 and again, this amount isequal to that $12,950 standard deduction for married individuals filing separately. And again,this amount is usually generally adjusted annually. Yvette Brooks-Williams: Perfect. Kim let mejust say audience, you guys have some amazing questions. These are great. Kim, what happens ifthe IRS does not receive notice or receive a late notice of bankruptcy filing? What happens inthat case? Kim Wheelock: Yeah, I've actually seen this question. So, under Bankruptcy Code 523,it actually provides that an individual debtor is not discharged of a debt. If the creditor doesnot receive notice in time to file a timely proof of claim because the debtor failed to includethe creditor on the schedules and statements. Please keep in mind, though, this provision doesnot apply if the creditor otherwise has timely notice or actual knowledge of the case. Thisprovision applies to Chapter 7 assets, Chapter 11, Chapter 12 and Chapter 13 cases. It does notapply to a chapter no-asset case, as a proof of claim is not filed for this type of case. YvetteBrooks-Williams: Thank you, Kim. Okay, Jerome, let's go back over to you with, what are theeffects of a Notice of Federal Tax Lien with regard to bankruptcy filing? Jerome Turner: Thankyou, Yvette. And then I saw that pop up a few times in the chat box. So under 11 USC subsection506(a), the IRS has a secure claim when a pre-petition Notice of Federal Tax Lien is properlyfiled and there's equity in the debtors property to which a lien attached or has a tax claim thatis subject to setoff under 11 USC subsection 553. The allowed amount of a secured claim will bedetermined after evaluation of the equity in the property. This valuation would be based on thedebtors property that became the estate and the commencement of the bankruptcy case for thebankruptcy filing petition date, including property exempted under 11 USC subsection 522. Filinga claim is not required in bankruptcy to preserve a lien on the debtor's pre-petition assetsthat are not sold and distributed during the bankruptcy case. A discharge will prevent a creditor from enforcing a dischargeable debt against the debtor personally. The IRS may enforce its lienfor dischargeable taxes against the debtor's exempt property if that Notice of Federal Tax Lienwas filed before the bankruptcy petition was filed. Yvette Brooks-Williams: Thank you, Jerome.
Kim, would you be able to explain the difference between a business that filed a Chapter 11versus a business that filed a Chapter 7 because it seems like it has been in most of thesequestions? Kim Wheelock: I certainly can explain the differences. It would be difficult to listall of the differences between the Chapter 11 versus the Chapter 7 and given the time restraints,I'm not going to attempt to do that here on this forum. But one of the most obvious differencesis that most businesses like a Chapter 11 bankruptcy, they filed to reorganize their businesswhile they repay their creditors under a plan of reorganization. They may also file toliquidate their business as a debtor in possession instead of liquidating in a Chapter 7 with thecourt appointed trustee. In the case of a Chapter 7, the business ceases to operate and that'sunder bankruptcy 11 USC subsection 721, it authorizes the Chapter 7 trustee to operate thebusiness of the debtor for a limited period. Operation must be in the best interest of theestate and be consistent with orderly liquidation of the estate. The trustee will then pay thecreditors through the liquidation and distribution of the debtor's assets. YvetteBrooks-Williams: Great explanation, thank you. Jerome, what happens to the pre-petition taxliability if the debtor defaults on payments under the Chapter 11 bankruptcy plan? Jerome Turner:So when the debtor is non-compliant with the terms of a confirmed plan, the assigned bankruptcy specialists will review the plan for default provisions. If there are no plan defaultprovisions, the bankruptcy specialist will attempt to phone contact the debtor in possession tonegotiate a cure for the default and try to work out repayment. If an agreement cannot bereached during this phone contact, the debtor in possession will be given a deadline to becomecurrent and in full compliance. A letter of default will be issued providing the paymentdeadline, as well as the consequences if the payment is not received. If there are defaultprovisions in the plan, the bankruptcy specialist will comply with those provisions. Theprovisions may require a default letter be sent to both the debtor in possession and/or thedebtor and possession's attorney. The letter will include a deadline to cure the late payment aswell as consequences if the payment is not received becoming into compliance. Now, if the defaultis not cured by the date requested, the IRS has the option to proceed with administrativecollection and/or filing the motion to convert or dismiss the Chapter 11 bankruptcy case. YvetteBrooks-Williams: Okay, thanks, Jerome. Kim, let me come back to you with what are some examplesif he could provide some of when the IRS may file an objection to the Chapter 13 plan? KimWheelock: Sure, there are many examples that I could provide. I'll give you just a few. If theplan fails to meet the requirements of 11 USC bankruptcy subsection 1322 and 1325, for example,the priority and secure claims on the proof of claim will not be paid in full through that plan.
Another example is if the plan proposes a balloon payment, then the IRS may object to that. Ifthe plan discriminates against the IRS by treating the Service's claim differently than othercreditors in the same classification that would certainly warrant an objection by the IRS; or ifthe plan is modified by the debtor after the confirmation if such a modification could impair thegovernment's claim; if the plan contains language requesting avoidance of the liens securingtaxes that may be another reason why we may object. As I mentioned, these are just a few examplesof them when the IRS may object to a Chapter 13 plan, but there are many reasons we may do so.
Yvette Brooks-Williams: Okay, great question and equally great response. Jerome, let me come backto you. What happens is there are post-petition tax liabilities after the plan has beenconfirmed? Jerome Turner: That's another great question. Taxes incurred after the date of thebankruptcy following are considered to be post-petition tax liabilities. Post-petition taxliabilities are handled in various ways by IRS throughout the country. There are variousapproaches when dealing with post-petition tax liabilities, including filing 11 USC 1305 claimthat that would be a claim file based on those post-petition liabilities, sending a request to acollection revenue officer for an investigation and possible collection actions, which could leadto a motion to lift the Automatic Stay as warranted, filing the motion to lift the AutomaticStay for a possible refund offset, or filing a motion to convert or dismiss the case. The debtorwill not qualify for an installment agreement on post-petition liability during the bankruptcyproceedings. Yvette Brooks-Williams: Okay. So Jerome and Kim, we've been kind of playing tennisback and forth. So this time, I'm just going to throw the ball up in the air and one of you needsto catch it, okay. The question we have is what is an Automatic Stay and I feel like we coveredit, but there needs to be more clarification because the question is being asked again. So what'san Automatic Stay? Kim Wheelock: Right, we did discuss it a little bit. This is Kim and I'lltake the question. But I don't know that if it was actually explained. The filing of thebankruptcy petition, under any chapter acts as an injunction or a legal prohibition of furtheraction against the estate, debtor, or property of the debtor. This injunction is called theAutomatic Stay. So that is a basic explanation of the Automatic Stay. Yvette Brooks-Williams:Thank you. All right, the ball is up again. Is the trust fund assessed during the Automatic Stay?
Jerome Turner: And that's another good question. So, with the Bankruptcy Reform Act of 1994,under B.R.A '94, that brought a lot of significant changes that affected the IRS, and then alsoincluded the ability for the Automatic Stay to allow for assessment of trust on recoverypenalties and that's based on deficiencies and that applies that no longer apply under 11 USC362(b)(9). So deficiencies in which a statutory period for petitioning the tax court has expiredprior to the bankruptcy petition can also be assessed. So, long story short, the trust fund canproceed with assessment. If there is funding in the plan, it would be beneficial for thebankruptcy to allow for that assessment to be included in there, so that the IRS can includethat on their proof of claim, along with the fact that the Trust Fund tax liabilities are non-dischargeable. Yvette Brooks-Williams: Okay, thanks, Jerome. Let me see here. Going back to thequestions. Here's one, can you file an offer and compromise while you are in bankruptcy? Whowants to take that one? Jerome Turner: I can go ahead and take that one. So you can't have anoffer and compromise while you're in bankruptcy. The offer and compromise unit would contact thebankruptcy unit to verify that there is a current bankruptcy now if that case has beenpreviously dismissed or discharge prior to the filing of the offer and compromise and the offerand compromise unit will proceed with reviewing it. The offer and compromise unit, because it'sa potential collection action and could be considered a violation of Automatic Stay, wouldactually be forced to hold on to that offer and compromised submission until the end of thebankruptcy case is reached. So it's a potential Chapter 13 bankruptcy case, and there are nodismissals on it and it goes the full five years, then the offer and compromise unit wouldprobably request after the discharge a updated packet for any liabilities that may still remainunder the IRS. Yvette Brooks-Williams: Thank you for that explanation. Let me see if I can findmore questions. We have just a few more minutes to go and I want to get as many questions as Ican. Give me a second to scroll through here. Sorry about the delay. I just want to make sure.
I'm not picking questions that we've already answered. Okay, I think we've gotten all thequestions. Okay, audience that is all the time we have for questions. And I just want to thankour presenters for sharing their knowledge and their expertise and a special thank you to ourSubject Matter Experts for answering your questions. So let me see what. So before we close theQ&;A session, Sabina, if you're still there, what key points do you want the attendees to rememberfrom today's webinar? Sabina Makarov: I'm here. Thank you, Yvette. So, we have covered a lot ofinformation in today's webinar. And at the conclusion, we want to emphasize some key points.
First, this compliance with filing and deposits is important. It is important to bring filingcurrent for pre-petition years and keep current with federal tax deposits, estimated payments,and required filings post-petition. In compliance may lead to bankruptcy case dismissal andreturning the case to regular collection. Please remember to notify the IRS timely and correctlyof bankruptcy filing and it is important otherwise the liability may not be dischargeable. Ifyou have any questions on the IRS' proof of claim, please reach out and communicate with theassigned IRS bankruptcy specialist. Further, we remind that EFTPS is a convenient system to makeplan payments, it reduces errors and provides faster payment application. We also talked aboutplans feasibility, payment plans must adequately provide for IRS claims, including statutoryinterest on secured claim, in order to avoid objection to confirmation. If the Notice of FederalTax Lien is recorded and there is an equity in assets, the IRS is a secured creditor. Also inorder to avoid the disclosure, bankruptcy specialists can only communicate with attorneysrepresenting the debtor in bankruptcy, and only while the case is open. Information can be sharedwith power of attorneys with valid Form 2848 only. All other attorney office staff is notauthorized to receive taxpayers information from the IRS. Last but not least, please takeadvantage of the new technologies that the service offers. Use our secure Document Upload Tool toexpedite communication with the IRS. You can contract assigned caseworker to obtain one-time useaccess code. This code is valid for 70 days. The advantage is reduced the amount ofcorrespondence, you can upload scans, photos, or digital copies in the form of jpg, png or pdfwith a maximum file size of 15 megabytes per file up to 40 files or a maximum of 120 page limitper file. And with that, that's all I have Yvette, so back to you for closing out. Thank you.
Yvette Brooks-Williams: Thanks Sabina for those key points. Audience, we are planning additionalwebinars throughout the year. To register for all upcoming webinars, please visit IRS.govkeyword search webinars and then select the webinars for tax practitioners or webinars for smallbusinesses. When appropriate, we will be offering certificates and CPE credit for upcomingwebinars. We invite you to visit our video portal at www.irsvideos.gov, there you can viewarchived versions of our webinars. Please note continuing education credit or certificates ofcompletion are not offered if you view any version of our webinars after the live broadcast.
Again, a big thank you to Alan, Anthony, and Sabina for providing a great webinar and sharingtheir expertise, and to the Subject Matter Experts Kim and Jerome for answering our questions. Ialso want to thank you, our attendees, for attending today's webinar, Bankruptcy and the IRS.
Now, if you attended today's webinar for at least 100 minutes after the official start time, youwill receive a certificate of completion that you can use with your credentialing organizationfor two possible CPE credits. If you stayed on for at least 50 minutes from the official starttime of the webinar, you will qualify for one possible CPE credit and again the time we spentchatting before the webinar started does not count towards the 50 or 100 minutes. If you areeligible for the continuing education from the IRS and you register with your valid PTIN, yourcredit will be posted in your PTIN account. If you are eligible for continuing education fromthe California Tax Education Council, your credit will be posted to your CTEC account as well.
Now if you qualify and you have not received your certificate and/or credit by June 6, pleaseemail us at cl.sl.web.conference.team@IRS.gov. The email address is shown on this slide as well.
If you're interested in finding out who your local stakeholder liaison is, you may send us anemail using the address shown on this slide and we'll send you that information. We wouldappreciate it if you would take just a few minutes to complete a short evaluation before youexit. If you'd like to have more sessions like this one, let us know. If you have thoughts onhow we can make them better, please let us know that as well. If you have requests for futurewebinar topics or pertinent information you'd like to see in an IRS Fact Sheet, a Tax Tip or anFAQ on IRS.gov, then please include your suggestions in the comment section of the survey. So,click on the survey button on the screen to begin and if it doesn't come up, check to make surethat you've disabled that popup blocker. So I just want to say it has been a pleasure to be herewith you and on behalf of the Internal Revenue Service and our presenters, we'd like to thankyou for attending today's webinar. It's important for the IRS to stay connected with the taxprofessional community, individual taxpayers, industry associations along with federal, stateand local government organizations. You really do make our jobs a lot easier by sharing theinformation that allows for proper tax reporting. So thanks again for taking time out of yourday to attend today's webinar and we hope you found the information helpful. You may exit thewebinar at this time.
If the IRS is listed as a creditor in their bankruptcy, the IRS will receive electronic notice about their case from the U.S. Bankruptcy Courts. People can check by calling the IRS' Centralized Insolvency Operation at 800-973-0424 and giving them the bankruptcy case number.How hard is it to get an offer in compromise with the IRS? ›
But statistically, the odds of getting an IRS offer in compromise are pretty low. In fact, the IRS accepted only 15,154 offers out of 49,285 in 2021.What is the IRS Fresh Start Program 2023? ›
The IRS Fresh Start Program is a variety of initiatives that helps struggling taxpayers reduce their tax debt and receive a “fresh start” through the implementation of tax relief procedures such as debt settlement, payment plans, first-time penalty waivers, and the temporary delay of tax collections.Can IRS debt be discharged in Chapter 13? ›
Chapter 13 bankruptcy is an excellent tool to use when you fall behind on your taxes because it allows you to discharge (wipe out) old income tax debt.Will Chapter 7 stop IRS garnishment? ›
In a Chapter 7 bankruptcy filing, all of your dischargeable debts will be wiped out. Since most tax debts are not dischargeable, they will remain. The IRS garnishment will, however, be temporarily halted due to the automatic stay while your bankruptcy case is processed.Can you get rid of IRS debt in Chapter 7? ›
At the conclusion of your Chapter 7 bankruptcy you will receive a discharge of debt. A discharge releases you (the debtor) from personal liability for certain dischargeable debts. Some taxes may be dischargeable. Whether a federal tax debt may be discharged depends on the unique facts and circumstances of each case.How much will the IRS usually settle for? ›
How much will the IRS settle for? The IRS will typically only settle for what it deems you can feasibly pay. To determine this, it will take into account your assets (home, car, etc.), your income, your monthly expenses (rent, utilities, child care, etc.), your savings, and more.Who qualifies for the Fresh Start Program with the IRS? ›
To be eligible for the Fresh Start Program, you must meet one of the following criteria: You're self-employed and had a drop in income of at least 25% You're single and have an income of less than $100,000. You're married and have an income of less than $200,000.What is the IRS 6 year rule? ›
If you omitted more than 25% of your gross income from a tax return, the time the IRS can assess additional tax increases from three to six years from the date your tax return was filed. If you file a false or fraudulent return with the intent to evade tax, the IRS has an unlimited amount of time to assess tax.Is the IRS forgiving debt in 2023? ›
What is the IRS Forgiveness Program? 2023 Updates. Certain taxpayers in the United States who cannot afford to pay their tax liability due to financial hardship may qualify for tax debt relief under the IRS Forgiveness Program.
Apply With the New Form 656
An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can't pay your full tax liability or doing so creates a financial hardship. We consider your unique set of facts and circumstances: Ability to pay.
There are 2 basic Offer in Compromise formulas:
On a 5-month repayment plan: (Available Monthly Income x 12) + Value of Personal Assets. On a 24-month repayment plan: (Available Monthly Income x 24) + Value of Personal Assets.
If you owe more than $50,000, you may still qualify for an installment agreement, but you will need to complete a Collection Information Statement, Form 433-A. The IRS offers various electronic payment options to make a full or partial payment with your tax return.What is the downside to filing Chapter 13? ›
Although a Chapter 13 bankruptcy stays on your record for years, missed debt payments, defaults, repossessions, and lawsuits will also hurt your credit and may be more complicated to explain to a future lender than bankruptcy.What happens if I owe the IRS and can't pay? ›
Taxpayers who owe but cannot pay in full by April 18 don't have to wait for a tax bill to set up a payment plan. They can apply for a payment plan at IRS.gov/paymentplan. These plans can be either short- or long-term.Do creditors get mad when you file Chapter 7? ›
They don't get mad when they get your bankruptcy filing and they don't cry when they get your bankruptcy filing. Instead, they process the bankruptcy notice along with the thousands of others they get each year without an ounce of emotion about it.Can creditors come after you after Chapter 7? ›
Debt collectors cannot try to collect on debts that were discharged in bankruptcy. Also, if you file for bankruptcy, debt collectors are not allowed to continue collection activities while the bankruptcy case is pending in court.What can you write off in bankruptcies? ›
Bankruptcy Can Wipe Out Credit Card Debt and Most Other Nonpriority Unsecured Debts. Bankruptcy is very good at erasing most nonpriority unsecured debts other than school loans. For instance, you can discharge unsecured credit card debt, medical bills, overdue utility payments, personal loans, gym contracts, and more.Can you wipe out tax debt with a bankruptcies? ›
You can wipe out or discharge tax debt by filing Chapter 7 bankruptcy only if all of the following conditions are met: The debt is federal or state income tax debt. Other taxes, such as fraud penalties or payroll taxes, cannot be eliminated through bankruptcy.What is the downside of Chapter 7? ›
The main cons to Chapter 7 bankruptcy are that most unsecured debts won't be erased, you may lose nonexempt property, and your credit score will likely take a temporary hit. While a successful bankruptcy filing can give you a fresh start, it's important to do your research before deciding what's right for you.
If you don't file taxes for a deceased person, the IRS can take legal action by placing a federal lien against the Estate. This essentially means you must pay the federal taxes before closing any other debts or accounts. If not, the IRS can demand the taxes be paid by the legal representative of the deceased.What if you owe the IRS over $100 000? ›
If you owe the IRS over $100,000, the agency can certify your tax debt to the State Department. Then, the State Department can revoke your existing passport and refuse to issue you a new one. The IRS only certifies seriously delinquent tax debt.What happens if you owe the IRS more than $25000? ›
For individuals, balances over $25,000 must be paid by Direct Debit. For businesses, balances over $10,000 must be paid by Direct Debit. Apply online through the Online Payment Agreement tool or apply by phone or by mail by submitting Form 9465, Installment Agreement Request.How do I get my IRS debt forgiven? ›
The IRS offers a debt forgiveness program for taxpayers who meet certain qualifications. To be eligible, you must claim extreme financial hardship and have filed all previous tax returns. The program is available to certain people only, so be sure to check if you qualify.What disqualifies you from an IRS payment plan? ›
If IRS computers show that you haven't filed all past due tax returns, you will not be eligible for an IA. Likewise, if you are self-employed, you must be current on your quarterly estimated tax payments for the current year.Is there a one time tax forgiveness? ›
One-time forgiveness, otherwise known as penalty abatement, is an IRS program that waives any penalties facing taxpayers who have made an error in filing an income tax return or paying on time. This program isn't for you if you're notoriously late on filing taxes or have multiple unresolved penalties.Does the IRS have a debt forgiveness program? ›
The IRS Debt Forgiveness program provides relief to taxpayers who can't pay their taxes in full. The program allows forgiveness for some or all of the liability. Forgiveness is at the discretion of the IRS based on specific criteria, such as income level and ability to pay.Does IRS forgive debt after 10 years? ›
Yes, after 10 years, the IRS forgives tax debt.
After this time period, the tax debt is considered "uncollectible". However, it is important to note that there are certain circumstances, such as bankruptcy or certain collection activities, which may extend the statute of limitations.
Each tax assessment has a Collection Statute Expiration Date (CSED). Internal Revenue Code section 6502 provides that the length of the period for collection after assessment of a tax liability is 10 years. The collection statute expiration ends the government's right to pursue collection of a liability.What are red flags for the IRS? ›
Some red flags for an audit are round numbers, missing income, excessive deductions or credits, unreported income and refundable tax credits. The best defense is proper documentation and receipts, tax experts say.
The statistics for the frequency of audits are telling. While the overall chance that your return may be audited is a scant 0.4%, those numbers jump dramatically for both the highest and lowest earners. If you have no total positive income, for example, the chance your return is audited jumps to 1.1%.What are the IRS changes for 2023? ›
The standard deduction also increased by nearly 7% for 2023, rising to $27,700 for married couples filing jointly, up from $25,900 in 2022. Single filers may claim $13,850, an increase from $12,950.What changes is the IRS making to 2023 taxes? ›
For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.How do I survive an IRS audit? ›
- Don't ignore the notice. You generally have 30 days to respond to an audit notice. ...
- Read and follow the notice. ...
- Organize your records. ...
- Replace missing records. ...
- Bring only what you're asked for. ...
- Don't be a jerk! ...
- Provide only copies. ...
- Stay on point.
Go for an Installment Agreement
Let the IRS know you'll pay the debt off within six years—but ideally within three years. 7 Aim high. The monthly payment you offer should be equal to or higher than what the IRS believes it can garner from you from a negotiated agreement that it initiates.
Generally, the IRS can't issue a tax levy until it sends out several written notices—generally four. It can take up to six months or even longer from the due date of your payment, until the IRS can legally levy on your bank account. The last of the IRS notices is known as a Collection Due Process Notice.How hard is it to get an IRS offer in compromise? ›
But statistically, the odds of getting an IRS offer in compromise are pretty low. In fact, the IRS accepted only 15,154 offers out of 49,285 in 2021.How long does it take for the IRS to approve an offer in compromise? ›
Processing times vary, but you can expect the IRS to take at least six months to decide whether to accept or reject your Offer in Compromise (OIC). The process can take much longer if you have to dispute the examiner's findings or appeal their decision.What is fresh start program? ›
Fresh Start is a one-time temporary program from the U.S. Department of Education (ED) that offers special benefits for borrowers with defaulted federal student loans. Fresh Start automatically gives you some benefits, such as restoring access to federal student aid (loans and grants).What is the longest IRS payment plan? ›
There are two types of Streamlined Installment Agreements, depending on how much you owe and for what type of tax. For both types, you must pay the debt in full within 72 months (six years), and within the time limit for the IRS to collect the tax, but you won't need to submit a financial statement.
The IRS may reject a payment plan or an installment agreement for a variety of reasons. One of the most common reasons because a person provided false or incorrect information in their application. Underreporting income or making mathematical mistakes can result in a denial.What percent can IRS garnish? ›
We often get asked, how do I stop IRS wage garnishments, and what is the maximum amount the IRS can garnish from your paycheck? Generally, the IRS will take 25 to 50% of your disposable income. Disposable income is the amount left after legally required deductions such as taxes and Social Security (FICA).Why do so many Chapter 13 bankruptcies fail? ›
In most cases, failure is due to one of several reasons: Life circumstances. Not having the guidance of an experienced bankruptcy attorney. Over-ambition.Will Chapter 13 leave me broke? ›
In Chapter 13 bankruptcy, you're able to keep expensive property like a house or a luxury car so long as you make monthly payments under a three-to-five year repayment plan. But unlike Chapter 7 which results in a discharge of debts in 96% of cases, only about 40% of Chapter 13 cases end in discharge.Is Chapter 7 or 13 worse? ›
Chapter 7 stays on your record for 10 years, while Chapter 13 stays for seven years. That would seem to suggest that Chapter 7 is worse for your credit score, but with Chapter 7, your debt, or at least the unsecured debt, will be gone. That means you can try to start rebuilding it immediately.What is the minimum payment the IRS will accept? ›
If you owe $10,000 or less in tax debt, then the IRS will usually automatically approve your payment plan. You have a fair amount of freedom in setting the terms of the plan. So long as it will take you less than three years to finish the plan, there is generally no minimum payment.How do creditors know I filed bankruptcies? ›
Very soon after the bankruptcy petition is filed, the clerk's office mails a notice to creditors that a debtor has filed for bankruptcy.Does filing Chapter 7 affect your tax return? ›
Your Tax Refund During Chapter 7 Bankruptcy
Tax refunds can become complicated during a Chapter 7 bankruptcy. However, the bottom line is that your bankruptcy trustee will likely take a portion or all of your annual tax refund as part of the bankruptcy estate and use it to pay your creditors.
If you file for bankruptcy under Chapter 13, you may need to provide your tax refund to the bankruptcy trustee so that they can use it to pay your creditors. However, in some situations, you may be able to get your tax refund excused from being included in the repayment plan.Do creditors report to IRS? ›
A 1099-C is sent when a consumer settles a debt with a creditor, or the creditor has chosen to not try to collect a debt. It is important to know that when a creditor is no longer attempting to collect any of the unpaid principal balance on a debt, they must report this amount to the IRS.
If a creditor violates bankruptcy law by pursuing collection activity after a court issues a bankruptcy discharge on your debt or during the automatic stay period, the bankruptcy court can sanction a violation of the automatic stay and find the creditor in contempt.What happens right after you file for bankruptcies? ›
Bankruptcy, Trustees & Protection from Creditors
Two things happen immediately once you file for bankruptcy: you're assigned a trustee, and actions by creditors against you immediately (though temporarily in some cases) stop.
There are certain things you cannot do after filing for bankruptcy. For example, you can't discharge debts related to recent taxes, alimony, child support, and court orders. You may also not be allowed to keep certain assets, credit cards, or bank accounts, nor can you borrow money without court approval.Do bankruptcies clear back taxes? ›
Can Tax Debts Be Erased Through Bankruptcy? Bankruptcy is a legal process that enables the debtor to eliminate or reduce various personal or business debts, including medical debt, most credit card debt, as well as certain types of federal and California tax debt.Are tax returns needed for bankruptcies? ›
The Bankruptcy Code requires chapter 13 debtors to file all required tax returns for tax periods ending within 4 years of the debtor's bankruptcy filing. All such federal tax returns must be filed with the IRS before the date first set for the first meeting of creditors.Can creditors take my tax refund? ›
Federal law allows only state and federal government agencies (not individual or private creditors) to take your refund as payment toward a debt. However, once you deposit the refund into your bank account, these rules no longer apply. depending on the laws of your state, private creditors may have access to those ...Do creditors check your income? ›
They typically ask about your income on credit applications and may require proof, in the form of a pay stub or tax return, before finalizing lending decisions. Sometimes creditors ask for proof of employment and the name of your employer on credit application as well.