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taxmap/pubs/p908-003.htm#TXMP549a66e2 Tax Procedures

The following section discusses the procedures for determining the amount of tax due from the debtor or the bankruptcy estate, paying the tax claim, and obtaining a discharge of the tax liability.

taxmap/pubs/p908-003.htm#TXMP4285008a Determination of Tax

The first step in the determination of the tax due is filing a return. As an individual bankrupt debtor, you file a Form 1040 for the tax year involved, and the trustee of your bankruptcy estate files a Form 1041, as explained earlier under Individuals in Chapter 7 or 11. A bankrupt corporation, or a receiver, bankruptcy trustee, or assignee having possession of, or holding title to, substantially all the property or business of the corporation, files a Form 1120 for the tax year.

After the return is filed, the Internal Revenue Service may redetermine the tax liability shown on the return. When the administrative remedies within the Service have been exhausted, the tax issue may be litigated either in the bankruptcy court or in the U.S. Tax Court, as explained in the following discussion.

taxmap/pubs/p908-003.htm#TXMP7754ff1f Request for prompt determination of tax liability by the trustee.

The trustee of the bankruptcy estate may request a determination of any unpaid liability of the estate for tax incurred during the administration of the case by the filing of a tax return and a request for such a determination with the internal Revenue Service. Unless the return is fraudulent or contains a material misrepresentation, the trustee, the debtor, and any successor to the debtor are discharged from liability for the tax upon payment of the tax:

1. As determined by the Internal Revenue Service,
2. As determined by the bankruptcy court, after the completion of the IRS examination, or
3. As shown on the return, if the IRS does not:
   1. Notify the trustee within 60 days after the request for the determination that the return has been selected for examination, or
   2. Complete the examination and notify the trustee of any tax due within 180 days after the request (or any additional time permitted by the bankruptcy court).

taxmap/pubs/p908-003.htm#TXMP2f5c0ded Making the request for determination.

To request a prompt determination of any unpaid tax liability of the estate, the trustee must file a written application for the determination with the IRS District Director for the district in which the bankruptcy case is pending. The application must be submitted in duplicate and executed under the penalties of perjury. The trustee must submit with the application an exact copy of the return (or returns) filed by the trustee with the IRS for a completed tax period, and a statement of the name and location of the office where the return was filed. On the envelope write "Personal Attention of the Special Procedures Function. DO NOT OPEN IN MAILROOM."

The IRS examination function will notify the trustee within 60 days from receipt of the application whether the return filed by the trustee has been selected for examination or has been accepted as filed. If the return is selected for examination, it will be examined as scon as possible. The examination function will notify the trustee of any tax due within 180 days from receipt of the application or within any additional time permitted by the bankruptcy court.

taxmap/pubs/p908-003.htm#TXMP3ca04867 Bankruptcy court jurisdiction.

Generally, the bankruptcy court has authority to determine the amount or legality of any tax imposed on the debtor or the estate, including any fine, penalty, or addition to tax, whether or not the tax was previously assessed or paid.

The bankruptcy court does not have authority to determine the amount or legality of a tax, fine, penalty, or addition to tax that was contested before and finally decided by a court or administrative tribunal of competent jurisdiction (that became res Judicata) before the date of filing the bankruptcy petition.

Also, the bankruptcy court does not have authority to decide the right of the bankruptcy estate to a tax refund until the trustee of the estate properly requests the refund from the Internal Revenue Service and either the Service determines the refund or 120 days pass after the date of the request.

If you (the debtor) have already claimed a refund or credit for an overpayment of tax on a properly filed return or claim for refund, the trustee may rely on that claim. Otherwise, if the credit or refund was not claimed by you, the trustee may make the request by filing the appropriate original or amended return or form with the District Director for the district in which the bankruptcy case is pending. On the return or claim for refund write "Personal Attention of the Special Procedures Function. DO NOT OPEN IN MAILROOM."

The appropriate form for the trustee to use in making the claim for refund is as follows:

1. For income taxes for which an individual debtor had filed a Form 1040, Form 1040A, or Form 1 040 EZ, the trustee should use a Form 1 040X, Amended U.S. Individual Income Tax Return.
2. For income taxes for which a corporate debtor had filed a Form 1120, the trustee should use a Form 1120X, Amended U.S. Corporation Income Tax Return.
3. For income taxes for which a debtor had filed a form other than Form 1040, Form 1040A, Form 1O4OEZ, or Form 1120, the trustee should use the same type of form that the debtor had originally filed, and write "Amended Return" at the top of the form.
4. For taxes other than certain excise taxes or income taxes for which the debtor had filed a return, the trustee should use a Form 843, Claim for Refund and Request for Abatement, attaching an exact copy of any return that is the subject of the claim along with a statement of the name and location of the office where the return was filed.
5. For excise taxes you reported on Forms 720,730, or 2290, the trustee should use Form 8849, Claim for Refund of Excise Taxes or Schedule C of Form 720, whichever is appropriate.
6. For overpayment of taxes of the bankruptcy estate incurred during the administration of the case, the trustee may choose to use a properly executed tax return (for income taxes, a Form 1041) as a claim for refund or credit.

The IRS examination function, if requested by the trustee or debtor-in-possession as discussed later, will examine the appropriate amended return, claim, or original return tiled by the trustee on an expedite basis, and will complete the examination and notify the trustee of its decision within 120 days from the date of filing of the claim.

taxmap/pubs/p908-003.htm#TXMP11873543 Tax Court jurisdiction.

The filing of a bankruptcy petition automatically results in a stay (suspension) of any U.S. Tax Court proceeding to determine your tax liability as the debtor. This stay continues until one of the acts removing it occurs. The stay may be lifted by the bankruptcy court upon your request, the request of the IRS, or the request of any other party in interest. Because the bankruptcy court has power to lift the stay and allow you to begin or continue a Tax Court case involving your tax liability, the bankruptcy court has, in effect, during the pendency of the stay, the sole authority to determine whether the tax issue is decided in the bankruptcy court itself or in the Tax Court.

taxmap/pubs/p908-003.htm#TXMP1045612e Suspension of time for filing.

In any bankruptcy case, the 90—day period for filing a Tax Court petition, after the issuance of the statutory notice of deficiency, is suspended for the time you are prevented from filing the petition because of the bankruptcy case, and for 60 days thereafter. However, even if the statutory notice was issued before the bankruptcy petition was filed, the suspension exists if any part of the 90—day period remained at the date the bankruptcy petition was filed.

taxmap/pubs/p908-003.htm#TXMP0f6cc9d7 Trustee may intervene.

The trustee of your bankruptcy estate in any title 11 bankruptcy case may intervene, on behalf of the estate, in any proceeding in the U.S. Tax Court to which you are a party.

taxmap/pubs/p908-003.htm#TXMP0eaeede4 Tax assessment.

Generally, the automatic stay rules prevent a creditor from taking actions to collect prepetition debts. However, the automatic stay does not apply to:

1. An audit to determine tax liability,
2. A demand for tax returns,
3. The issuance of a notice of deficiency to the debtor, or
4. The making of an assessment for any tax and the sending of a notice and demand for payment of the tax assessed (for bankruptcy cases filed after October 22, 1994).

Any tax lien that attaches to the estate's property because of an assessment described above can only take effect when the property (or its proceeds) are transferred back to the debtor. Also, the tax must be the debtor's debt that will not be discharged in the case.

taxmap/pubs/p908-003.htm#TXMP488fbd89 Disclosure of return information.

In bankruptcy cases other than those of individuals filing under chapter 7 or 11, and in receivership proceedings where substantially all the debtor's property is in the hands of the receiver, current and earlier returns of the debtor are, upon written request, open to inspection by or disclosure to the trustee or receiver, but only if the Internal Revenue Service finds that the trustee or receiver has a material interest which will be affected by information on the return.

taxmap/pubs/p908-003.htm#TXMP35ce6f02 Payment of Tax Claim

Payment of Tax Claim

After the filing of a bankruptcy petition and during the period the debtor's assets or those of the bankruptcy estate are under the jurisdiction of the bankruptcy court, these assets are not subject to levy. The Internal Revenue Service may file a proof of claim in the bankruptcy court the same way as other creditors. This claim may be presented to the bankruptcy court even though the taxes have not yet been assessed or are subject to a Tax Court proceeding.

taxmap/pubs/p908-003.htm#TXMP542be279 Eighth priority taxes.

In bankruptcy, the debtor's debts are assigned priorities for payment. Most of the prepetition tax debts are classified as eighth priority claims. Generally, prepetition taxes are certain income and other taxes that the debtor is considered to owe before he or she files a bankruptcy petition.

The following federal taxes, if unsecured, are prepetition eighth priority taxes of the government:

1. Income taxes for tax years ending on or before the date of filing the bankruptcy petition, for which a return is due (including extensions) within 3 years of the tiling of the bankruptcy petition.
2. Income taxes assessed within 240 days before the date of filing the petition. This 240-day period is increased by any time, plus 30 days, during which an offer in compromise with respect to these taxes was pending, that was made within 240 days after the assessment.
3. Income taxes that were not assessed before the petition date, but were assessable as of the petition date, unless these taxes were still assessable solely because no return, a late return (within 2 years of the filing of the bankruptcy petition), or a fraudulent return was filed.
4. Withholding taxes for which you are liable 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 11 USC 507(a)(3) or for which a return is 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 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/p908-003.htm#TXMP071e4d5f Priority of payment.

For a chapter 7 case, the preceding eighth priority prepetition taxes may be paid out of the assets of the bankruptcy estate to the extent there are assets remaining after paying the claims of secured creditors and other creditors having higher priority claims.

Different rules apply to payment of eighth priority prepetition taxes under chapters 11, 12, and 13:

1. In chapter 11, the debtor can pay these taxes over a period of 6 years from the date of assessment, including interest,
2. In chapter 12, the debtor can pay such tax claims in deferred cash payments over time, and
3. In chapter 13, the debtor can pay such taxes over 3 years (or over 5 years with court approval).

Certain taxes are assigned a higher priority for payment. Taxes incurred during administration by the bankruptcy estate are paid first, as administrative expenses. Taxes arising in the ordinary course of your business or financial affairs in an involuntary bankruptcy case, after the filing of the bankruptcy petition but before the earlier of the appointment of a trustee or the order for relief are included in the second priority of payment. The employee's portion of the employment taxes on the first $4,000 (to be adjusted 4/1/98) described in (5) above is included in the third priority.

taxmap/pubs/p908-003.htm#TXMP6402110f Relief from penalties.

A penalty for failure to pay tax, including failure to pay estimated tax, will not be imposed for any period during which a title 11 bankruptcy case is pending, under the following conditions. If the tax was incurred by the bankruptcy estate, the penalty will not be imposed if the failure to pay resulted from an order of the court finding probable insufficiency of funds of the estate to pay administrative expenses. If the tax was incurred by you as the debtor, the penalty will not be imposed if:

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 retum (including extensions) or the date for imposing the penalty occurs on or after the day the bankruptcy petition was filed.

This relief from the failure-to-pay penalty does not apply to any penalty for failure to pay or deposit tax withheld or collected from others and required to be paid over to the U.S. government. Nor does it apply to any penalty for failure to timely file a return.

taxmap/pubs/p908-003.htm#TXMP5f406c7b FUTA credit.

An employer is generally allowed a credit against the federal unemployment tax (FUTA) for contributions made to a state unemployment fund, if the contributions are paid by the last day for filing an unemployment tax return for the tax year. If the contributions to the state fund are paid after that date, generally only 90% of the otherwise allowable credit may be taken against the federal unemployment tax.

However, for any unemployment tax on wages paid by the trustee of a title 11 bankruptcy estate, if the failure to pay the state unemployment contributions on time was without fault by the trustee, the full amount of the credit is allowed.

taxmap/pubs/p908-003.htm#TXMP492f1414 Statute of limitations for collection.

In a title 11 bankruptcy case, the period of limitations for collection of tax (generally, 10 years after assessment) is suspended for the period during which the Internal Revenue Service is prohibited from collecting, plus 6 months thereafter.

taxmap/pubs/p908-003.htm#TXMP11ccc863 Discharge of Unpaid Tax

Discharge of Unpaid Tax

Debts are divided into two categories; dischargeable and nondischargeable. Dischargeable debts are those that the debtor is no longer personally liable to pay after the bankruptcy proceedings are concluded. Nondischargeable debts are those that are not canceled because of the bankruptcy proceedings. The debtor remains personally liable for their payment.

As a general rule, there is no discharge for you as an individual debtor at the termination of a bankruptcy case for the second and eighth priority taxes described earlier, or for taxes for which no return, a late return (filed within 2 years of the filing of the bankruptcy petition), or a fraudulent return was filed. However, claims against you for other taxes predating the bankruptcy petition by more than 3 years may be discharged. However, if the IRS has a lien on the debtor's property, this property may be seized to collect discharged tax debts.

taxmap/pubs/p908-003.htm#TXMP7523f3ec Exception for Individuals with regular Income.

If you complete all payments under a chapter 13 debt adjustment plan for an individual with regular income, the court may grant you a discharge of debts, including a discharge of the second and eighth priority prepetition taxes described earlier. However, if you fail to complete all payments under the plan, these taxes are not discharged although the court may grant a discharge of other debts in limited circumstances.

Previous Page:  Publication 908 - Bankruptcy Tax Guide - Partnerships and Corporations Next Page:  Publication 908 - Bankruptcy Tax Guide - Debt Cancellation Use   to find additional occurrences of topic items.