5.9.13. Manual Proofs of Claim and Common Claim Issues

(1) Internal Revenue Manual (IRM) 5.9, Bankruptcy and Other Insolvencies, contains the IRS’s position, procedures, information, instructions, guidance, and references concerning bankruptcy cases, stockbroker insolvencies, receiverships, assignments for the benefit of creditors, corporate dissolutions, and bulk sales.

(2) This IRM specifically addresses the IRS’s position, procedures, information, instructions, guidance, and references on filing proofs of claim.

(1) The Insolvency program operates within the guidelines of the Bankruptcy Code (11 USC) and the Federal Rules of Bankruptcy Procedure.

(2) The United States Code (USC) authorities referenced in this IRM are:

• 11 USC 303, Involuntary Cases

• 11 USC 326, Limitation on Compensation of Trustee

• 11 USC 341, Meetings of Creditors and Equity Security Holders

• 11 USC 362, Automatic Stay

• 11 USC 501, Filing of Proofs of Claims or Interests

• 11 USC 502, Allowance of Claims or Interests

• 11 USC 503, Allowance of Administrative Expenses

• 11 USC 506, Determination of Secured Status

• 11 USC 507, Priorities

• 11 USC 521, Debtor's Duties

• 11 USC 523, Exceptions to Discharge

• 11 USC 541, Property of the Estate

• 11 USC 553, Setoff

• 11 USC 726, Distribution of Property of the Estate

• 11 USC 1112, Conversion or Dismissal

• 11 USC 1116, Duties of Trustee or Debtor in Possession in Small Business Cases

• 11 USC 1129, Confirmation of Plan

• 11 USC 1305, Filing and Allowance of Post-petition Claims

• 11 USC 1308, Filing of Pre-petition Tax Returns

• 11 USC 1328, Discharge

• 28 USC 960, Tax Liability

(3) The Internal Revenue Code (IRC) section authorities referenced in this IRM:

• IRC 1398, Rules Relating to Individuals' Title 11 Cases

• IRC 3302, Credits Against Tax

• IRC 4971, Taxes on Failure to Meet Minimum Funding Standards

• IRC 4980H, Shared Responsibility for Employers Regarding Health Coverage

• IRC 5000A, Requirement to Maintain Minimum Essential Coverage

• IRC 6020(b), Execution of Return by Secretary

• IRC 6213, Restrictions Applicable to Deficiencies; Petition to Tax Court

• IRC 6321, Lien for Taxes

• IRC 6411, Tentative Carryback and Refund Adjustments

• IRC 6503, Suspension of Running of Period of Limitation

• IRC 6601, Interest on Underpayment, Nonpayment, or Extensions of Time for Payment, of Tax

• IRC 6658, Coordination with Title 11

• IRC 6672, Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax

(1) The Director, Specialty Collection Insolvency is responsible for program oversight.

(2) Territory and Frontline managers are responsible for ensuring reviews are completed as required per IRM 1.4.51.17.2, Operational Review,IRM 1.4.51.16.2, EQ Consistency Reviews, and IRM 1.4.51.5.2, Reviews.

(3) Employees are responsible for following the provided guidance to process cases.

(1) Program Reports. Reports housed on the Business Objects system are used to support the insolvency program. The required AIS reports are described in IRM 5.9.12, Insolvency Automated Processes, IRM 5.9.16, Insolvency Case Monitoring, and in IRM 1.4.51.8.3, Case Management Tools.

(2) Program Effectiveness.

1. Operational and Program reviews are conducted on a yearly basis. See IRM 1.4.51.17.2, Operational Reviews, and IRM 1.4.51.17.5, Program Reviews, for more information.

2. National quality reviews are conducted on a monthly basis. Consistency reviews are conducted at least annually. See IRM 1.4.51.16.1, NQRS, and IRM 1.4.51.16.2, EQ Consistency Reviews, for more information.

(1) Insolvency managers are required to follow program management procedures and controls addressed in IRM 1.4.51.5.2, Reviews (Overview), IRM 1.4.51.15, Controls, and IRM 1.4.51.16, Quality.

(2) Caseworkers and managers utilize the Automated Insolvency System (AIS) for case management, assignment and documentation of insolvency and non-bankruptcy insolvency cases. See IRM 5.9.3.2, Automated Insolvency System (AIS). IRM 1.4.51.8.3, Case Management Tools, contains reports for managing and controlling inventory. AIS users have various levels of authorized access based on their assigned roles.

(1) A glossary of terms used in this IRM can be found in Exhibit 5.9.1-1, Glossary of Common Insolvency Terms.

(2) Common acronyms acceptable for use in the AIS history are listed in Exhibit 5.9.1-2, Acronyms and Abbreviations.

(3) Additional acceptable acronyms and abbreviations are found in the ReferenceNet Acronym Database, which may be viewed at: http://rnet.web.irs.gov/Resources/Acronymdb.aspx.

(4) Acronyms used specifically in this IRM section are listed below:

(1) AIS Insolvency System (AIS) User Guide, Document 13219.

(2) Automated Proof of Claim User Guide, Document 13163.

(3) Insolvency Knowledge Base Home Page https://portal.ds.irsnet.gov/sites/vl114/pages/default.aspx

(4) Taxpayer Bill of Rights, Pub 5170, and Taxpayer Bill of Rights page https://www.irs.gov/taxpayer-bill-of-rights

(1) Resource Gathering. As part of any review and in preparation for working proof of claim issues, case resource materials should be gathered to perform a quality case analysis. Some of the materials that may be used include:

1. IDRS Documents. IDRS materials are necessary research tools used in the calculation and classification of a claim, in determining if the liability is assessed or unassessed, and in identifying freezes or controls on the account that may affect the tax liability computation or the need to file a POC. The caseworker must review command codes INOLE, IMFOL, and/or BMFOL on IDRS.

   Note: Assistance with IDRS command codes is available on SERP by clicking the "Job Aids" button and scrolling down to “Miscellaneous” or at: http://serp.enterprise.irs.gov/job-aids/command-code/command-code.html.

2. Command Codes. The table below identifies useful command codes and their purposes.

CC	Reference	Purpose
INOLE/ ENMOD	IRM 2.3.47, Command Codes INOLE, EOGEN and SPARQ, and IRM 2.3.15, Command Code ENMOD	Verify debtor’s name, address and filing requirements. Identify cross reference (XREF) taxpayer identification numbers (TINs) for which research may be required.
IMFOL/ BMFOL	IRM 2.3.51, Command Code IMFOL, and IRM 2.3.59, Command Codes BMFOL and BMFOR	IMFOL (for Individual Master File) and BMFOL (for Business Master File). Verify if required returns have been filed. Give a complete history of returns required and filed. Note: These command codes do not reflect pending actions.
SUMRY/ TXMOD	IRM 2.3.11, Command Codes TXMOD and SUMRY	Depict current activity on an account summary or on individual modules reflecting such data as pending adjustments, notices, collection activity, revenue officer (RO) assignment, bankruptcy freezes, NFTL indicators, and Exam and CI controls.
INTST/ COMPA	IRM 2.3.29, Command Codes INTST, ICOMP, and COMPA	Calculate the tax, penalty and interest for claim preparation.
FFINQ	IRM 2.3.13, Command Codes FFINQ, REINF, and REMFE	Displays return fact-of-filing and refund information.
NAMEE/ NAMES	IRM 2.3.60, Command Codes NAMES, NAMEE, NAMEI, NAMEB, FINDS, FINDE and TPIIP	Search for potential IMF and BMF TINs when limited information is known.
IRPTR	IRM 2.3.35, Command Code IRPTR	Provides document data from the Information Returns Master file (IRMF). Used in preparation of estimated claims.
UNLCE	IRM 2.4.41, Command Code UNLCE	Identifies parties assessed a TFRP and periods covered by the assessment.
MFREQ	IRM 2.3.10, Command Codes MFREQ and RECON	Establishes a tax module on SUMRY. Used for an INTST calculation. Note: If the module is not on SUMRY, then INTST cannot be used. COMPA must be used instead to calculate penalty and interest. InterestNet/Automated Computation Tool (DMI/ACT) may also be used to compute interest and is preferred for more complex calculations.
AMDIS	IRM 2.8.3, AIMS Command Code AMDIS	Requests information on current audits.

3. Non-Master File (NMF). NMF research differs from IDRS research and is conducted through the Automated Non-Master File system (ANMF). (See IRM 4.4.22.2.1, Automated Non-Master File Accounting, and IRM 3.17.46, Automated Non-Master File Accounting.) NMF accounts are centralized at the Cincinnati Submission Processing Campus. Debtors may have accounts on ANMF when the IRS is not able to make normal assessments on IDRS, such as Tax Court cases where one debtor in a joint return has agreed to assessment and the other debtor on the joint return is contesting the assessment.

4. Bankruptcy Court Documents. Court documents may be accessed through the electronic court records or can be requested directly from the court.

   Note: Depending on the court, electronic records may be accessed through Public Access to Court Electronic Records (PACER), Case Management/Electronic Case Files (CM/ECF), or the website: https://pcl.uscourts.gov/pcl/index.jsf

   
   They potentially provide, among other things, cross referenced business information, corporate officer information for TFRP investigations, income and expense information and asset information. They consist of:

Bankruptcy Court Document	Definition
Schedules	A/B - Property C - Property You Claim as Exempt D - Creditors Who Hold Claims Secured By Property E/F - Creditors Who Have Unsecured Claims G - Executory Contracts and Unexpired Leases H - Your Co-debtors I - Your Income J - Your Expenses J-2 - Expenses for Separate Household of Debtor 2
Statement of Financial Affairs (SOFA)	The SOFA lists questions and answers about the debtor’s finances and provides income information for the current year and the last two years, business interests and corporate officer information (for TFRP investigations).
Statement of Monthly Income and Means Test Calculation	This statement must be completed by all individual Chapter 7 debtors who file bankruptcy on or after October 17, 2005. It provides income and expense information in addition to information given in Schedules I/J.
Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income	This statement must be completed by Chapter 13 debtors who file bankruptcy after October 17, 2005. It provides income and expense information given in Schedules I/J.
Other Court Documents	These can include motions, pleadings and filings from other parties with an interest in the case and can yield information not previously disclosed in the SOFA or schedules, such as other income/expense items, issues concerning potentially fraudulent activities, or sale of assets.

5. Notices of Federal Tax Lien (NFTL). Notices of Federal Tax Lien reflect the secured claim of the IRS. Facsimiles may be used as attachments to the POC. To be used to secure a claim in bankruptcy, the Notice of Federal Tax Lien must have been properly recorded pre-petition. Lien facsimiles may be printed individually from the AIS Lien Tab (see AIS User’s Guide) or the Automated Lien System (ALS) (see ALS User’s Guide) for review. However, only the redacted Social Security Number (SSN) lien facsimiles that accompany the printed POC may be used as attachments to the claim.

6. Standardized Correspondence. The IRS may send correspondence, either manually or systemically, to secure returns or information relative to the preparation of the claim or to establish liability. Written referrals may be sent to internal customers such as Exam, CI, and Area Counsel. Standardized letters may be sent to external customers such as trustees, attorneys for the debtors, or the debtors’ accountants. Letters initiated by SCI may include AIS Letter 1714, Request for Returns or Return Information, to secure missing or unfiled returns, or other AIS letters as appropriate.

   Note: Caseworkers can generate and print AIS letters by going to the AIS Letter Tab and selecting the applicable AIS letter. In addition to AIS letters/memos, caseworkers may also generate documents by using any approved customized document in Microsoft Word, Integrated Collection System (ICS), IDRS, SERP, or letters available on the IRS intranet.

7. Ad Hoc Correspondence. If the suite of standardized letters does not fit a specific situation, caseworkers may write an ad hoc letter, with managerial approval, to a debtor or debtor’s attorney. Counsel input should be sought if the nature of the ad hoc letter is technical.

8. Commercial Systems. Other information systems may be researched on an as needed basis and may include "Accurint," an Internet based research tool for finding people, businesses and assets, and "Bloomberg Tax," or Westlaw electronic legal research tools.

   Note: Access to "Accurint", Bloomberg Tax and "Westlaw" can be requested through the Business Request Entitlement Access Request System (BEARS).

(2) 341 Meeting Review. The first meeting of creditors, also known as the 341 meeting, will usually occur soon after the commencement of the bankruptcy. Caseworkers should conduct a timely initial case review, allowing ample time to determine if an IRS presence is needed at the hearing. IRM 5.9.2.5, First Meeting of Creditors, provides more information on 341 meetings. The case history should address whether or not attending the 341 meeting is necessary, and include a discussion that clearly and fully documents any of the following that apply:

• Any case issue which needs to be addressed at the 341 meeting;

• Any case issue for which an objection to confirmation of the plan is being contemplated;

• Unfiled returns; and

• Problems with the plan or motions, including not recognizing the IRS secured or priority claims.

(3) Plan Review. Field Insolvency caseworkers should evaluate bankruptcy plans or plan summaries prior to the confirmation date. Ample time should be allowed for a referral to Counsel should an objection to the plan be required. Area Counsel can advise Field Insolvency of lead time needed for effective referral preparation.

(4) Stay Violation Review. When initially reviewing cases, caseworkers should access IDRS to determine if stay violations have occurred. (See IRM 5.9.3.5, Automatic Stay.) For individual Chapter 7, 11, and 13 cases filed on or after October 17, 2005, this review should include checking for previously filed bankruptcies that may affect the imposition of the stay. (See IRM 5.9.5.7, Serial Filers.)

(5) Review for Nondischargeability. If the requisite time between previous bankruptcy discharges and a current bankruptcy filed on or after October 17, 2005, has not elapsed, the debtor may not be allowed a discharge in the current proceeding. (See Exhibit 5.9.5-3, Allowable Elapsed Time Between Bankruptcy Filings, and IRM 5.9.5.7.1(5), Discharge Limitations.)

(1) Lien Information. IRM guidance regarding liens, NFTLs, and refiling for cases in bankruptcy is found in IRM 5.9.6.11.1, Initial Case Review of Large Dollar 7 No Asset (7N) Reassignments by FI, IRM 5.9.6.11.2, Initial Case Review of the 7A Individual Case by FI, IRM 5.9.8.4, Initial Case Review for Chapter 11, IRM 5.9.10.3, Initial Case Review for Chapter 13 Bankruptcy, IRM 5.9.5.9.1, NFTL Filing after Bankruptcy Filing, IRM 5.9.5.9.2, Refiling Notices of Federal Tax Lien (NFTLs), and IRM 5.9.17.18(10), Lien Release Revocation and Refile.

(1) Late Claim May Not Be Allowed or Paid. Except in Chapter 7 cases, a late claim may be disallowed under 11 USC 502(b)(9) and may not be paid. If the IRS did not receive notice of the bankruptcy case in order to file a timely claim, caseworkers should follow the procedures outlined in paragraph (6) below.

1. If a liability is discovered after the bar date for filing claims has passed, and if the liability was not listed on a timely filed original or amended claim, an amendment may be warranted within certain constraints. (See paragraph (4) below.)

2. An untimely tax claim may be disallowed solely on the basis it was filed late (11 USC 502).

(2) Chapter 7 Late Claim Allowed. For Chapter 7 cases filed prior to October 17, 2005, if a claim was untimely filed, the IRS can still receive full payment of priority tax claims as long as the claim is filed before the trustee begins distribution (11 USC 726). For Chapter 7 cases filed on or after October 17, 2005, late filed priority claims are to be paid with timely filed priority claims (11 USC 726(a)(1)) if they are filed by the earlier of:

• The date that is ten days after the mailing to creditors of the summary of the trustee's final report, or

• The date on which the trustee commences final distribution.

  Note: In a Chapter 7 case, untimely claims should generally be filed because the IRS may be entitled to a share of the assets.

(3) Chapter 13 Caution. When a liability is discovered after the governmental bar date in a Chapter 13 proceeding and SCI cannot cite special circumstances for its tardiness (for example, the IRS was not given timely notice of the bankruptcy filing), the late claim may be disallowed unless the IRS can justify it as an amendment to a timely filed proof of claim.

(4) Considerations for Late Filing. If a proof of claim is not filed prior to the bar date, SCI must decide if a late filed claim is warranted. If a claim was not filed because the IRS did not receive sufficient notice for a timely claim to be filed, the procedures in paragraph (6) below should be followed. A decision to file a proof of claim after the bar date has passed should be based on:

• Reasons the claim was not filed prior to the government’s bar date

• Amount of the claim

• Type of taxes

• Chances that the claim will be paid by the trustee in a specific court jurisdiction

• Collection potential from a non-debtor spouse in a case where a joint income tax return was filed

• Favorable legal rulings on late filed claims in a specific jurisdiction

• Support of Area Counsel to file a late claim

• Likelihood the tax will not be discharged and therefore the debtor may be willing to modify a plan to pay the liability

• Likelihood of future collection (either through or outside of the case)

• If the claim meets the criteria noted in Exhibit 5.9.13-1, Threshold for Claims

(5) Counsel Review. Generally, Counsel should be consulted after SCI determines a late claim should be filed to add a tax debt, exceptions being for claim filing changes cited previously in this IRM section for cases commencing on or after October 17, 2005. Bankruptcy courts are more likely to consider late filed claims in some bankruptcy chapters and in some jurisdictions than in others.

(6) Notice Received with Insufficient Time to File A Timely Proof of Claim. 11 USC 523(a)(3) states that an individual debtor is not discharged of a debt if the creditor does not receive notice in time to file a timely proof of claim because the debtor failed to include the creditor on the schedules and statements. This provision does not apply if the creditor otherwise has timely notice or actual knowledge of the case.

1. When notice is received late based on the time periods above, the caseworker should first check to see if the Internal Revenue Service was listed as a creditor prior to receipt of the current notice. It will be necessary for caseworkers to check the creditor mailing matrix, the original Schedules D, E and F, any amendments to Schedules D, E and F, any documents stating an amendment has been made to the creditor mailing matrix, and any other pertinent documents on PACER to determine if the Internal Revenue Service was listed as a creditor prior to receipt of the current notice. Caseworkers should be aware that when the creditor mailing matrix is amended to show additional creditors, the creditors are added to the matrix but there is no indication to show when they were added. However, any amendments made to the creditor mailing matrix will be shown on the PACER docket report. The method of reflecting these amendments varies between courts. If notice was previously given to the correct address 30 calendar days or more before the expiration of the bar date, the notice should be treated as timely even if the Internal Revenue Service did not receive this notice. In this situation, caseworkers should note the details of the prior notice in the history and process the case without following the procedures below for a late notice.

   Caution: The bar date field on AIS generally displays a presumptive general bar date. Caseworkers should not rely on this as being the bar date, but should also compute whether the governmental bar date has expired, using the period of 180 days from the filing of the petition (excluding the 180th day). Additionally, if the bar date has not expired because of some other procedure, such as when a new bar date is set after a case is converted, the bar date should also be considered to be open even if AIS shows it as expired.

2. If the bar date has expired when notice is received, but the proof of claim will still be allowed under provisions of the Bankruptcy Code or under local procedures, the proof of claim should still be filed.

   Example: The Internal Revenue Service can still receive payment for priority taxes on a proof of claim filed after the bar date in a Chapter 7 asset case if the proof of claim is filed on or before the earlier of: (1) the date that is 10 days after the mailing of the summary of the trustee's final report; or (2) the date on which the trustee commences final distribution of the estate.

   Example: In some jurisdictions, a proof of claim is considered to be timely in a Chapter 13 case even when filed after the bar date if the debtor failed to give timely notice of the bankruptcy to the affected creditor.

3. If notice is received less than 18 calendar days before the bar date or after the bar date has expired, and a late proof of claim will not be allowed under the Bankruptcy Code or local procedures, no proof of claim is required to be filed where the caseworker determines the claim cannot be timely filed. The caseworker should obtain managerial approval for any decision not to file a proof of claim. The caseworker should document the history as to when and how the notice was received, and why it was not possible to file a timely proof of claim. The manager should document the history with a concurrence that a claim should not be filed. The case should then be processed as non-dischargeable as set out below.

4. If the case was received 18 calendar days or more but less than 30 calendar days before the bar date, the caseworker should consider consulting Area Counsel on whether the courts in the jurisdiction where the case is pending have established a firm date by which notice will be considered to be untimely. The caseworker may also want to consult Counsel if notice was received during this time period and exceptional circumstances, such as a system outage, prevented the caseworker from filing a proof of claim before the expiration of the bar date. When notice is received less than 30 calendar days before the bar date or after the bar date expiration and the caseworker has determined that a proof of claim could not be timely filed, the caseworker should consider whether a suit referral should be made to Counsel. A referral should be made for a suit to determine dischargeability when it is questionable if the notice was untimely before treating the taxes as non-dischargeable. Caseworkers should apply the tolerance amounts for referrals contained in IRM 5.9.4.15.4, Referral Tolerances, absent exceptional circumstances.

5. At the time the caseworker determines that a timely proof of claim cannot be filed, the "NoNotice" classification must be added to the case classification screen on AIS. Caseworkers need to follow the procedures in IRM 5.9.5.4(6), Classifications and Summary Histories, for AIS history documentation, but should use the "NoNotice" classification rather than inputting "PDSC".

6. When a caseworker makes a determination that a timely proof of claim cannot be filed and the manager concurs, the history should be documented to show: (1) when notice was received, (2) when the bar date expired, (3) if notice was received prior to the expiration of the bar date, a detailed explanation as to why a proof of claim could not be timely filed, (4) concurrence by the manager in any decision not to file a proof of claim when notice was received prior to the expiration of the bar date, (5) any opinion received from Counsel, and (6) a statement that the liabilities are non-dischargeable due to lack of timely notice.

(1) Proof of Claim. Include the following liabilities on a proof of claim in the LLC's bankruptcy:

• Income tax liabilities assessed in the name and EIN of the LLC.

• Excise tax liabilities assessed in the name and EIN of the LLC.

• Employment taxes reported in the name and EIN of an LLC that elected to be classified as an association taxable as a corporation or as a partnership.

• Employment taxes on wages paid on or after January 1, 2009, regardless of the classification of the LLC.

  Reminder: Employment taxes on wages for tax periods ended before January 1, 2009 where the LLC is a disregarded entity are not included on a proof of claim in the LLC's bankruptcy, as the SMO is liable for those taxes.

(2) Disregarded Entity Employment Taxes. A proof of claim will generally not be filed in the LLC's bankruptcy when the LLC is a disregarded entity for employment tax periods ended before January 1, 2009. However, even if an LLC is presently a disregarded entity, it may still be liable for taxes that arose out of periods when it was not a disregarded entity or when an entity of which the LLC is the successor was not disregarded. When a disregarded LLC is liable for taxes that arose out of periods when it was not a disregarded entity or when an entity of which the LLC is the successor was not disregarded, a proof of claim should be filed.

(3) Collection Against SMO. When a single member disregarded entity LLC files bankruptcy, but the SMO does not, collection action may continue for employment tax liabilities owed by the SMO that were reported in the name and EIN of the LLC for wages paid prior to January 1, 2009. The liability is owed by the SMO rather than by the LLC in bankruptcy. In this case a TC 520 cc 84 should be input on the applicable modules under the LLC EIN as an alert to Field Collection to contact SCI before taking enforcement action. Upon contact, the revenue officer will be advised by SCI to pursue collection from the SMO and not the LLC.

(4) Protective Claim. If the tax status of the LLC cannot be determined prior to the bar date, SCI should file a protective proof of claim with an annotation explaining the IRS has not been able to ascertain if the debtor is the entity liable for the tax. A protective proof of claim could also be filed when SCI is still investigating if the LLC is liable for taxes that arose out of periods when it was not a disregarded entity or when an entity of which the LLC is the successor was not disregarded.

(5) Counsel Guidance. To ensure the government's interests are protected, Area Counsel may be consulted when issues arise related to claims against LLCs that cannot be easily resolved.

(1) Proof of Claim. Include the following liabilities on a proof of claim when the owner of an LLC files bankruptcy:

• Income taxes reported in the name and TIN of the owner.

• Excise taxes assessed in the name and EIN of the owner.

• Employment taxes on wages paid before January 1, 2009 for a disregarded entity LLC reported in the name and EIN of the SMO or the name and EIN of the LLC.

• Trust fund recovery penalty liability against the SMO, if applicable, for employment or excise tax periods where the LLC was the taxpayer.

(2) Determining Liable Party. When a single member owner is the bankruptcy petitioner, SCI may not be aware of a liability arising from the activities of a disregarded LLC. IDRS and CFOL do not identify if LLCs are disregarded, nor do they cross-reference LLC EINs to the single member's SSN. The debtor's bankruptcy plan or schedules may identify the debtor's ownership of an LLC and if it is a disregarded entity for tax purposes. If the plan or schedules do not identify whether an LLC is a disregarded entity, and the LLC's classification cannot be determined by checking internal sources identified in IRM 5.1.21, Collecting from Limited Liability Companies, the caseworker should consider questioning the debtor at the 341 meeting or directing an OI to a revenue officer to obtain this information. If the caseworker cannot determine the status of the LLC by following these avenues, the caseworker may consider referring the case to Area Counsel to pursue a Bankruptcy Rule 2004 examination of the debtor to obtain this information.

(3) Protective Claim. If the tax status of the LLC cannot be determined prior to the bar date, a protective proof of claim should be filed with an annotation explaining the IRS has not been able to ascertain if the debtor is the person liable for the tax.

(4) Counsel Guidance. To ensure the government's interests are protected, Area Counsel may be consulted when issues arise in determining liabilities that cannot be easily resolved.

(1) Protecting the Government’s Interests. By meeting the bar date time frame, an "unassessed" (estimated) proof of claim protects the government’s interests before the exact liability is determined.

1. An unassessed claim should be followed as soon as possible by an amended or a supplemental proof of claim stating the correct tax liability once a debtor files a return, or Examination determines the amount of a tax liability or tax deficiency.

2. An unassessed claim may also be filed when Exam has determined a proposed tax amount, but an assessment is prohibited because the debtor’s time for filing a Tax Court petition has not expired due to the automatic stay, or Tax Court proceedings are pending.

3. APOC will estimate claims when return information is available. However, if no return information is available for a period from which to compute an estimate, APOC will default to "$100.00" tax due.

   Note: The $100 APOC default should not be left on the claim unless all efforts to obtain a factual basis for the claim as described in IRM 5.9.13.18.1(4) thru IRM 5.9.13.18.1(7) have been exhausted.

(2) Combining Assessed and Unassessed Amounts. One proof of claim form can include both assessed (i.e., the exact amount owing has been determined) and unassessed amounts.

(3) Factual Basis. The IRS’s unassessed claim must have a factual basis and cannot be inflated. The unassessed tax liability must be based on as much information as possible.

(4) Base on Resources Available. The resources SCI may use to obtain a factual tax basis include, but are not limited to:

• IDRS data using command codes such as IRPTR, PMFOL, RTVUE, and BRTVU

• Last filed return information

• Income or expense schedules

• Statement of financial affairs

• Information available from revenue officers (from RO’s files and/or oral communication)

• Examination ("admin") files or information from Examination functions

• Underreporter information

• Information from debtor or debtor’s attorney

(5) Liability on Last Filed Return (LFR) for IMF. In preparing a manual proof of claim, if the caseworker is relying on the LFR as a basis for estimating unfiled returns, the caseworker should use the LFR total of assessed tax transaction codes (TC 150, 290, 300, etc.) less any credits (TC 640, 650, 660, 670, etc.) appearing on the tax module being estimated in calculating the total tax due. To the LFR figure, the caseworker must increase the total tax due 5% on an annual basis to allow for inflation.

(6) Liability on LFR for BMF. Business tax returns are based on quarterly filings (such as Form 941), calendar year filings (such as Form 940 or Form 944), or fiscal year filings (some Forms 1120). As such, manual calculations of estimated BMF tax are more involved than IMF calculations.

1. Quarterly Returns. For estimating quarterly returns such as Forms 941, the caseworker should calculate the tax on the LFR period in the same calendar year and subtract credits shown on the unfiled period. For each subsequent unfiled quarterly period of that calendar year, the unassessed claim is based on the LFR for that calendar year. However, if an unfiled quarterly return occurs in the next calendar year when the LFR was received for the prior year, 5% is added to the tax liability for the LFR. That dollar amount, less any credits, is used for all four quarters of the subsequent calendar year.

   Example: The second quarter Form 941 for tax year 2021 is the LFR and has a tax liability of $10,000. Unfiled returns for the third and fourth quarters of 2021 are estimated at $10,000. Forms 941 for the first and second quarters of tax year 2022 also have not been filed. The estimated amount for each of those periods is $10,500 ($10,000 X 1.05).

2. Annual Returns/Fiscal Year Returns. For estimating unfiled annual or fiscal year returns such as Forms 940, 944, or 1120, the estimated tax is calculated by adding 5% to the tax liability from the LFR and deducting any prepaid credits.

3. Sporadic Filings. If unfiled returns are mingled between filed returns, the LFR period is based on the most recent LFR prior to the unassessed period.

   Example: For tax year 2021, the second quarter Form 941 is the LFR with a liability of $5,000. A Form 941 return has not been filed for the third quarter of that tax year. A return has been received for the fourth quarter of tax year 2021 with a liability of $6,000, but no return has been received for the first quarter of tax year 2022. Following the instructions above, the unassessed claim for the third quarter of tax year 2021 is $5,000. The estimated liability for the first quarter of tax year 2022 is $6,300 ($6,000 X 1.05).

(7) Penalties and Interest. All applicable pre-petition penalties and interest for filed returns with pending assessments should be computed and claimed. If unassessed liabilities are listed for unfiled returns, penalties and/or interest do not have to be computed unless required by local guidelines.

(8) IRC 6020(b) Returns. Periods for which tax returns are prepared by the IRS under authority of IRC 6020(b) should be considered to be unassessed (estimated) liabilities if the 30–day period for the taxpayer to respond to a proposed assessment is still open, and the taxpayer has yet to respond.

(9) Tax Subject to Deficiency Procedures. Taxes subject to deficiency procedures remain estimates unless the taxpayer signs a consent to assessment or the liability is determined by the Tax Court. If the taxpayer disagrees with the proposed assessment or fails to respond within the 30 day period, the IRS must then issue a statutory notice of deficiency which allows the taxpayer to file a Tax Court petition. The automatic stay does not prevent the IRS from issuing the notice of deficiency. However, the stay prevents the individual taxpayer from filing a petition with the Tax Court during bankruptcy for pre-petition deficiencies. The stay prevents a corporate debtor from petitioning the Tax Court for a taxable period the bankruptcy court may determine, which includes pre-petition and post-petition periods.

(10) Closing Codes (cc). When an estimated claim is filed, the closing code assigned to the TC 520 freeze on the estimated period should be cc 60 or cc 61 to prevent erroneous refunds. IRM 5.9.5.6.1, Closing Codes, explains the conditions for each closing code.

(11) AIS Statements. The proof of claim should include a statement identifying the reason for the unassessed liability. A support file in AIS contains allowable standardized statements.

(12) Liability Not Pursued. After a proof of claim has been filed with unassessed (estimated) amounts, and a determination is made the estimated liability has no factual basis and will not be pursued (for example, by examination process or underreporter unit) or a return is filed showing little or no tax due, the proof of claim should be amended or withdrawn, as appropriate. If a claim is withdrawn, any trustee payments received must be refunded to the trustee. If trustee payments have been applied to periods that are no longer being pursued, the payments need to be moved to other balance due periods, or refunded to the trustee, whichever action is appropriate.

(13) Zero Amendment. The Electronic Proofs of Claim (EPOC) system does not allow for electronic withdrawal of claims. Because of this, for most courts a claim is withdrawn by filing an amended claim for $0.00. When amending a claim to $0.00, the caseworker must select the appropriate POC statement to indicate the claim is being withdrawn.

(1) Delinquent Return Limits. Standard IRS practice usually limits the pursuit of unfiled returns to the prior six years. In certain instances the IRS may find it advantageous to require filing of delinquent returns going back eight years. (See IRM 5.9.14.2.10, Case Compliance.) Pursuit of unfiled returns for periods preceding the prior six years requires managerial approval. (See IRM 5.1.11.7.1, Enforcement Determination.)

(2) Publication 1. If a debtor has unfiled returns, but has no current assessed tax liabilities, the SCI caseworker must provide them with a copy of IRS Publication 1 upon initial contact to secure those returns whether that contact is made by phone, letter, or attendance at a 341 hearing or other in-person meeting.

(3) 1714 Letters. When a caseworker's initial review or APOC processing indicates a debtor is responsible for unfiled returns with tax potential, the caseworker usually should send AIS Letter 1714, Request for Returns or Return Information, to the debtor with a courtesy copy to the debtor’s attorney. Caseworkers may follow local practice in sending courtesy copies to the trustee, and may choose not to send them where the trustee has indicated they are not of assistance. While most AIS letters do not require previous actions, a caseworker cannot generate and print AIS Letter 1714 unless a claim has been prepared which reflects an unassessed liability. This liability will be shown on the claim as estimated condition #1," Estimated - SEE NOTE - LIABILITY IS ESTIMATED BASED ON AVAILABLE INFORMATION BECAUSE THE RETURN HAS NOT BEEN FILED. THIS CLAIM MAY BE AMENDED AS NECESSARY AFTER THE DEBTOR FILES THE RETURN OR OTHER REQUIRED INFORMATION". Letter 1714 is generated systemically when APOC computes a claim for an unassessed pre-petition liability. The letter is then available on AIS for printing.

(4) Letter 1714 Follow-up. A 15- day follow-up date will be set on all cases where Letter 1714 is issued, including individual debtors and streamlined cases. (See Exhibit 5.9.4-1, Inputting Follow-up Dates, for steps in setting a follow-up date.) Upon follow-up, the caseworker must review the case to verify if the requested returns have been filed or if the debtor has provided pertinent information regarding the filing or non-filing of the delinquent returns.

(5) Reply to Letter 1714. Responses to the 1714 letter may be written or telephonic. Written replies may contain copies of returns or original returns. The following table explains actions required for potential replies to Letter 1714.

(6) No Reply to Letter 1714. In some cases, the debtor will not respond to Letter 1714. In those cases, the caseworker must contact the debtor or debtor’s attorney by phone to secure returns or return information. If contact with the debtor or the debtor’s attorney by phone does not bring the debtor into compliance, the caseworker should consider the appropriate next action which may include:

1. Attendance at 341 hearing to secure the return(s);

2. Creating an OI for a revenue officer to collect the return(s);

3. Preparation of an IRC 6020(b) return;

   Note: Delegation Order 5-2 (Rev. 1) gives specified bankruptcy advisors and specialists the authority to prepare and execute IRC 6020(b) returns. IRM 5.1.11.7.7, IRC 6020(b) Authority, IRM 5.1.11.7.7.1, Taxpayer Contact, and IRM 5.1.11.7.7.2, Preparation and Approval of 6020(b) Returns, provide guidance and instructions on IRC 6020(b) procedures.

4. Referral to Counsel to dismiss; or

   Note: No referral to Counsel should be made in a Chapter 13 case if the only unfiled returns contained in the referral relate to tax years that ended more than four years before the filing of the bankruptcy petition. See 11 USC 1307(e), 1308, 1325(a)(9).

5. Preparation of an estimated claim or allowing an existing estimated claim to stand.

(7) Securing Unfiled Returns at the 341 Hearing. For cases filed on or after October 17, 2005:

1. 11 USC 521(e)(2) requires the debtor to provide the trustee with a copy of the federal income tax return for the last tax year ending before the petition date before the 341 hearing;

2. 11 USC 521(f) requires the debtor to file copies of selected income tax returns with the court at the same time it files the return(s) with the IRS at the request of the court, the trustee, or a party in interest; and

3. 11 USC 1308(a) requires Chapter 13 debtors to file all required returns for tax periods ending during the four-year period ending on the petition date.

(8) Unfiled Returns Below the Required Criteria. Where returns are due and yet remain unfiled, and the caseworker has determined the aggregate liability of unfiled returns and assessed liability does not exceed the amount noted within Exhibit 5.9.13-1, Threshold for Claims, criteria, no proof of claim need be prepared. The case worker will:

1. Update the "case class" field to indicate the case is below the required criteria for proof of claim processing; and

2. Document the AIS History.

(9) No Longer Required to File Return. If the caseworker determines the debtor is no longer required to file or is no longer in business, the caseworker should request to close the filing requirements and request the appropriate TC 590/591 to satisfy the module. See IRM 5.1.11.8.3, No Return Secured Taxpayer Not Required to File for This Period, and IRM 5.1.11.8.4, No Return Secured Taxpayer No Longer Required to File (Final). The history should be documented to explain why filing is not required and the research conducted or information provided, to verify the business is closed.

(10) No Claims Required Below Tolerance Criteria. If completion of the initial review reveals all required pre-petition returns are filed and the liability does not exceed the claim tolerance criteria outlined in Exhibit 5.9.13-1, Threshold for Claims, no claim is required. However, SCI must maintain the bankruptcy freeze on the account. The caseworker will take the following steps:

(11) Delinquent Returns Not Filed. If the debtor does not respond to the IRS’s request for unfiled returns and potential liabilities exist, the caseworker should take the actions in the table below.

(12) SCI Responsibilities. Although the trustee can move for dismissal or conversion if tax returns remain unfiled, Field SCI must assume the responsibility for filing a motion to dismiss on the grounds of non-compliance. If missing tax returns are not filed or the debtor does not give a credible explanation as to why the debtor is not liable for those returns by the deadline given on the 1714 letter, caseworkers should consult Exhibit 5.9.13-1, Threshold for Claims, and IRM 5.9.4.15.4, Referral Tolerances, to determine if the IRS should move for dismissal or conversion. Appropriate administrative actions (see paragraph (6) above) must be pursued, time permitting, before making a referral to Counsel for dismissal based on unfiled returns.

(1) State Credit Adjustment. IRC 3302 reduces the federal credit taken on a Federal Unemployment Tax Act (FUTA) return if the employer has made late payments to the state unemployment fund. Although it might be presumed the IRS can include this reduction in the FUTA credit on its proof of claim, 11 USC 502(b)(8) alters the ability of the IRS to file claims for these credits. In short, state credit adjustments to pre-petition FUTA accounts (MFT 10) that result in an additional liability to the debtor generally cannot be included on the IRS's proof of claim.

(2) Exceptions. The disallowance of claims under 502(b)(8) for the reduction of the FUTA credit for state unemployment payments only applies to pre-petition payments of wages, salaries or commissions. If a trustee fails to make timely payment of state unemployment taxes, the IRS may assert an administrative claim for the reduction in the FUTA credit. If, however, the trustee is without fault for the failure to make a FUTA tax payment by the required date, the full state credit may be allowed to the debtor (IRC 3302(a)(5)).

(3) Identifying State Adjustments. A FUTA adjustment resulting from a state's reduction of the FUTA credit can be identified on an IDRS TXMODA for tax Form 940 by a TC 290 which is not preceded by an amended tax return identifier (usually TC 97X). Along with an extract number and the dollar amount a "T" (for "tax") will appear followed by the two letter state abbreviation, e.g., TFL. The amount of this TC 290 cannot be included on the IRS's proof of claim.

(4) APOC Update. At this time APOC is not programmed to omit TC 290 assessments resulting from a reduction of a state credit on FUTA returns. Therefore, MFT 10 claims must be reviewed manually and adjusted if necessary prior to mailing or electronically transmitting the claims to the court.

(1) Mirror Modules (MFT 31 and MFT 65) and NMF Modules. All of a debtor’s tax liabilities accrued as of the petition date should be included on the proof of claim. This includes MFT 31 and MFT 65 mirror modules and modules on the non master file (NMF). The claim procedures for an MFT 31 or MFT 65 mirror or NMF module are the same as for an MFT 30 module. The caseworker must determine:

• If the tax liability is pre-petition or post-petition,

• The correct classification of the mirror module, and

• The accurate claim amount.

(2) Duplicate Spousal MFT 31, MFT 65, and Trust Fund Recovery Penalty (TFRP) Assessments. A proof of claim may list two MFT 31, two MFT 65, or two TFRP modules for the same period when a married couple files a joint bankruptcy. The amounts of the assessments for the same period may be identical, or one may be larger than the other. When AIS computes the total amount of a claim on Form B410, the sum includes the amounts of each module. The total amount computed by AIS cannot be systemically overridden, so when both spouses have duplicate MFT 31, MFT 65, and/or TFRP assessments, the amount of the claim on Form B410 is overstated. Caseworkers should determine whether the assessments are for the same liabilities. If so, the claim should be filed according to local procedures in one of two ways.

1. The caseworker may omit one spouse’s MFT 31, MFT 65, and/or TFRP assessment(s) from the claim and provide a clarifying statement on the proof of claim that both debtors are liable, but that only one assessment is being shown on the proof of claim to prevent overpayment. If the assessments are in differing amounts, the caseworker should determine which assessment should be included on the proof of claim. In most cases, this will be the higher assessment, but in some situations, the lower assessment should be used. For example, when payments have been made on one account, but have not yet been cross-referenced to the other account, the lower assessment should be included on the proof of claim to prevent overpayment.

   Example: Proof of Claim Statement 20 is one option for providing this information. It states: "Separate assmnts, one assmnt is being claimed to avoid overpayment." There are other options available in the Proof of Claim statements on AIS.

2. The caseworker may include both spouses' MFT 31, MFT 65, and/or TFRP assessments and provide a suitable clarifying statement on the proof of claim that both assessments are included, but the amount is to be paid only once.

   Example: Proof of Claim Statement 30 is one option for providing this information. It states: "Separate Assmnts. Both are shown, but the amt is to be collected once." There are other options available in the Proof of Claim statements on AIS.

   Caution: Because the Confirmed Plan Monitoring (CPM) screen populates systemically from the proof of claim, with this option the duplicate assessments will both populate to the CPM screen. Caseworkers must remember to delete the duplicate assessment from the CPM so the assessment is not being paid twice through the plan. If the assessments are in different amounts, the caseworker will need to determine which assessment should be included on the proof of claim, as discussed above.

(1) Restitution Assessments on APOC. Restitution based assessments can be identified as using MFT 31 and having TC 971 AC 102 on the module(s). For purposes of a bankruptcy case, a restitution assessment is classified in the same manner as the tax module to which it relates. The Automated Proof of Claim (APOC) system will recognize the assessment and classify it based on the tax module. No flag will be raised solely due to the fact that the assessment is for restitution.

(2) Manual Proof of Claim Preparation. If it is necessary for a caseworker to create a proof of claim manually, caseworkers should follow the regular classification rules for the type of tax for which restitution is to be made. Interest on the restitution assessment will have the same classification as the tax assessment. If the failure to pay penalty accrued on the restitution assessment, it will either be secured or general unsecured.

(3) Mirror Assessments. A mirror assessment of the restitution-based assessment for the same type of tax is created based on a return filed, an assessment made after an audit, or the creation of a 6020(b) return. The caseworker must determine:

• If the tax liability is pre-petition or post-petition,

• The correct classification of the mirror module, and

• The accurate claim amount.

(1) IRC 5000A - Individual Shared Responsibility Provision.

1. Assessment and Treatment under Bankruptcy. When applicable, the Individual Shared Responsibility Payment (SRP) liability will be assessed under MFT 35 or for mirrored accounts, MFT 65. Even though the SRP may be thought of as a penalty, it is not treated as one when filing a proof of claim. Rather, for bankruptcy purposes, the SRP will be treated as an excise tax under 11 USC 507 (a)(8)(E). See IRM 5.9.13.19.3, Unsecured Priority for additional information.

   Note: The SRP follows the tax year Form 1040, 1040A, or 1040EZ information from which it arose. Since there is no "tax return" on the SRP module, the caseworker must use the Form 1040, 1040A, or 1040EZ from the same year as the SRP assessment for all information needed in order to correctly classify the liability.

2. Including the SRP on a Proof of Claim. APOC will calculate and classify assessed balances due for the Shared Responsibility payment; however, it will NOT compute unassessed claims or issue a flag. Caseworkers will not file estimated claims for an unassessed SRP.

   Caution: If the taxpayer incurs a pre-petition SRP liability prior to the bar date it should be included on the Proof of Claim. If the IRS discovers a pre-petition SRP after the bar date, please see IRM 5.9.13.7.1, Late Filed Claims, or IRM 5.9.13.8, Amended Claims, for guidance.

   Note: If needed, IRM 5.9.13.20, Claim Calculations, explains how to manually calculate an assessed SRP liability.

3. Multiple Persons Assessed the SRP. Problems may arise with proofs of claim involving SRPs that have been assessed against both spouses under MFT 65 mirrored accounts.

4. Duplicate Spousal SRP Assessments. A proof of claim may list two identical SRPs when a married couple files a joint bankruptcy, and each has been assessed a SRP for the same module(s). The assessments may either be in the same or differing amounts. When AIS computes the total amount of a claim on Form B410, the sum equals the amounts of each module. That total amount computed by AIS cannot be systemically overridden, so when both spouses have duplicate SRP assessments, the amount of the claim on Form B410 is overstated. Caseworkers should follow the procedures outlined in IRM 5.9.13.18.4, Duplicate and Mirror Assessments and NMF Periods, choosing the appropriate option based on local procedures.

   Caution: Caseworkers should not assume that assessments made against both spouses for the same period are duplicates simply because they are for the same tax period. Before assessments are treated as duplicates, caseworkers should verify that the shared responsibility payment assessments are for the same underlying liability (jointly filed Form 1040), and are not for separately filed Forms 1040.

5. Collection of Proper Amount. The IRS must not over-collect. The IRS’s policy is to collect the unpaid SRP only once.

6. Post-Petition SRP assessments in Chapter 13. An 11 USC 1305 claim may be filed for taxes that become payable while the case is pending. This includes any amounts due for the SRP. If the Form 1040, 1040A or 1040EZ is a post-petition module (see IRM 5.9.10.9(1), Post-Petition Tax Liabilities), the SRP is also post-petition.

(2) ACA Provision Section 9008 - Annual Fee on Branded Prescription Pharmaceutical Manufacturers and Importers (Branded Prescription Drug Fee or BPD Fee)

1. General Information. The Annual Fee on Branded Prescription Pharmaceutical Manufacturers and Importers (Branded Prescription Drug Fee or BPD Fee), imposes an annual fee on manufacturers and importers of branded prescription drugs (BPDs) with gross sales to specified government programs exceeding $5 million. See IRM 25.21.1, Branded Prescription Drug Fee for further information.

   Note: An entity that owes a BPD fee may be a debtor in a bankruptcy case.

2. Assessment and Treatment under Bankruptcy. When applicable, the Branded Prescription Drug (BPD) liability will be assessed under MFT 03, however it will have a period ending in 08 to distinguish it from all other assessments under the same MFT. For bankruptcy purposes, it will be treated as an excise tax under USC 507(a)(8)(E). See IRM 5.9.13.19.3, Unsecured Priority, for additional information.

   Note: Since no return is required to report the BPD fee, the BPD fee is considered to be incurred in the year that is two years before the fee year, at the time the entity sales to the Government programs exceed $5 million. The bankruptcy three-year priority period would begin when the tax is incurred.

3. Including the BPD on a Proof of Claim. APOC will not calculate and/or classify assessed balances due for the BPD. Caseworkers will be required to calculate and classify the period manually. APOC will not compute unassessed claims or issue a flag for unassessed periods; however, caseworkers should file estimated claims for an unassessed BPD, where necessary. If the sales were made in the year in which the petition was filed, the portion of the fee based on pre-petition sales would be a pre-petition claim, and the portion based on post-petition sales would be a post-petition administrative expense. The pre-petition portion could be estimated based on the ratio of pre-petition sales to total sales by the taxpayer for that year. In order to prepare an accurate estimate and file a protective claim, the caseworker would have to request the amount of pre-petition sales from the debtor, since the debtor is the only entity that may have that information. If that information can not be obtained, the IRS could either file a protective claim based on the information it has from the last year that it has data for (noting that it’s an estimate), or refer the case to Counsel for a BR 2004 exam/request.

Note: Since the treatment of the BPD fee presents novel legal issues, SCI should work with Local Counsel in any bankruptcy case where the debtor owes, or may owe, the BPD fee.

(3) IRC 4980H – Employer Shared Responsibility Provision.

1. Assessment and Treatment under Bankruptcy. When applicable, the Employer Shared Responsibility Payment (ESRP) liability will be assessed under MFT 43. The ESRP will be treated as an excise tax under 11 USC 507(a)(8)(E)(ii). Unless secured by a valid NFTL, the ESRP MFT 43 assessment is considered priority if the Letter 226-J, date (TC 971 AC 782) is less than 3 years from the petition date. See IRM 5.9.13.19.3, Unsecured Priority, for additional information. If not secured by a valid NFTL and the Letter 226-J date is more than 3 years prior to the petition date, the liability is unsecured general.

Note: Since there is no "tax return" on the ESRP module, the caseworker must use the date of the Letter 226-J, which is identified by the transaction code TC 971 AC 782 to determine classification of the tax period.

2. Including the ESRP on a Proof of Claim. APOC will calculate and classify assessed balances due for the ESRP; however, it will NOT compute unassessed claims. A flag will be issued in the situation where a Letter 226-J has been issued, but no assessment has been made. Caseworkers will determine if a protective claim is required. See IRM 5.9.14.2.8(4), Case Flag Conditions and Resolutions, for more information.

Caution: If the IRS discovers a pre-petition ESRP after the bar date, please see IRM 5.9.13.7.1, Late Filed Claims, or IRM 5.9.13.8, Amended Claims, for guidance.

Note: If needed, IRM 5.9.13.20, Claim Calculations, explains how to manually calculate an assessed ESRP liability.

3. Post-Petition ESRP assessments in Chapter 13. An 11 USC 1305 claim may be filed for taxes that become payable while the case is pending. This includes any post-petition amounts due for the ESRP. Proof of Claim statement ‘Z9’ is available and should be used to identify the ESRP assessment as post-petition on the 1305 claim. It states," ESRP is post-petition since Letter 226-J was issued post-petition."

4. Administrative claims in Chapter 11. Administrative claims may be filed for post-petition ESRP assessments in Chapter 11 bankruptcy cases. Proof of Claim statement ‘Z9’ is available in order to identify the ESRP assessment as post-petition on the Administrative claim. It states, "ESRP is post-petition since Letter 226-J was issued post-petition."

(1) Classification. Section 965 requires certain taxpayers to pay a transition tax on untaxed earnings of certain specified foreign corporations. See IRM 5.9.4.23, Section 965 Transition Tax, for more information. A Section 965 tax liability is an increase in the taxpayer’s income tax liability for the year in which it was required to be included on the debtor’s income tax return (generally, 2017 and/or 2018). It is classified in the same manner as the income tax period of the inclusion year, even if the payment is not yet due because of an election under section 965(h) or 965(i).

(2) Inclusion Year. The tax generally should have been reported on a U.S. shareholder’s 2017 tax return if the specified foreign corporation’s last taxable year beginning before January 1, 2018 ended on December 31, 2017 (i.e., for calendar year specified foreign corporations). If the foreign corporation’s last tax year beginning before January 1, 2018 ended after January 1, 2018 (i.e., for non-calendar year specified foreign corporations), the tax generally would be included on the U.S. shareholder’s 2018 tax return. In certain circumstances, due to the presence of one or more domestic pass-through entities, the tax may be reported on a U.S. shareholder’s 2019 or later tax return.

(3) Identifying Section 965 Tax. The debtor is required to report their Section 965 tax on their income tax return. For the 2017 tax year, the debtor was also required to file a Section 965 Transition Tax Statement; for tax years 2018 and subsequent, the debtor is required to file Form 965, Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System, for the year of the inclusion. When a debtor reports a Section 965 tax, a TC 971 Action Code (AC) 114 will post with the return. The Miscellaneous (MISC) Field will show the total amount of the Section 965 tax as shown on the return and it will be included in the TC 150.

1. Employee User Portal (EUP) can be used to identify e-filed tax returns with Section 965 liabilities. The taxpayer is required to report the net tax liability and any deferred amount. If a paper return is filed, the caseworker will need to use IDRS command code RTVUE or TRDBV to research the 965 liability.

2. See IRM 3.14.1.6.9.16, IRC 965 Transition Tax for IMF cases, and IRM 3.14.2.7.5, IRC 965 Transition Tax, for BMF cases, for details on where the debtor is required to report their Section 965 liability on their income tax return and transition statement.

3. For tax years 2018 and subsequent, the debtor is required to file either Form 965-A, Individual Report of Net 965 Tax Liability or Form 965-B, Corporate and Real Estate Investment Trust (REIT) Report of Net 965 Tax Liability and Electing REIT Report of 965 Amounts, for the year of the inclusion and to report Section 965 activity in subsequent years.

   Note: All taxpayers with Section 965 inclusions, including a debtor with a Section 965 inclusion for 2017 who did not make a deferral election, and who paid the liability in full, are still instructed to file Forms 965 and 965-A or –B with their 2018 tax return.

(4) Identifying Section 965(h). If the debtor elects to pay the tax over 8 years, IDRS will show:

1. A TC 150 for the combined amount of the Section 965 tax liability and the income tax liability.

2. A TC 971 AC 114 containing the Section 965 liability amount in the MISC field without decimal points or cents included.

3. A TC 766 Credit Reference Number (CRN) 263 credit for the portion of the Section 965 liability that will be deferred for future payment to bring the period into compliance. IDRS will show a zero-balance due for the Section 965 liability, after the TC 766 CRN 263 adjustment when the taxpayer is current on installment payments. The account will show a balance due for any non - Section 965 liability owed for that period.

4. A TC 971 AC 115 with the deferred amount in the MISC field without decimal points or cents included.

   Note: If the TC 766 CRN 263 is input manually, the account will not reflect a TC 971 AC 115.

5. Payments received should be posted on IDRS as TC 670 Designated Payment Code (DPC) 64.

6. When a future payment is made, an identical amount will then be systemically posted on IDRS as TC 767 CRN 263, reducing the Section 965(h) deferred balance.

(5) Section 965(h) Transfer Elections. Section 965(h) net tax liabilities can be transferred to another person if certain requirements are met. When a Section 965(h) net tax liability is transferred, both the transferor (if still in existence) and the transferee become jointly and severally liable for payment of the liability (like a trust fund recovery penalty). The transferee will be assessed under a new MFT 82 (individual) or MFT 83 (non-individual) account. These transferee assessments will start to be assessed under MFT 82 and MFT 83 in 2020. The transferor accounts will have a TC 971 AC 507 to reflect the cross referenced TIN.

(6) Identifying Section 965(i). If the debtor made a deferral election under Section 965(i), no assessment will be made. A taxpayer with a Section 965(i) election, will show a TC 971 AC 114 reflecting zeros in the MISC field. In the future, the TC 971 AC 114 will be replaced by a TC 971 165, which will have the amount of the Section 965 liability in the MISC field.

(7) Proof of Claim. The caseworker is required to add the total Section 965 liability on the claim.

1. No 965(h) or 965(i) Election. The liability will be reflected as a balance due on the account. Command code INTST can be used to calculate the liability if there is no income tax liability. If there is an income tax liability, each liability needs to be computed manually and added separately to the claim.

2. Section 965(h) Election Made. The caseworker will need to manually compute the remaining Section 965 liability and add it on the claim. If the sum of all TC 766 CRN 263 transactions is zero, the remaining Section 965 liability is zero and nothing needs to be added. If the sum is less than zero (credit), then that amount needs to be added. The TC 150 date would be used as the assessment date. No interest or penalty should be added on the claim for this liability if the taxpayer is compliant on their installments.

   Note: IMF taxpayers owing less than one million dollars for tax year 2017 will not be considered defaulted if they pay the first installment prior to the due date of the second installment. However, the taxpayer will be liable for interest on such amount from the due date of the installment until the date the payment is made. 

3. Section 965(i) Election Made. The caseworker will need to manually compute the Section 965 liability and add it on the claim. The TC 150 date would be used as the assessment date.

(1) General Information. Section 2302 of the CARES Act allows employers to defer the deposit and payment of the employer's portion of Social Security taxes and certain railroad retirement taxes. Employers are still responsible for timely payment of the employee's share of FICA tax, full amount of Medicare tax, and total withheld income tax. The payroll tax deferral period is 3/27/2020 – 12/31/2020. Impacted tax forms include:

• Form 941 series - MFT 01

• Form 943 series - MFT 11

• Form 944 series - MFT 14

• Form 1040 series - MFT 30

  Note: Self-employed individuals may defer 50 percent of the social security tax imposed under Section 1401(a) of the Code on net earnings from self-employment income for the deferred period.

• Form CT-1 MFT 09

(2) Payments. Employers must timely deposit 50 percent of the eligible deferred amount of the tax by 12/31/2021 and deposit the remaining amount by 12/31/2022.

(3) Identifying Deferred Amount. If the debtor elects to defer the deposit and payment of the employer's portion of Social Security taxes and certain railroad retirement taxes, IDRS will show a TC 766 Credit Reference Number (CRN) 280 with the deferred amount. When the debtor makes a payment towards the deferred amount, IDRS will show the transaction code of the payment and a TC 767 CRN 280 with amount of the payment to reverse the false credit.

(4) Proof of Claim. The full amount owed for the tax period needs to be included on the proof of claim. Caseworkers are required to manually review all 2020 periods that qualify for this deferment and calculate the total amount owed for the tax period. Use the following chart to calculate the amount of tax to add to the claim :

(5) Interest and Penalties. The debtor is required to pay the deferred tax in two equal payments that are due on 12/31/2021 and 12/31/2022, respectively. Interest and penalties do not accrue on the deferred tax unless the debtor defaults on making the required payments. If the debtor defaults on the making a payment, the false credit will be reversed for that payment only and the tax will show on INTSTB.

(1) Three Categories. The three basic types of debt are secured, priority, and unsecured general. Tax debts on a proof of claim are designated as being within one of these three categories. A claim is secured when a valid NFTL was filed prior to the bankruptcy and there is equity to secure the lien, or there is an amount subject to setoff. A priority claim is not secured, but is entitled to priority treatment in the bankruptcy case before certain other creditors according to the payment schemes set out in the Bankruptcy Code. An unsecured general claim is not secured and is not entitled to priority treatment. Absent APOC, the caseworker must determine if the debt is to be claimed as secured, unsecured priority, or unsecured general. Balances due on a module may be split among these categories on a proof of claim.

(2) Counsel Guidance. If the claim classification of a tax liability cannot be easily determined, Counsel can offer advice. Exceptions and special circumstances may govern how taxes are classified from one judicial district to another.

(1) Secured. The IRS may assert a secured claim for taxes, penalties, and interest under IRC 6321. A tax debt is secured by an NFTL or by setoff.

(2) Notice of Federal Tax Lien. A valid pre-petition NFTL attaches to debtor’s property, whether real or personal, and includes exempt/abandoned property listed in the debtor’s schedules filed with the court.

(3) Tenancy by the Entirety. The Supreme Court has ruled state law cannot preclude the attachment of a federal tax lien to property held as tenancy by the entirety in states permitting this form of ownership. When determining the value of the IRS's secured interest on a proof of claim when only one spouse has filed bankruptcy, 50% of the equity in property held as tenancy by the entirety generally can be used. See United States v. Craft, 535 U.S. 274 (2002)

(4) Secured Setoffs. A pre-petition setoff exists when the IRS holds a pre-petition credit for a debtor who owes the IRS a pre-petition debt. The POC is secured to the extent of the amount subject to setoff. Both the credit due to the debtor and the debit due to the IRS are considered mutual debts. The Bankruptcy Code preserves the right of setoff of mutual debts (11 USC 553). It is not necessary for the IRS to have filed a NFTL to be secured for the amount of the setoff.

(5) Setoffs under BAPCPA. 11 USC 362(b)(26) allows the IRS to setoff a pre-petition income tax refund to a pre-petition income tax liability without a lift of the automatic stay. This section applies to pre-petition income taxes only. It does not apply to:

• Non-income taxes such as Form 941 employment taxes or TFRP assessments.

• Pre- to post-setoffs.

• Post- to pre-setoffs.

• Post- to post-setoffs.

(6) Setoffs in the Government's Best Interest. The IRS has the right to allocate the secured status from setoffs in its own interest.

(7) Oversecured. When equity in a debtor’s property exceeds the amount of the IRS claim, the IRS is fully secured (oversecured) and is entitled to post-petition interest. (See 11 USC 506(b).) The interest rate equals the statutory IRS rate effective during the calendar month of confirmation. In cases where the IRS is entitled to post-petition interest, the caseworker must annotate the AIS plan screen accordingly.

(8) Undersecured. If the IRS is undersecured, the claim amount not covered by equity in the debtor’s property may be reclassified as a priority claim if it qualifies. Otherwise, it must be relegated to unsecured general claim status.

(9) Unsecured. Tax debts that cannot be secured by a pre-petition NFTL attaching to equity in assets or those debts that cannot be secured by setoff are determined to be unsecured debt. The unsecured debt is therefore classified and claimed as either unsecured priority debt or unsecured general debt.

(10) Unable to Determine Value of Secured Claim. On rare occasions, caseworkers may not be able to determine the equity in the debtor's property, either because it is not possible to determine the extent of the property owned by the debtor, or the value of the property cannot be estimated. In these situations, it may be necessary to file the claim showing the periods for which NFTLs have been filed as fully secured until a determination of the debtor's property is made by the bankruptcy court. Caseworkers should consult Area Counsel in these situations.

• For the IRS to preserve its rights to claim any unsecured portion of its claim as either priority or unsecured general, caseworkers should add a statement to the proof of claim. Proof of claim statements 90 and 91 can be used for this purpose. This statement will provide: "If any portion of the secured claim is unsecured, the IRS claims this portion as priority and/or unsecured general, as appropriate."

  Note: Proof of claim statements 90 and 91 can be selected from the Claim Statement drop down menu on the Proof of Claim screen on AIS. Both statements must be selected for the entire statement to print on the proof of claim.

• Once an equity determination is made, if an amended proof of claim is filed showing the correct amount of the secured claim and reclassifying the remainder as priority and/or unsecured general, proof of claim statements 90 and 91 should be removed.

(11) Creditor's Option. The existence of a valid NFTL does not obligate the IRS to file a secured claim if the government's interest can best be served by filing a priority claim.

(12) Converted Cases. It is not uncommon for a case to convert from one chapter to another, and caseworkers frequently review converted cases to see if an amended claim is needed. Regardless of the status of the NFTL at the time of the review of the converted case, caseworkers should continue to treat a claim as secured when IRS was secured on the petition date.

(1) Priority Classification. USC 11 507(a)(8) defines pre-petition taxes entitled to priority status. See the following table.

(2) The Concept of Tolling. Tolling interrupts the running of a statute of limitations in certain situations. Tolling can occur due to statutory provisions providing for tolling or equitable tolling created by the courts. In bankruptcy cases, tolling applies to the periods used to determine priority and dischargeability of taxes. Tolling in bankruptcy occurs as a result of Bankruptcy Code provisions and Supreme Court decision in the case of Young v. United States, 535 U.S. 43, 122 S. Ct. 1036 (2002).

(3) Pre-BAPCPA Tolling. The Supreme Court confirmed the three-year lookback period of 11 USC 507(a)(8)(A)(i) is a limitations period subject to traditional notions of equitable tolling with their decision in Young v. US, 535 US 43, 122 S. Ct. 1036 (2002). In light of the rationale used by the Court in Young, the IRS no longer takes the position that it is entitled to an additional six months based upon IRC 6503(h).

(4) BAPCPA Tolling. For cases filed on or after October 17, 2005, BAPCPA tolls the "look back" priority periods in 11 USC 507(a)(8):

• While the automatic stay is in effect in a prior bankruptcy case.

• During a Collection Due Process (CDP) hearing for a proposed levy action and any related appeals.

• While collection is precluded because of the existence of a confirmed plan in a prior bankruptcy case.

• Income taxes due within 3 years.

• Income taxes assessed within 240 days, including extensions of the 240 day period during which an offer in compromise is pending or in effect.

• Employment taxes due within 3 years.

• Excise taxes due within 3 years.

(1) Unsecured General Claims. The term "unsecured general" does not appear in the Bankruptcy Code. Liabilities classified as unsecured general claims do not fall into either secured or priority status. These include all penalties where the IRS did not suffer an actual loss (also referred to as "non-pecuniary loss" penalties) and any interest associated with that penalty. The following chart can aid in determining claim status.

(2) Failure to Pay Penalties.IRM 5.9.4.14, Failure to Pay Tax Penalty and Failure to Pay Estimated Income Tax Penalty, discusses when failure to pay penalties are included on a proof of claim for pre-petition tax liabilities.