5.9.18. Automated Discharge System (ADS)

(1) Internal Revenue Manual (IRM) 5.9, Bankruptcy and Other Insolvencies, contains the Service’s position, procedures, information, instructions, guidance, and references concerning bankruptcy cases.

(1) IRM 5.9.3.1.2, Authority, contains Insolvency caseworker authority in the Insolvency program.

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

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

(2) IRM 5.9.1, Overview of Bankruptcy, provides a list of titles and responsibilities with an explanation of their roles and authority.

(1) IRM 1.4.51.8.3, Case Management Tools, IRM 5.9.12, Insolvency Automated Processes, and IRM 5.9.16, Insolvency Case Monitoring, contain a list of required reports for caseworkers and managers to utilize for inventory management and review of case inventories. These sections also include the frequency and purpose of each report.

(2) National quality reviews and consistency reviews are conducted on a consistent basis. See IRM 1.4.51.16.1, NQRS and IRM 1.4.51.16.2, EQ Consistency Reviews, for more information.

(3) Quality Knowledge Base Home Page Quality (irsnet.gov).

(1) 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) 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.

(3) Caseworkers and managers utilize the Automated Insolvency System (AIS) for case management, assignment, and documentation of all insolvency and non-bankruptcy insolvency cases. Access and permissions to AIS is restricted. See IRM 5.9.3.2, Automated Insolvency System (AIS).

(1) Glossary terms used by Insolvency 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, Acronyms Database (irs.gov).

(4) Acronyms used locally in this IRM section are shown in the table below.Acronyms

(1) The US Bankruptcy Code 11 USC

(2) Bankruptcy Rules (Federal Rules of Bankruptcy Procedure)

(3) Applicable Case Law

(4) Local Bankruptcy Court Rules

(5) Document 13219, Automated Insolvency System (AIS) User Guide

(6) Document 11834, Insolvency Interface Program (IIP) User Guide

(7) Insolvency Knowledge Base Home Page: Specialty Collection Insolvency (SCI) (irsnet.gov)

(8) The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them in 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3) , Execution of Duties in Accord with Taxpayer Rights. For additional information about TBOR, see Taxpayer Bill of Rights | Internal Revenue Service (irs.gov)

(1) Non-Dischargeable Taxes. ADS flags modules where the tax is non-dischargeable, but the penalties could be dischargeable. This condition may exist with Chapter 7 discharges as well as Chapter 13 hardship discharges. This flag also includes non-hardship Chapter 13 discharges cases. Specifically trust fund taxes, taxes due on unfiled returns or late returns filed within two years prior to the petition date, and taxes resulting from fraudulent returns or that the debtor willfully attempted to evade or defeat are not dischargeable for Chapter 13 cases. Penalty abatement determinations must be made in situations where a tax liability is non-dischargeable, since under 11 USC 523(a)(7), penalties are sometimes dischargeable even when the associated taxes are not. Thus, a DDR is generated to notify the caseworker to make a determination on the dischargeability of a module, and, if appropriate, manually process the penalty abatement using the discharge date as the effective date.(See IRM 5.9.17.8, Discharge and Exceptions to Discharge, Exhibit 5.9.17-11, Determining Dischargeability of Non-Pecuniary Loss Penalties when the Underlying Tax is Non-Dischargeable (Except in the Chapter 13 Case with a Discharge Upon Completion of the Plan), IRM 5.9.13.19.3(2), The Concept of Tolling , and IRM 5.9.17.22, Adjustment Methods for Discharged Liabilities.)

(2) Penalty Abatement. When processing a PDTN DDR, the caseworker must determine if there are any TC 276 Failure to Pay (FTP) Penalties to be abated.

(3) Priority - Penalties Dischargeable, Tax Is Not (PDTN). ADS flags modules where the due date of the return is more than three years before the petition date and tax is still determined to be priority (non-dischargeable) because of tolling of time from prior bankruptcies. The three-year period under 11 USC 523(a)(7) for determining if a penalty is non-dischargeable may also be equitably tolled. The caseworker must determine if penalties must be discharged even though the tax is not discharged. The caseworker should complete the following procedures to remove the case from ADS:

• If dischargeable unpaid penalties exist, abate the applicable penalties on line, then follow the procedures listed in Exhibit 5.9.18-4, Partial Abatement / DDR Manual Determination.

• If no dischargeable penalties exist or if all penalties have been paid, follow steps given in Exhibit 5.9.18-5, Not Discharged Closing Action.

(4) 240 Days - Penalties Dischargeable, Tax is Not (PDTN). ADS flags modules where the return due date is more than three years before the petition date, and an assessment (TC 150, TC 290, or TC 300) was made within 240 days before the petition date. This flag is limited to Chapter 7 discharges and Chapter 13 hardship discharges. The caseworker must determine if penalties should be discharged even though the tax is not dischargeable. To remove from ADS, the caseworker must:

1. Abate the applicable penalties on line and then follow the steps given in Exhibit 5.9.18-4, Partial Abatement / DDR Manual Determination, if dischargeable penalties exist; or

2. Follow instructions in Exhibit 5.9.18-5, Not Discharged Closing Actions, if no dischargeable penalties are posted.

(5) 2 Year Rule - Penalties Dischargeable, Tax Is Not (PDTN). ADS identifies modules where the return due date is more than three years before the petition date, and the tax return was filed within two years before the petition date. Originally this flag was limited to Chapter 7 and Chapter 13 hardship discharges. However, it now has been expanded to include all Chapter 13 cases. The caseworker must determine if unpaid penalties are present to discharge even though the tax is not dischargeable. Command code INTST can be reviewed to determine if unpaid penalties exist for Chapter 7 cases. In Chapter 13 cases, review TXMOD to determine the amount of penalties to abate. IDRS does not separate TC 670, 680, 690 on INTST. Caseworkers should use the discharge date as the transaction date when inputting abatement transactions. The caseworker must complete the following procedures to remove from ADS:

1. Abate the applicable penalties on line and then follow the steps given in Exhibit 5.9.18-4, Partial Abatement / DDR Manual Determination, if dischargeable penalties exist; or

2. Follow instructions in Exhibit 5.9.18-5, Not Discharged Closing Actions, if no dischargeable penalties have posted.

(6) Unagreed SFR - Penalties Dischargeable, Tax Is Not (PDTN). ADS identifies modules where the tax period has an SFR and an unagreed indicator. An unagreed indicator is where the following is not present:

• Disposal code 03, 04, 09

• TC 560

• TC 599 cc 39, 64, or 89

1. Abate the applicable unpaid penalties on line and then follow the steps given in Exhibit 5.9.18-4, Partial Abatement / DDR Manual Determination, if dischargeable penalties exist; or

2. Follow instructions in Exhibit 5.9.18-5, Not Discharged Closing Actions, if no dischargeable penalties exist or if the penalties have been full paid.

(7) Fraud - Penalties Dischargeable, Tax Is Not (PDTN). ADS will identify modules where the fraud indicator TC 320 is present on TXMODA. The caseworker must determine if penalties should be discharged even though the tax is not. As stated above this flag will apply to Chapter 13 cases, which would otherwise be subject to a Chapter 13 super discharge, as well as, to Chapter 7 and Chapter 13 hardship discharges. To remove the account from ADS, the caseworker must:

1. Abate the applicable penalties on line and then follow the steps given in Exhibit 5.9.18-4, Partial Abatement / DDR Manual Determination, if dischargeable penalties exist; or

2. Follow instructions in Exhibit 5.9.18-5, Not Discharged Closing Action, if no dischargeable penalties have posted.

(8) Extension to File - Penalties Dischargeable, Tax is Not (EXTEN PDTN) ADS will flag periods that have a Transaction Code 460 and the original return due date was more than three years prior to the petition date and the extended date (TC 460) is within three years of the petition date. This flag is limited to Chapter 7 discharges and Chapter 13 hardship discharges. When working the flag, caseworkers must determine if the Failure to Pay Penalty (FTP) and/or the Estimated Tax Penalty is dischargeable. The caseworker must consider the transaction or event that gave rise to the penalty. An extension for filing a return is not an extension for paying the tax. The event date for the failure to file (FTF) penalty is changed by an approved extension for filing of the return. The event date for the failure to pay (FTP) penalty is not changed by an approved extension for filing the return. Refer to IRM 5.9.17.8(8), Discharge and Exceptions to Discharge, Non-Pecuniary Loss Penalties - Non-Dischargeable (Within Three Year Rule). Use the chart provided in Exhibit 5.9.17-11, Determining Dischargeability of Non-Pecuniary Loss Penalties when the Underlying Tax is Non-Dischargeable (Except in the Chapter 13 Case with a Discharge Upon Completion of the Plan), to determine whether penalties are dischargeable under these conditions. The caseworker must complete the following procedures to remove from ADS:

1. Abate the applicable penalties online and then follow the steps given in Exhibit 5.9.18-4, Partial Abatement/DDR Manual Determination, if dischargeable penalties exist; or

2. Follow instructions in Exhibit 5.9.18-5, Not Discharged Closing Actions, if no dischargeable penalties have posted or if the penalties have been full paid.

(1) No Return; Return Not Assessed. ADS flags Chapter 13 modules where no TC 150 has posted to the account. If a return has not been filed prior to the petition date, any taxes due for that return are not dischargeable. Any open returns not assessed should not be closed. The caseworker must input TC 521 and complete the procedures outlined in Exhibit 5.9.18-2, ADS Manual Determination Closing Actions, to clear the account from ADS.

(1) Possible Fraud. ADS flags modules as possible fraud when the due date of the return to the petition date is greater than three years, a TC 350 (negligence penalty) appears on the TXMOD, and a TC 914 or 910 (case held or assigned to Criminal Investigation) is present.

1. A determination must be made if fraud exists which excepts a period from discharge. See IRM 5.9.17.8, Discharge and Exceptions to Discharge, IRM 5.9.17.8.2, The Fraud and Willful Evasion Exemption, and IRM 5.9.4.12, Bankruptcy Fraud.

2. If fraud exists and the case is Chapter 7 or Chapter 13 hardship or a non-hardship Chapter 13 case, the CIO caseworker should reassign the case to the appropriate Field Insolvency caseworker. A decision to forward a case to Area Counsel or a Fraud Enforcement Advisor will be made by Field Insolvency.

(2) Assistance in Determining Fraud. Fraud Enforcement Advisors assist employees in identifying and documenting indicators of fraud cases for referral to Criminal Investigation (CI). Fraud enforcement advisors are made up of revenue agents and revenue officers and are located in designated areas across the country. The Philadelphia Campus has a fraud enforcement advisor assigned to work issues arising from CIO processing. The fraud enforcement advisor may contact Counsel for help in developing a quality referral to CI.

• If the fraud referral is not accepted by CI, the caseworker must determine if the case will be referred to Area Counsel based on the fraud exception to discharge.

• If written concurrence is received from Counsel stating the taxes are non-dischargeable based on the fraud exception to discharge, the caseworker must complete the procedures in Exhibit 5.9.18-5, Not Discharged Closing Action, to remove the case from ADS.

• If fraud does not exist, the caseworker follows the steps in Exhibit 5.9.18-3, ADS Forward for Manager Approval Closing Actions.

(1) Abandoned/Exempt/Excluded Property Review. ADS identifies modules as flagged conditions when a TC 582 (Notice of Federal Tax Lien indicator) exists and command code IRPTRL shows at least one of the following with a dollar amount greater than zero:

• Mortgage Interest Paid (MTG INT PD)

• Rents

• Investment Expenses (INVEST EXP)

(2) ADS Dollar Tolerance. The total aggregate balance due modules with a TC 582 present must be greater than the database dollar criteria established in the ADS parameters for the system to generate this DDR.

(3) Non-Dischargeable Periods. The caseworker must determine the dischargeability of the flagged periods, including penalties. (See IRM 5.9.17.8, Discharge and Exceptions to Discharge, and IRM 5.9.13.19.3(2), The Concept of Tolling.) If a period is non-dischargeable, steps in Exhibit 5.9.18-5, Not Discharged Closing Action are followed to remove the case from ADS.

(4) Dischargeable Periods and Exempt/Abandoned/Excluded Property. In most instances, investigations for exempt, abandoned or excluded property are completed "up-front" instead of when a discharge is received. The caseworker should review the case history and the case classifications to determine if the review has been completed.

(1) Post-petition Claims. ADS flags a Chapter 13 post-petition module in status 72. This indicates a TC 520 is posted to the module. At the time the Field Insolvency specialist addresses the post-petition liability, (s)he must update the AIS history with an explanation of how that liability will be handled upon discharge. If Field Insolvency prepares an 11 USC 1305 claim, the Field caseworker must document in the history that payment of the post-petition module has been provided for in a plan or in a modified plan. (See IRM 5.9.10.9.2, 11 USC Section 1305 Claims, and IRM 5.9.17.15.1(1), BAPCPA Discharges.)

(2) Unpaid 1305 Claims. If a 1305 claim has been partially paid at the time of discharge, the caseworker should research IDRS and the AIS payment screen for misapplied payments. If misapplied payments are found that fully pay the 11 USC 1305 claim, the payments in question should be transferred to the post-petition period and a follow-up input for the payment transfer(s) to post. Once the payments have posted to the 1305 period, the period should be discharged, unless exceptions to discharge apply. The caseworker should process the closure following Exhibit 5.9.18-3, ADS Forward for Manager Approval Closing Actions.

(3) Transfer for Trustee Contact. If the AIS history confirms a chapter 13 plan has been modified or a modified plan has been approved and the plan includes provisions for payment of an 11 USC 1305 claim, full pay has not been received, and misapplied payments are not found, the case should be transferred to Field Insolvency for contact with the trustee. When the issue has been resolved between the trustee and Field Insolvency, the case will be transferred back to the CIO for final disposition.

(1) Counsel Request. The willful failure to pay flag was established at the request of Counsel to identify potential "Toti" cases based on the court's decision in Toti v. United States, 24 F. 3d 806 (6th Cir. 1994). The reviewer must determine if the flagged condition is an exception to discharge as outlined in 11 USC 523. (See IRM 5.9.17.8, Discharge and Exceptions to Discharge, and IRM 5.9.17.8.2, The Fraud or Willful Evasion Exception to Discharge.)

(2) Systemic Identification. ADS identifies modules where the:

1. due date of the return to the petition date is greater than three years;

2. prior tax year's adjusted gross income (AGI) is greater than the ADS parameter set by management; and

3. aggregate balance is greater than the ADS parameter based on Counsel referral criteria.

(3) Caseworker Actions. The bankruptcy caseworker must:

1. review AIS History screen and AIS Classification screen to determine if a willful failure to pay investigation has been performed (See IRM 5.9.6.10.3(3) FI Investigation); and

2. if no investigation has been performed, reassign the case to Field Insolvency to complete the investigation and to prepare a referral to Counsel for written concurrence not to discharge taxes based on the exception to discharge, if necessary.

3. if the AIS History and Classification screens confirm an investigation was previously completed, follow the discharge guidance provided by the FI caseworker in the “Summary History” on AIS.

4. Document AIS history with actions taken.

(4) Field Insolvency (FI) Willful Failure to Pay (WFTP) Review. Willfulness means that the intended act was done knowingly. The Willful Failure to Pay (WFTP) may be reviewed hand-in-hand during the EAEP review. BC 523 and the Toti case concerns the willful failure to pay taxes as an exception to discharge whether the debtor attempted to willfully evade or defeat taxes under BC 523(a)(1)(C) by failing to file returns and pay taxes as willful evasion exception to discharge. IRM 5.9.2.10.1(5), Willful Evasion, to judge actions as constituting willful evasion, the IRS must consider the following strictures:

1. A preponderance of the evidence is the standard to prove willful evasion,

2. Failure to file and pay taxes is usually not enough to demonstrate willful evasion. But a debtor’s voluntary conscious and intentional failure to file returns for an extended period of time may qualify as willful evasion under 11 USC 523(a)(1)(C),

3. Some courts require the IRS to prove some affirmative misconduct, such as concealed or fraudulently transferred assets.

   Caution: Insolvency must obtain written approval from Counsel before returning cases to the collection stream where taxes were not discharged on the grounds of willful evasion.

(1) Post-petition Payment, Violation of Automatic Stay: TC 670=05/706 /820. When the flagged condition is Post Petit Payment, Viol stay-TC 670 pay=05/706/820, a payment is identified as a TC 670 = 05 (Notice of Levy), TC 706 (Overpayment Applied from Another Tax Module), or a TC 820 (Credit Transferred). ADS identifies modules with a TC 670 followed by designated payment code of 05, 18, 19, 20, or 21 or TC 706, or TC 820 with a transaction date between the petition date and the discharge date. This DDR generates for regular discharges, but not for super discharges. The reviewer must determine if the post-petition payment is a violation of the stay. (See IRM 5.9.4.5.1(3), Table - Credits, Refunds, Offsets (Post-BAPCPA), IRM 5.9.4.5.1(4),Table - Credits, Refunds, Offsets (Pre-BAPCPA), and IRM 5.9.4.5.2, Post-Petition Payments and Credits).

(2) Levy Payments. Levy payments are often identified as TC 670 with designated payment code 05, however levy payments may also be identified with a designated payment code of 18, 19, 20, or 21. If the levy payment results in an overpayment on a module, it may systemically roll over to other modules as a TC 706 or TC 820. When addressing TC 706 or TC 820, the caseworker must refer to the module from which the credit has been transferred to determine if the payment was originally derived from a post-petition levy of the debtor. When a credit is identified as a levy payment, the caseworker should prepare Form 5792, Request for IDRS Generated Refund. (See IRM 5.9.16.3, Manual Refunds).

(3) Non-Levy Payment. If the credit is a TC 706 or TC 820 representing a post-petition payment to a pre-petition liability, and does not represent proceeds from a notice of levy, the caseworker should review local rules/standing orders or AIS history to determine if the offset of a post-petition refund to a pre-petition liability is allowed, and if so, abide by the local rules/standing orders.

(4) Discharge Actions. After post-petition payment issues have been addressed, the caseworker must determine if any or all of the liabilities are dischargeable. If so, the caseworker should follow procedures in Exhibit 5.9.18-3, ADS Forward for Manager Approval Closing Actions or Exhibit 5.9.18-1, Discharge Determination and IDRS Actions, for full abatements or follow Exhibit 5.9.18-4, Partial Abatement / DDR Manual Determination, for partial abatements.

(5) No Action Required. If no action is necessary or no liability is dischargeable, the caseworker should follow the procedures in Exhibit 5.9.18-5, Not Discharged Closing Action.

(1) Non-Debtor Spouse. A DDR is generated when ADS identifies a bankruptcy filed in a community property state or commonwealth when a non-debtor spouse has filed joint tax returns with a debtor spouse. A determination must be made if the account should be mirrored or discharged for both spouses.

• Arizona

• California

• Idaho

• Louisiana

• Nevada

• New Mexico

• Texas

• Washington

• Wisconsin

• Puerto Rico

• Alaska (may elect)

• South Dakota (may elect)

(2) Marital Property. Property acquired during marriage is presumed to be community property with certain exceptions, such as an inheritance where only one spouse is the heir. All community property becomes a part of the bankruptcy estate, including the interest of the non-debtor spouse.

(3) "Hypothetical Discharge. " Upon the debtor spouse's discharge, the non-debtor spouse receives a "hypothetical discharge." (See IRM 25.18.4.18.4, Discharge Provisions) This hypothetical discharge is only good as long as the spouses remain subject to community property laws which are determined by the state where the taxpayers domicile (live). The Service assumes the spouses are subject to community property laws as long as both are alive, they remain married to each other, and they domicile in a community property state or commonwealth. (See IRM 25.18.1.3,Determining if Community Property Laws Apply.)

(4) Necessary Research. When working community property DDRs, caseworkers should review the official bankruptcy forms filed by the debtor to determine the debtor's marital status at the time of bankruptcy filing. IMFOLI also shows the current marital status of the debtor based on the most recently filed return.

(5) Joint Dischargeability. If the debtor listed (s)he was married at the time of the bankruptcy filing and IDRS/CFOL research indicates the debtor remains married to the same non-debtor spouse, the caseworker can process any joint dischargeable periods for abatement. However, if the debtors are no longer married or for some other reason are no longer subject to collection from community property, the accounts must be mirrored if the balance due meets the dollar criterion for mirroring.

(6) Undetermined Marital Status. If a caseworker is unable to determine the debtor's marital situation at time of filing the bankruptcy and at the time of discharge using PACER and IDRS, the jointly filed returns should be treated as community property for abatement purposes.

(7) Manual Designation. If the determination is made to treat the joint liabilities according to community property provisions and not mirror the account, the caseworker should close the DDR by selecting M (Manual) and should manually abate the periods on IDRS and release the bankruptcy freeze code.

(8) "Forward" to Abate and Mirror. If the determination is made to mirror the account because community property criteria do not apply, the caseworker should F (Forward) the case to the manager's queue for approval. Systemic mirroring will begin upon the manager's inputting the ADS approval code. Once mirroring is complete, ADS will perform the appropriate automated discharge and closing actions on these mirrored modules.

(9) Documentation. The AIS history must be updated to reflect the research leading to treating the joint liabilities as community property or the reasons for proceeding with mirroring.

(1) ADS Background. For bankruptcy purposes, the Employer Shared Responsibility Payment (ESRP) MFT 43 liability is treated as an excise tax for which a return is not required.

(2) ADS Discharge Actions. ADS will flag a module where the MFT code is 43 and the date of the TC 971 AC 782 is within the three years prior to the petition date. ADS will make the discharge determination for this condition and input closing transactions on IDRS. If any additional flagged conditions prevent systemic discharge on the module, the caseworker must determine appropriate discharge actions according to the chapter of the bankruptcy, method of closure, and the exceptions to discharge. The ESRP is excepted from discharge under the applicable provisions of 11 USC 523(a)(1) when that section is applicable. See IRM 5.9.17, Closing a Bankruptcy Case, and IRM 5.9.17.8.11, Discharge and Employer Shared Responsibility Payment (ESRP) Liabilities, for more information.