IRS SB/SE Interim Guidance Addresses How to Determine Discharge of Some Tax Debt in Bankruptcy Cases

Background

Section 523(a)(1)(B)(i) of the Bankruptcy Code provides that a bankruptcy discharge does not discharge a tax debt for which no return was filed. On September 2, 2010, the Office of Chief Counsel issued Chief Counsel Notice CC-2010-016, Litigating Position Regarding the Dischargeability in Bankruptcy of Tax Liabilities on Late Filed Returns and Returns filed After Assessment, to set forth the official position of the Service when a delinquent Form 1040 has been received either prior to or after an SFR assessment under IRC § 6020(b). The Notice makes clear that not every tax for which a return was filed late is nondischargeable. Rather, dischargeability of a late filed return is determined based on the date the return was filed or the date of the assessment.

When the debtor submits a Form 1040 after the assessment under IRC § 6020(b), only the portion of the tax that was not previously assessed would be subject to discharge.

If the Form 1040 filed after the assessment reported no additional tax, or a tax decrease, no portion of the tax would be dischargeable. Thus, a specific tax year may have a portion of the liability that is subject to discharge and a portion that is excepted from discharge under section 523(a)(1)(B)(i).

Procedures

When there has been a substitute for return assessment made by Examination or the SFR Unit, the caseworker must determine if the outstanding liability is subject to discharge based on the attached tables.

In order to determine if the outstanding liability is subject to discharge, the caseworker must first determine if outstanding assessments are due to an SFR assessment under IRC § Section 6020(b) or from a tax return received by the Service. A transaction code (TC) 599 closing code (cc) 89 can indicate an "agreed SFR" or a "return secured." To determine if the TC 599 cc 89 is an "agreed SFR" or "return secured," the caseworker must consider the following:

• Is there a TC 976, TC 977 or TC 610 present? Generally, when a return has been received, a TC 976, TC 977 or TC 610 will be present on the module on Integrated Date Retrieval System (IDRS). The transaction date of the TC 976, TC 977 or TC 610 indicates the Service received date.

• If there is no TC 976, TC 977 or TC 610 present that clearly indicate that the Service has received a Form 1040, additional research must be conducted:

•  

  a) TXMODA must be reviewed for history items that indicate receipt of the tax return.

  b) Account Management Services (AMS) may contain entries that indicate that the tax return has been filed or received, or may clearly state that no return was received and the IRC § 6020(b) was due to the receipt of a signed waiver agreeing to the assessment.

  c) When the SFR was prepared by the Examination function, as indicated by the presence of a TC 300 on the TXMOD, there may be information present on IDRS through cc: AMDISA that indicates if a return was received or if a waiver was secured agreeing to the SFR assessment.

Conclusion

Effective immediately, Insolvency Specialists and Advisors, as well as CIO Tax Examiners, must determine dischargeability based on Chief Counsel Notice 2010-016. All complaints to determine dischargeability in which a substitute for return has been prepared by the Service under IRC § 6020(b) must be assigned to Field Insolvency for a referral to Area Counsel. These cases should not be referred directly to the U.S. Attorney or Department of Justice. The assessment package should be ordered upon receipt of the adversary proceeding; however, it is not necessary to wait for receipt of the assessment package before referring the case to Area Counsel. The package can be forwarded upon receipt. Contact Area Counsel with any questions regarding application of the discharge exception under section 523(a)(1)(B)(i), involving a Form 1040 filed during or after assessment of a SFR return.

If you have any questions regarding this Interim Guidance Memorandum, please contact me, or a member of your staff may contact Deborah Fowler, Insolvency Program Analyst, or Gae Canal, Insolvency Program Analyst.

Attachments (2)

cc: www.irs.gov

Attachment 1

1040 due within 3 years of petition date,

THEN . . .

the 3 year rule is not applicable if provided for under the plan and debtor receives a discharge.

____________________________________________________________________

IF . . .

unagreed SFR,

THEN . . .

the tax is non-dischargeable; however, penalties may be dischargeable.

____________________________________________________________________

IF . . .

agreed SFR on or after 9/12/2005

THEN . . .

tax is non-dischargeable; however, penalties may be dischargeable.

____________________________________________________________________

IF . . .

No tax return has been filed by the debtor,

THEN . . .

the tax is non-dischargeable; however, penalties may be dischargeable.

____________________________________________________________________

IF . . .

1040 filed before the SFR assessment date and the filing date is within 2 years of the petition date,

THEN . . .

the tax is non-dischargeable; however, penalties may be dischargeable.

____________________________________________________________________

IF . . .

1040 filed before the SFR assessment date and the filing date is more than 2 years of the petition date,

THEN . . .

the tax is dischargeable; if provided for by the plan and all required payments were made.

____________________________________________________________________

IF . . .

1040 filed before the SFR assessment date and the filing date is more than 2 years before the petition date, the tax is dischargeable if provided for by the plan and all required payments were made. 1040 filed after the SFR assessment date, the filing date is within than 2 years of the petition date and there is a subsequent TC290 or TC300 with an additional tax assessment,

THEN . . .

the caseworker must consider the original SFR assessment (TC290/TC300) and subsequent TC290/300 assessment separately.

• The original assessment will be non-dischargeable.

• The subsequent assessment will be non-dischargeable.

____________________________________________________________________

IF . . .

1040 filed after the SFR assessment date, the filing date is more than 2 years before the petition date and there is a subsequent TC290 or TC300 with an additional tax assessment,

THEN . . .

the caseworker must consider the original SFR assessment (TC290/TC300) and subsequent TC290/TC300 assessment separately.

• The original assessment will be non-dischargeable; however, penalties may be dischargeable.

• Subsequent assessment will be dischargeable if provided for under the plan.

IF . . .

1040 filed after the SFR assessment date, the filing the total outstanding tax liability is non-date is within 2 years of the petition date, and there dischargeable; however, penalties may be is a subsequent TC290 or TC300 for $.00, a TC291 dischargeable. or a TC301 with a tax decrease,

THEN . . .

the total outstanding tax liability is non-dischargeable; however, penalties may be dischargeable.

____________________________________________________________________

IF . . .

1040 filed after the SFR assessment date, the filing the total outstanding tax liability is non-date is more than 2 years before the petition date dischargeable; however, penalties may be and there is a subsequent TC290 or TC300 for $.00, dischargeable. a TC291 or TC301 with a tax decrease,

THEN . . .

the total outstanding tax liability is non-dischargeable; however, penalties may be dischargeable.

____________________________________________________________________

the tax return is due, including extensions, within 3 years of the petition date,

THEN . . .

the tax is non-dischargeable.

____________________________________________________________________

IF . . .

unagreed SFR,

THEN . . .

the tax is non-dischargeable; however, penalties may be dischargeable.

____________________________________________________________________

IF . . .

agreed SFR prior to 9/12/2005,

THEN . . .

determine the date of the agreement (TC599cc89).

• If within 2 years of the petition date, non-dischargeable

• If more than 2 years of the petition date, dischargeable

____________________________________________________________________

IF . . .

agreed SFR on or after 9/12/2005,

THEN . . .

tax is non-dischargeable; however, penalties may be dischargeble.

____________________________________________________________________

IF . . .

no tax return has been filed by the debtor,

THEN . . .

the tax is non-dischargeable; however, penalties may be dischargeable.

____________________________________________________________________

IF . . .

1040 filed before the SFR assessment date and the filing date is within 2 years of the petition date,

THEN . . .

tax is non-dischargeable; however, penalties may be dischargeable.

____________________________________________________________________

IF . . .

1040 filed before the SFR assessment date and the filing date is more than 2 years before the petition date,

THEN . . .

tax is dischargeable.

____________________________________________________________________

IF . . .

1040 filed before the SFR assessment date and the assessment date is within 240 days of the petition date,

THEN . . .

tax is non-dischargeable; however, penalties may be dischargeable.

____________________________________________________________________

IF . . .

1040 filed after the SFR assessment date, the filing date is within 2 years of the petition date and there is a subsequent TC290 or TC300 with an additional tax assessment,

THEN . . .

the caseworker must consider the original SFR assessment (TC290/TC300) and subsequent TC290/TC300 assessment separately.

• The original assessment will be non-dischargeable.

• The subsequent assessment will be non-dischargeable

____________________________________________________________________

IF . . .

1040 filed after the SFR assessment date, and the subsequent TC290 or TC300 with an additional tax assessment was within 240 days of the petition date,

THEN . . .

the caseworker must consider the original SFR assessment (TC290/TC300) and subsequent TC290/TC300 assessment separately.

• The original assessment will be non-dischargeable.

• The subsequent assessment within 240 days of the petition will be non-dischargeable.

____________________________________________________________________

IF . . .

1040 filed after the SFR assessment date, the filing date is more than 2 years before the petition date and there is a subsequent TC290 or TC300 with an additional tax assessment,

THEN . . .

The caseworker must consider the original SFR assessment (TC290/TC300) separately.

• Original assessment will be non-dischargeable.

• Subsequent assessment will be dischargeable.

____________________________________________________________________

IF . . .

1040 filed after the SFR assessment date, the filing date is within 2 years of the petition date, and there is a subsequent TC290 or TC300 for $.00, a TC291 or a TC301 with a tax decrease,

THEN . . .

the total outstanding liability is non-dischargeable; however, penalties may be dischargeable.

____________________________________________________________________

IF . . .

1040 filed after the SFR assessment date, the filing date is more than 2 years before the petition date and there is a subsequent TC290 or TC300 for $.00, a TC291 or TC301 with a tax decrease,

THEN . . .

the total outstanding tax liability is non-dischargeable; however, penalties may be dischargeable.

____________________________________________________________________

IF . . .

1040 filed after the SFR assessment date, there is a subsequent TC290 or TC300 for $.00, a TC291 or TC301 with a tax decrease, and the assessment date was within 240 days of the petition date,

THEN . . .

the total outstanding tax liability is non-dischargeable; however, penalties may be dischargeable

____________________________________________________________________