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Publication 908

Determination of Tax(p22)

The determination of the proper amount of tax due for a tax year begins with the bankruptcy estate's filing of Form 1041, and the individual debtor's filing of Form 1040, or for bankrupt entities filing Forms 1065, 1120, or 1120S. After a return is filed, the IRS will either accept the return as filed or select the return for examination. Under examination the IRS may redetermine the tax liability shown on the return. If the bankruptcy estate or debtor disagrees with the redetermined tax due, the tax as redetermined by the IRS may be contested in the bankruptcy court, or Tax Court, as applicable. See Court Jurisdiction over Tax Matters, later.

Prompt Determination Requests(p22)

Pursuant to Rev. Proc. 2006-24, 2006-22 I.R.B. 943,, as modified by Announcement 2011-77,, the bankruptcy trustee may request a determination of any unpaid tax liability incurred by the bankruptcy estate during the administration of the case, by filing a tax return and a request for such determination with the IRS. Unless the return is fraudulent or contains a material misrepresentation, the estate, trustee, debtor, and any successor to the debtor are discharged from liability upon payment of the tax:
  1. As determined by the IRS,
  2. As determined by the bankruptcy court, after completion of the IRS examination, or
  3. As shown on the return, if the IRS does not:
    1. Notify the trustee within 60 days after the request for determination that the return has been selected for examination, or
    2. Complete the examination and notify the trustee of any tax due within 180 days after the request (or any additional time permitted by the bankruptcy court).

Making the request for determination.(p23)

As detailed in Rev. Proc. 2006-24, as modified by Announcement 2011-77, to request a prompt determination of any unpaid tax liability of the estate, the trustee must file a signed written request, in duplicate, with the Internal Revenue Service, Centralized Insolvency Operation, P.O. Box 7346, Philadelphia, PA 19101–7346 (marked "Request for Prompt Determination").
The request must be submitted in duplicate and must be executed under penalties of perjury. In addition, the trustee must submit along with the request an exact copy of the return(s) filed by the trustee with the IRS for each completed tax period. The request must contain the following information:
The copy of the return(s) submitted with the request must be an exact copy of a valid return. A request for prompt determination will be considered incomplete and returned to the trustee if it is filed with a copy of a document that does not qualify as a valid return.
To qualify as valid, a return must meet certain criteria, including a signature under penalties of perjury. A document filed by the trustee with the jurat stricken, deleted, or modified will not qualify as a valid return.

Examination of return.(p23)

The IRS will notify the trustee within 60 days from receipt of the request whether the return filed by the trustee has been selected for examination or has been accepted as filed. If the return is selected for examination, it will be examined as soon as possible. The IRS will notify the trustee of any tax due within 180 days from receipt of the application or within any additional time permitted by the bankruptcy court.
If a prompt determination request is incomplete, all the documents received by the IRS will be returned to the trustee by the assigned Field Insolvency Office with an explanation identifying the missing item(s) and instructions to re-file the request once corrected.
Once corrected, the request must be filed with the IRS at the Field Insolvency Office address specified in the correspondence accompanying the returned incomplete request.
In the case of an incomplete request submitted with a copy of an invalid return document, the trustee must file a valid original return with the appropriate IRS office and submit a copy of that return with the corrected request when the request is re-filed.
Note.An incomplete request includes those submitted with a copy of a return form, the original of which does not qualify as a valid return.
The 60-day period to notify the trustee whether the return is accepted as filed or has been selected for examination does not begin to run until a complete request package is received by the IRS. The compete request package must be filed with the Field Insolvency Office specified by the IRS in its correspondence returning the incomplete request for the 60-day period to begin to run.
If the IRS does select the estate's return for examination and redetermines the tax shown on the return, the trustee may contest the IRS's determination in bankruptcy court. See Bankruptcy Court, below.

Assessment of tax.(p23)

Assessment is the statutorily required recording of a tax liability. During a bankruptcy case, the IRS may make an assessment of tax due and issue a notice and demand for payment. This grant of authority is a specific exception to the "automatic stay" rules discussed below.
Accordingly, after the correct amount of tax is determined by the IRS, bankruptcy court, or Tax Court, the IRS may assess the tax due against the bankruptcy estate and issue a notice and demand for payment.

Automatic stay.(p23)

When the debtor files a petition with the bankruptcy court, the debtor receives the protection of the automatic stay. The automatic stay arises as a matter of law and with certain exceptions suspends most collection activity.
Note.The stay against property of the estate does not end (as long as the property is in the estate) unless the stay is lifted (removed).
The automatic stay prohibits acts to collect taxes that arose before the bankruptcy filing. IRS collection actions such as serving Notices of Federal Tax Lien or Levy are prohibited if they were intended to collect pre-bankruptcy debts or property of the estate. The automatic stay also stops the commencement or continuation of civil actions, including certain Tax Court cases. The automatic stay applies to all entities, including governmental units.
Generally, the automatic stay to collect taxes continues until either the bankruptcy court lifts the stay, the bankruptcy case is closed or dismissed, or the debtor receives a discharge.
Exceptions to the automatic stay.(p23)
There are exceptions to the stay. For example, the automatic stay does not prohibit:
  1. An audit to determine tax liability,
  2. A demand for tax returns,
  3. The issuance of a Notice of Deficiency, or
  4. Assessing a tax and sending a notice and demand for payment.

Statute of limitations for collection.(p23)

In a bankruptcy case, the period of limitations for collection of tax (generally, 10 years from the date of assessment) is suspended for the period during which the IRS is prohibited from collecting, plus 6 months thereafter.

Requests for refund or credit(p23)

If the debtor has already claimed a refund or credit for an overpayment of tax on a properly filed return or claim for refund, the trustee may rely on that claim. However, if the credit or refund was not claimed by the debtor, the trustee may make the request on behalf of the bankruptcy estate by filing the original or amended return or form with the Internal Revenue Service, Centralized Insolvency Operation, P.O. Box 7346, Philadelphia, PA 19101-7346 (marked “Request for Prompt Refund” and accompanied by a written statement explaining that the request is being submitted pursuant to section 505(a) of the Bankruptcy Code. See Rev. Proc. 2010-27, as modified by Announcement 2011-77.
The appropriate form for the trustee to use in making the claim for refund is as follows:
  1. For income taxes for which an individual debtor filed a Form 1040, Form 1040A, or Form 1040EZ, the trustee should use a Form 1040X, Amended U.S. Individual Income Tax Return.
  2. For income taxes for which a corporate debtor filed a Form 1120, the trustee should use a Form 1120X, Amended U.S. Corporation Income Tax Return.
  3. For income taxes for which a debtor filed a form other than Form 1040, Form 1040A, Form 1040EZ, or Form 1120, the trustee should use the same type of form that the debtor had originally filed, and write "Amended Return" at the top of the form.
  4. For taxes other than certain excise taxes or income taxes for which the debtor filed a return, the trustee should use a Form 843, Claim for Refund and Request for Abatement, and attach an exact copy of any return that is the subject of the claim along with a statement of the name and location of the office where the return was filed.
  5. For excise taxes reported on Forms 720, 730, or 2290, the trustee should use Form 8849, Claim for Refund of Excise Taxes, or Form 720X, Amended Quarterly Federal Excise Tax Return, as appropriate.
  6. For overpayment of taxes of the bankruptcy estate incurred during the administration of the case, the trustee may use a properly executed tax return (for income taxes, a Form 1041) as a claim for refund or credit.
Once the IRS receives the trustee's claim for refund, it will examine the refund claim on an expedited basis and notify the trustee of its decision within 120 days from the date of the filing of the claim. If the trustee disagrees with the IRS's decision or does not receive a decision from the IRS within 120 days of filing the claim, the trustee may seek a determination from the bankruptcy court to determine the estate's right to the refund.

Excessive and erroneous tax refunds paid to the bankruptcy estate.(p24)

Taxpayers who have net losses can sometimes carry back the losses to previous years where they paid taxes to reduce the liability in the prior year, which generate a refund. Such taxpayers may also make a special request for a refund, known as a tentative carryback adjustment (also called a "quickie refund"). A tax liability arising from an excessive allowance for a "quickie refund" payable to the bankruptcy estate is given second priority treatment as an administrative expense. However, an erroneous refund or credit other than a "quickie refund" paid to the bankruptcy estate receives the same priority as the underlying tax. See Federal Tax Claims, below.
Note.Generally, the automatic stay prevents the IRS from offsetting the refund against a tax liability; however, the IRS may freeze the refund until the stay is lifted. The IRS can offset a pre-petition income tax refund against a pre-petition income tax liability while the automatic stay is in effect.