Help Center

Representing the Bankrupt Taxpayer

Journal Issue: 
Column Name: 
Journal Article: 
Any tax attorneys and most accountants are generally unfamiliar with bankruptcy law and debtor/creditor issues, and bankruptcy attorneys usually know very little about tax law and its impact on financially distressed individuals and businesses. Representing the Bankrupt Taxpayer, a two-volume workbook, is designed to bring together pertinent portions of tax law and bankruptcy law in a manner useful to accountants, tax attorneys and bankruptcy attorneys.

The author starts by presenting various statistical information about tax return filings, tax examination and collection actions, and bankruptcy case filings. Following, he covers the structure of the Internal Revenue Service (IRS), including the national, regional and district offices and the functions performed by each operating division, and the Service Centers where tax returns are processed and initial collection actions take place. He also covers the Department of Justice, which has primary responsibility in representing the federal government in bankruptcy matters.

An important part of Chapter 1 of the workbook deals with the various research tools available and an extensive review of the structure of the Internal Revenue Manual (IRM), which the author notes as being "the most confusing and obscure guidebook ever written." Having worked with the IRM myself, I wholeheartedly agree. It is very difficult to use the IRM. However, the IRM contains a wealth of information on how the IRS conducts its business.

Another important feature of the workbook that practitioners will find helpful is the section detailing information that is available from the IRS and how you go about requesting it. Knowing what is available and how to get it is important when deciding how to approach the resolution of tax issues. Also included in this section of the workbook is a detailed discussion about Service Center tax return processing and the various electronic records they maintain, the most important of which is the account transcript. The author has included a partial list of some of the more frequently encountered codes used by the IRS and their explanations. For the inexperienced practitioner, this section of the workbook will be a big help when trying to figure out how to obtain taxpayer records from the IRS and how to analyze the information received.

One of the most confusing areas of tax law that overlaps with bankruptcy is the area of tax liens, levies and seizures. The author provides a good overview of the IRS as a creditor and how tax liens arise, to what they attach, their duration and their priority status against competing liens. With regard to levies and seizures, he explains the various types of levies used, exemptions that apply, specific property subject to levy, and a discussion of the more drastically enforced collection tool, seizure.

The final two chapters covering the IRS and general tax matters are devoted to a detailed discussion of how to resolve unpaid taxes through the use of installment payment plans and offers in compromise, and other measures that are alternatives to bankruptcy. The author includes an overview of the IRS Restructuring and Reform Act of 1998, which substantially expands taxpayer rights. Provisions of the Act now provide taxpayers owing up to $10,000 the right to an installment payment plan where the tax will be paid within three years, subject to certain conditions. Additional provisions now bar the IRS from taking enforced collection while an installment agreement or offer in compromise is under consideration, and taxpayers now have expanded rights to appeal denials of such agreements.

The bankruptcy portion of the workbook begins with an overview of the various historical bankruptcy acts leading up to the present law. Following, the author discusses the organization and content of the Bankruptcy Code with appropriate explanation of each of the chapters of the Code, types of bankruptcy and a brief mention of the organization and function of the office of the U.S. Trustee.

I might mention here that the author includes appropriate worksheets, checklists, forms, etc., with each chapter. For those not regularly engaged in bankruptcy matters, Chapter 6 includes what may be the most important information in the two-volume workbook set, "Guidelines for Applications for Compensation and Reimbursement of Expenses." Getting compensated should be important to all professionals providing bankruptcy services.

One of the key features of our bankruptcy system is the protection afforded debtors by the "automatic stay." The author devotes an entire chapter to the stay including its scope, relief from stay, adequate protection, damage for violating the stay and its applicability to third parties.

Volume 2 begins with a chapter dealing with pre-bankruptcy planning including a discussion about making maximum use of allowable exemptions, the distinctions that arise with pension plan assets, preferential payments, planning with regard to non-dischargeable obligations, and timing considerations when a bankruptcy is to be filed.

Often one of the reasons debtors file bankruptcy is to discharge taxes that may be owed to a federal or state tax agency. The author discusses how various tax claims are treated in bankruptcy, including the "counting of time" rules for discharging income taxes. He also covers the treatment of tax penalties and interest and the effect of tax liens filed prior to bankruptcy. His narrative covers other tax issues such as employment and trust fund taxes, fraudulent returns, late filings and failure to file tax returns.

For an ongoing business attempting to reorganize in bankruptcy, the author includes a discussion about issues generally unfamiliar to non-bankruptcy professionals such as preferential transfers, avoidance and setoff. He also touches on tax-related issues including abatement of tax penalties, the trust fund recovery penalty, chapter 11 bankruptcy tax return filing requirements and payment of taxes.

The author devotes an entire chapter to the rules covering the taxation of individual bankruptcy estates, which are governed under a separate section in the Tax Code often overlooked by tax professionals.

The author points out how a new tax entity is created when an individual files a chapter 7 or chapter 11 case, but not when a chapter 12 or chapter 13 is filed. He covers income and deductions to the estate, how the tax is calculated and the tax reporting forms that are to be used, and elections that are available to the debtor and his/her spouse.

Once a bankruptcy case has commenced that results in a discharge of indebtedness, certain provisions of the Tax Code come into play. The author presents a discussion of these cancellations of indebtedness provisions and the related requirements for the debtor to reduce "tax attributes," such as net operating losses and/or the basis of property, among others. For bankruptcy counsel, these concepts are often difficult to understand. However, the author does a good job of explaining the issues and adjustments involved.

As a final note, the author has included numerous practice tips throughout the material that I found quite informative. The workbook was recently updated and now includes a supplement with an in-depth discussion of the IRS Restructuring and Reform Act of 1998 that bankruptcy and non-bankruptcy professionals should find useful.

The information presented in this set of workbooks is easy to follow and should go a long way to helping bankruptcy and tax practitioners understand each other's practice area.

Journal Author: 
Journal Date: 
Monday, February 1, 1999

Reprint Request