The Observer wrote:And what should the IRS do with a company who has a record of having requirements to file returns for employment/unemployment returns and stops filing. Assume that they no longer have to file returns? You can easily see how thousands of employers could delay paying taxes exploiting that assumption.
You might suggest that the IRS should contact the company and inquire about their filing status. But what if the IRS never gets a response? Are they to assume at that point the business probably doesn't have to file returns? Or has gone out of business? Or does the IRS just wash their hands and write another taxpayer off to the underground economy?
The IRS should make at least a minimal effort. I simply don't see that happening in some cases. I have worked hundreds of these cases. If the IRS sends a letter and does not get a response, that would be one thing. But my experience has shown that the very first letter the trustee receives is a bogus assertion of tax liabilities, sometimes in cases where the IRS has received notice of the bankruptcy. Where the IRS has notice of the bankruptcy, all IRS letters should be going to the trustee, not to the prior address of the debtor -- and systemically
somebody somewhere at the IRS knows that very well.
Where the IRS has no notice -- and this would be the case in Chapter 7 where the IRS was not listed as a creditor, I can see more of a problem.
In Chapter 11, the rule used to be that the IRS had to be notified of every single case. I don't know whether that's still the rule, or if it is the rule whether it's being followed consistently.
There are a number of times the IRS finds out that bankruptcy trustees are unaware that a petitioner has failed to file returns for one reason or another. Sometimes the petitioner lies to the trustee. And there are a number of times when the petitioner has used bankruptcy to delay the inevitable. I don't know what happened in your client's particular case, but if he didn't get verification from the business about their filing status and the taxpayer is not responding to the IRS notices being sent about whether a return is due, then to blame the IRS for trying to ensure that payroll taxes are being paid is not accurate.
Again, if the IRS is aware of the bankruptcy, then the trustee should be receiving all the notices. That is simply does not seem to be happening on a consistent basis, at least in my experience.
And whether it is a hassle for the trustee or not, it is still part of his duties in ensuring that the petitioner is going to come out of bankruptcy with clean hands.
I'm going to have to respectfully disagree -- in part. In a Chapter 11 where a trustee has been appointed, the assumption is that the debtor will eventually emerge and continue.
But in chapter 7 cases, the debtor entity (corporation or partnership cases are what I am talking about) is being liquidated. In most Chapter 7 cases, there are no operations and no payroll, and the corporate or partnership shell will simply go out of existence after the case is closed. No competent business man is going to continue to use a corporate or partnership shell after a chapter 7 case has been closed. When the trustee pays wage claims at the close of a case, we insure that the trustee files the 941, the 940, the W-2s and any state unemployment tax returns that apply.
After all, the law does allow for the IRS to file and assess taxes under IRC 6020(b) and the taxpayer gets a 60 day notification to contest the filing before it gets assessed. Why didn't the business (or trustee) respond to that? It is the final step of due process. Ignoring it was just another way of telling the IRS to go ahead and make their day.
Obviously, your experience and mine are different. I have worked hundreds of these cases, and my sense is that the IRS is NOT issuing notifications in at least some cases prior to assessing taxes.
By the way, the IRS has never had a comprehensive system for dealing with the intricacies of bankruptcy taxation.
Example: For cases commenced prior to October 22, 1994, the IRS used to take the position (I can't remember if it was a national position or not) that the automatic stay did not apply to assessment of taxes incurred
during administration of the case, citing the point that 11 USC 362(a)(6) applied only to pre-petition claims.
Wrong argument.
For taxes incurred during case administration, the relevant provision is 362(a)(4), which applies to
any act to create, perfect, or enforce any lien against property of the estate (with no limitation as to whether the tax in question is pre-petition or post-petition). The assessment of a federal tax under IRC 6321 is, fundamentally, an attempt to
create a lien. True, the lien does not arise until after the taxpayer has failed to pay in response to the post-assessment notice and demand, but the creation of the lien relates back to the time of the assessment.
In 1994, the law was changed to allow the tax collector (whether IRS or other authority) to assess the tax without having to ask for and obtain relief from the stay, but the assessment under the changed law
does not create the IRC 6321 tax lien with respect to property that remains part of the estate. See 11 USC 362(b)(9)(D), effective for cases commenced on or after October 22, 1994. In other words, if the trustee files a return showing a tax incurred during case administration, the IRS can assess without violating the stay, but no tax lien arises with respect to property of the estate. Instead, the tax is afforded administrative status under 11 USC 503: priority unsecured.
In other words, all those assessments of federal
administrative expense taxes (such as taxes incurred by corporate bankruptcy estates during case administration) in cases commenced prior to October 22, 1994 were technical violations of the automatic stay -- and I don't think very many IRS employees were aware of that.
I have been dealing with the IRS on bankruptcy issues for a long, long time. I got off the main subject, but my point is that some of what I have heard the IRS is supposedly doing procedurally does not conform to the reality I have seen over the years. Bankruptcy in particular is an area where the Service in my view has long needed some direction, which perhaps could come with help from the Chief Counsel's office.
EDIT: I believe under Rule 2002(j) of the Federal Rules of Bankruptcy Procedure, the IRS is supposed to be notified of each Chapter 11 case. Of course, in Chapter 11, the assumption that the debtor continues to operate and incur payroll tax liabilities is a reasonable one. And in most Chapter 11 cases, no trustee is appointed.
There is no blanket rule that the IRS be notified of Chapter 7 cases (99.9% of which are straight liquidations) -- where a trustee is always appointed, and where the blanket assumption that the debtor continues to operate and incur payroll tax liabilities would be patently unreasonable.
Thus, I grant that the IRS has a difficult job here.
"My greatest fear is that the audience will beat me to the punch line." -- David Mamet