Quiz on bankruptcy taxation

[Famspear]

A quiz on bankruptcy taxation.

Multiple choice.

1. A certified public accountant (CPA) licensed in Texas prepares a 2009 Form 1040 federal income tax return for an individual client. He is paid to prepare the return. The individual files that return with the Internal Revenue Service on April 12, 2010. The individual files Chapter 7 bankruptcy on March 10, 2011, and a Trustee is appointed. During bankruptcy case administration, the Trustee contacts the CPA and requests a copy of the 2009 return. The individual refuses to give permission for turnover of a copy. If the CPA provides the Trustee with the copy without obtaining permission from the client and without a court order, the CPA:

A. Has violated Texas law, relating to regulation of CPAs, but has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

B. Has violated Texas law, relating to regulation of CPAs, and has also violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

C. Has not violated Texas law, relating to regulation of CPAs, and has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

D. Has not violated Texas law, relating to regulation of CPAs, but has violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

2. Same information as in question 1, except that the Trustee requests a copy of the return from the Internal Revenue Service. If an IRS employee provides the Trustee with a copy of the return without obtaining permission from the individual taxpayer, the IRS employee:

A. Has violated the Internal Revenue Code (imposing criminal penalties for disclosing such information) unless the IRS has obtained a court order.

B. Has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

C. May provide the copy to the Trustee without violation of the Internal Revenue Code only if the IRS employee obtains proof that the Trustee, in his capacity as Trustee, has a material interest in the information found in the return, and the burden of proof is on the Trustee to show material interest.

D. May provide the copy to the Trustee without violation of the Internal Revenue Code only if the IRS employee obtains proof that the Trustee, in his capacity as Trustee, has a material interest in the information found in the return, and the burden of proof is on the IRS employee to show lack of material interest.

3. Same information as in question 1, except that the CPA refuses to provide the copy. The client is still refusing to give permission. The CPA asserts that under Texas law he is not allowed to disclose the information without the client's permission. The CPA also asserts that before he can be ordered to turn over the copy, the Bankruptcy Court should order that he be paid for work done for the client prior to the bankruptcy to prepare that return, for which the CPA has not yet been paid. In a Bankruptcy Court hearing to determine whether the CPA must turn over a copy to the Trustee without the client's permission (and without being paid):

A. The Court will rule that the Texas law does not constitute an applicable privilege that would allow the CPA to refuse to turn over the return, and will rule that the CPA must turn over the return without being paid.

B. The Court will rule that the Texas law does constitute an applicable privilege allowing the CPA to refuse to turn over the return, but will also state that if the privilege had not applied, the CPA would have been required to turn over the return without being paid.

C. The Court will rule that the Texas law does not constitute an applicable privilege that would have allowed the CPA to fail to turn over the return, but will rule that the CPA cannot be required to turn over the return without being paid.

D. The Court will rule that the Texas law does constitute an applicable privilege allowing the CPA to fail to turn over the return, but will state that had the privilege not applied the CPA would have been required to turn over the return without being paid.

4. A tax attorney licensed in Texas prepares a 2009 Form 1040 federal income tax return for an individual client. The attorney is paid for preparing the return. The individual files that return with the Internal Revenue Service on April 12, 2010. The individual files Chapter 7 bankruptcy on March 10, 2011, and a Trustee is appointed. During bankruptcy case administration, the Trustee contacts the attorney and requests a copy of the 2009 return. The attorney checks with his client, and the client refuses to give permission for turnover of a copy, citing attorney-client privilege. If the attorney nevertheless provides the Trustee with the copy without obtaining permission from the client and without a court order, the attorney:

A. Has violated Texas attorney-client privilege, but has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

B. Has violated Texas attorney-client privilege, and has also violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

C. Has not violated Texas attorney-client privilege, and has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

D. Has not violated Texas attorney-client privilege, but has violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

[LaVidaRoja]

Under Bankruptcy law, to what extent is the trustee "in the shoes of" the bankrupt individual. I recall that the trustee may affirm/dis-affirm or execute contracts, and of course, he is required to file the income tax return of the bankrupt estate. However, is he entitled to pre-petition documentation necessary to fulfill his duties even without the consent of the bankrupt?

[jcolvin2]

Under Bankruptcy law, to what extent is the trustee "in the shoes of" the bankrupt individual. I recall that the trustee may affirm/dis-affirm or execute contracts, and of course, he is required to file the income tax return of the bankrupt estate. However, is he entitled to pre-petition documentation necessary to fulfill his duties even without the consent of the bankrupt?

Section 301.7216-2(j) provides the following:

If after furnishing tax return information to a tax return preparer, the taxpayer dies or becomes incompetent, insolvent or bankrupt, or the taxpayer's assets are placed in conservatorship or receivership, the tax return preparer may disclose the information to the duly appointed fiduciary of the taxpayer or his estate, or to the duly authorized agent of the fiduciary.

I would guess that the Chapter 7 trustee is a fiduciary for purposes of the regulation.

[jcolvin2]

Section 6103(b)(5)(A) provides that the IRS can disclose:

In any case to which section 1398 applies (determined without regard to section 1398(b)(1)), any return of the debtor for the taxable year in which the case is commenced or any preceeding taxable year shall, upon written request, be open to inspection by or disclosure to the trustee in such case.

Section 1398(a) provides:

Except as provided in subsection (b), this section shall apply to any case under chapter 7 (relating to liquidiations) or chapter 11 (relating to reorganizations) of title 11 of the United States Code where the debtor is an individual.

[wserra]

A quiz on bankruptcy taxation.

Arghh.

[Famspear]

A quiz on bankruptcy taxation.

Arghh.

[Arthur Rubin]

A lawyer friend of my asked if I was (as a tax preparer) willing to help her by preparing returns of bankruptcy estates. I declined, as it has all the complexity of a general tax return, with the additional problem of having a hostile client.

Your quiz brings up the question of whether the bankruptcy trustee has power-of-attorney to get financial records from other custodians of information, although that may be a state law question, rather than Federal.

[jcolvin2]

Knowing nothing about CPA ethics, I am going to take a stab at the answering the quiz:

1. A certified public accountant (CPA) licensed in Texas prepares a 2009 Form 1040 federal income tax return for an individual client. He is paid to prepare the return. The individual files that return with the Internal Revenue Service on April 12, 2010. The individual files Chapter 7 bankruptcy on March 10, 2011, and a Trustee is appointed. During bankruptcy case administration, the Trustee contacts the CPA and requests a copy of the 2009 return. The individual refuses to give permission for turnover of a copy. If the CPA provides the Trustee with the copy without obtaining permission from the client and without a court order, the CPA:

A. Has violated Texas law, relating to regulation of CPAs, but has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

B. Has violated Texas law, relating to regulation of CPAs, and has also violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

C. Has not violated Texas law, relating to regulation of CPAs, and has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

D. Has not violated Texas law, relating to regulation of CPAs, but has violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

[/quote]

A. I think that the regulation (301.7216-2(j)) makes the Chapter 7 trustee a fiduciary for purpose of the IRC penalty on tax preparers who disclose return information. But under In re Hunt, 153 B.R. 445, and its progeny, I don't think that the trustee displaces the client for purposes of any privilege in an individual Chapter 7 case, though CFTC v. Weintraub, 471 U.S. 343 (1985) counsels differently for corporations.

2. Same information as in question 1, except that the Trustee requests a copy of the return from the Internal Revenue Service. If an IRS employee provides the Trustee with a copy of the return without obtaining permission from the individual taxpayer, the IRS employee:

A. Has violated the Internal Revenue Code (imposing criminal penalties for disclosing such information) unless the IRS has obtained a court order.

B. Has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

C. May provide the copy to the Trustee without violation of the Internal Revenue Code only if the IRS employee obtains proof that the Trustee, in his capacity as Trustee, has a material interest in the information found in the return, and the burden of proof is on the Trustee to show material interest.

D. May provide the copy to the Trustee without violation of the Internal Revenue Code only if the IRS employee obtains proof that the Trustee, in his capacity as Trustee, has a material interest in the information found in the return, and the burden of proof is on the IRS employee to show lack of material interest.

B. Because this is an individual Chapter 7, section 6103(e)(5) allows for the disclosure. The "material interest" provisions of 6103(e)(4) accordingly are not relevant.

3. Same information as in question 1, except that the CPA refuses to provide the copy. The client is still refusing to give permission. The CPA asserts that under Texas law he is not allowed to disclose the information without the client's permission. The CPA also asserts that before he can be ordered to turn over the copy, the Bankruptcy Court should order that he be paid for work done for the client prior to the bankruptcy to prepare that return, for which the CPA has not yet been paid. In a Bankruptcy Court hearing to determine whether the CPA must turn over a copy to the Trustee without the client's permission (and without being paid):

A. The Court will rule that the Texas law does not constitute an applicable privilege that would allow the CPA to refuse to turn over the return, and will rule that the CPA must turn over the return without being paid.

B. The Court will rule that the Texas law does constitute an applicable privilege allowing the CPA to refuse to turn over the return, but will also state that if the privilege had not applied, the CPA would have been required to turn over the return without being paid.

C. The Court will rule that the Texas law does not constitute an applicable privilege that would have allowed the CPA to fail to turn over the return, but will rule that the CPA cannot be required to turn over the return without being paid.

D. The Court will rule that the Texas law does constitute an applicable privilege allowing the CPA to fail to turn over the return, but will state that had the privilege not applied the CPA would have been required to turn over the return without being paid.

A. Just because.

4. A tax attorney licensed in Texas prepares a 2009 Form 1040 federal income tax return for an individual client. The attorney is paid for preparing the return. The individual files that return with the Internal Revenue Service on April 12, 2010. The individual files Chapter 7 bankruptcy on March 10, 2011, and a Trustee is appointed. During bankruptcy case administration, the Trustee contacts the attorney and requests a copy of the 2009 return. The attorney checks with his client, and the client refuses to give permission for turnover of a copy, citing attorney-client privilege. If the attorney nevertheless provides the Trustee with the copy without obtaining permission from the client and without a court order, the attorney:

A. Has violated Texas attorney-client privilege, but has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

B. Has violated Texas attorney-client privilege, and has also violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

C. Has not violated Texas attorney-client privilege, and has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

D. Has not violated Texas attorney-client privilege, but has violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

A. For the same reasons as in (1) above.

Edited to correct answer to (1) above. The discussion indicated that "A" was the appropriate answer, but for some reason my fingers typed "B."

[Famspear]

Good discussion. Tomorrow night, I'll post what I believe are the answers to the four multiple choice questions.

[Famspear]

OK, here we go......

1. A certified public accountant (CPA) licensed in Texas prepares a 2009 Form 1040 federal income tax return for an individual client. He is paid to prepare the return. The individual files that return with the Internal Revenue Service on April 12, 2010. The individual files Chapter 7 bankruptcy on March 10, 2011, and a Trustee is appointed. During bankruptcy case administration, the Trustee contacts the CPA and requests a copy of the 2009 return. The individual refuses to give permission for turnover of a copy. If the CPA provides the Trustee with the copy without obtaining permission from the client and without a court order, the CPA:

A. Has violated Texas law, relating to regulation of CPAs, but has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

My colleague "jcolvin2" and I agree that "A" is the correct answer.

From the Internal Revenue Code:

(a) GENERAL RULE.--Any person who is engaged in the business of preparing, or providing services in connection with the preparation of, returns of the tax imposed by chapter 1, or any person who for compensation prepares any such return for any other person, and who knowingly or recklessly—

(1) discloses any information furnished to him for, or in connection with, the preparation of any such return, or

(2) uses any such information for any purpose other than to prepare, or assist in preparing, any such return,

shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not more than $1,000, or imprisoned not more than 1 year, or both, together with the costs of prosecution.

(b) EXCEPTIONS.--

(3) REGULATIONS.--Subsection (a) shall not apply to a disclosure or use of information which is permitted by regulations prescribed by the Secretary under this section. [. . . ]

---from Internal Revenue Code section 7216.

And, from the U.S. Treasury Regulations:

(j) Disclosure to taxpayer’s fiduciary.

If, after furnishing tax return information to a tax return preparer, the taxpayer dies or becomes incompetent, insolvent, or bankrupt, [ . . . ] the tax return preparer may disclose the information to the duly appointed fiduciary of the taxpayer or his estate, or to the duly authorized agent of the fiduciary.

---from Treasury Regulation 301.7216-2(j), 26 C.F.R. section 301.7216-2(j).

So, no federal violation. However, the CPA has committed a misdemeanor under Texas law. From the Texas Occupations Code:

Sec. 901.457. ACCOUNTANT-CLIENT PRIVILEGE. (a) A license holder ... may not voluntarily disclose information communicated to the license holder ... by a client in connection with services provided to the client by the license holder ... except with the permission of the client or the client's representative.

(b) This section does not prohibit a license holder from disclosing information that is required to be disclosed:

(1) by the professional standards for reporting on the examination of a financial statement;

(2) under a summons under the provisions of the Internal Revenue Code of 1986 and its subsequent amendments, the Securities Act of 1933 (15 U.S.C. Section 77a et seq.) and its subsequent amendments, or the Securities Exchange Act of 1934 (15 U.S.C. Section 78a et seq.) and its subsequent amendments or under a court order if the summons or order:

(A) is addressed to the license holder;

(B) mentions the client by name; and

(C) requests specific information concerning the client.....

None of the exceptions in the Texas Occupations Code cover disclosure to a bankruptcy trustee without the client's permission -- unless the CPA has a court order. A subpoena by itself would not suffice. Under section 901.602 of the Texas Occupations Code, a violation of section 901.457 would appear to be a class B misdemeanor which (under section 12.22 of the Texas Penal Code) would be punishable by up to 180 days in jail or a $2,000 fine, or both.


Next question:

2. Same information as in question 1, except that the Trustee requests a copy of the return from the Internal Revenue Service. If an IRS employee provides the Trustee with a copy of the return without obtaining permission from the individual taxpayer, the IRS employee....

My colleague "jcolvin2" and I both believe the correct answer is B:

B. Has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

As jcolvin2 pointed out, IRC section 6103(e)(5)(A) -- and the reference to "section 6103(b)(5)(A)" was obviously just a typo -- is the operative provision. And, as jcolvin2 pointed out, under that particular provision there is no requirement that the trustee demonstrate "material interest" (although such a demonstration may be required under various other provisions of 6103(e)).

Next question:

3. Same information as in question 1, except that the CPA refuses to provide the copy. The client is still refusing to give permission. The CPA asserts that under Texas law he is not allowed to disclose the information without the client's permission. The CPA also asserts that before he can be ordered to turn over the copy, the Bankruptcy Court should order that he be paid for work done for the client prior to the bankruptcy to prepare that return, for which the CPA has not yet been paid. In a Bankruptcy Court hearing to determine whether the CPA must turn over a copy to the Trustee without the client's permission (and without being paid)....

Again, jcolvin2 and I agree that the correct answer is:

A. The Court will rule that the Texas law does not constitute an applicable privilege that would allow the CPA to refuse to turn over the return, and will rule that the CPA must turn over the return without being paid.

The CPA who wants to be paid before being required to turn over the document has a problem found in the U.S. Bankruptcy Code, in the form of subsection (e) of section 542:

(e) Subject to any applicable privilege, after notice and a hearing, the court may order an attorney, accountant, or other person that holds recorded information, including books, documents, records, and papers, relating to the debtor’s property or financial affairs, to turn over or disclose such recorded information to the trustee.

---from U.S. Bankruptcy Code, 11 U.S.C. section 542(e).

Back in 1978, when section 542(e) was enacted, the Senate Report No. 95-989, accompanying the Bankruptcy Reform Act of 1978, Public Law No. 95-598, 92 Stat. 2549 (Nov. 6, 1978), stated:

It [subsection (e) of section 542 of the Bankruptcy Code] is a new provision that deprives accountants and attorneys of the leverage that they have today [in 1978], under State law lien provisions, to receive payment in full ahead of other creditors when the information they hold is necessary to the administration of the estate.....

Further, the accountant-client privilege obviously is NOT an "applicable privilege" under Bankruptcy Code section 542(e) and the aforementioned Texas Occupations Code provision in the face of a court order. Indeed, the Texas statute and the Bankruptcy Code provision seem to dovetail with each other: The CPA needs either the client's permission or a court order. If the CPA gets a court order, the non-compliance client is just out of luck.

Now, question 4:

4. A tax attorney licensed in Texas prepares a 2009 Form 1040 federal income tax return for an individual client. The attorney is paid for preparing the return. The individual files that return with the Internal Revenue Service on April 12, 2010. The individual files Chapter 7 bankruptcy on March 10, 2011, and a Trustee is appointed. During bankruptcy case administration, the Trustee contacts the attorney and requests a copy of the 2009 return. The attorney checks with his client, and the client refuses to give permission for turnover of a copy, citing attorney-client privilege. If the attorney nevertheless provides the Trustee with the copy without obtaining permission from the client and without a court order, the attorney.....

This is a trick question. I submit that the correct answer is C:

C. Has not violated Texas attorney-client privilege, and has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

First, there simply is no attorney-client privilege with respect to a federal income tax return that has been filed with the Internal Revenue Service, so it's hard to see how there could be an attorney client privilege with respect to a copy of that return that was kept by the preparer -- be he an attorney or CPA or whatever. The courts have pretty much uniformly ruled that while federal income tax returns are "confidential" in the sense that IRS personnel cannot release them except under certain specified circumstances, the tax return cannot be covered by the attorney-client privilege. It is not a "confidential" communication for purposes of the attorney-client privilege. The attorney-client privilege pretty much covers communications to the attorney and those working on behalf of the attorney. By contast, a tax return is, by definition, something communicated to the IRS. So, not only is there no violation of the privilege, there is no "attorney-client privilege" at all. Also, the attorney has not violated the Internal Revenue Code -- again, because the Code and accompanying Treasury regulation (cited above) specifically provide that the tax return preparer (in this case, the attorney) may disclose the return to the fiduciary in the bankruptcy case (or even to the fiduciary's representative). The fiduciary in a Chapter 7 case is, of course, the Chapter 7 panel trustee.

[jcolvin2]

Now, question 4:

4. A tax attorney licensed in Texas prepares a 2009 Form 1040 federal income tax return for an individual client. The attorney is paid for preparing the return. The individual files that return with the Internal Revenue Service on April 12, 2010. The individual files Chapter 7 bankruptcy on March 10, 2011, and a Trustee is appointed. During bankruptcy case administration, the Trustee contacts the attorney and requests a copy of the 2009 return. The attorney checks with his client, and the client refuses to give permission for turnover of a copy, citing attorney-client privilege. If the attorney nevertheless provides the Trustee with the copy without obtaining permission from the client and without a court order, the attorney.....

This is a trick question. I submit that the correct answer is C:

C. Has not violated Texas attorney-client privilege, and has not violated the Internal Revenue Code (imposing criminal penalties for disclosing such information).

First, there simply is no attorney-client privilege with respect to a federal income tax return that has been filed with the Internal Revenue Service, so it's hard to see how there could be an attorney client privilege with respect to a copy of that return that was kept by the preparer -- be he an attorney or CPA or whatever. The courts have pretty much uniformly ruled that while federal income tax returns are "confidential" in the sense that IRS personnel cannot release them except under certain specified circumstances, the tax return cannot be covered by the attorney-client privilege. It is not a "confidential" communication for purposes of the attorney-client privilege. The attorney-client privilege pretty much covers communications to the attorney and those working on behalf of the attorney. By contast, a tax return is, by definition, something communicated to the IRS. So, not only is there no violation of the privilege, there is no "attorney-client privilege" at all. Also, the attorney has not violated the Internal Revenue Code -- again, because the Code and accompanying Treasury regulation (cited above) specifically provide that the tax return preparer (in this case, the attorney) may disclose the return to the fiduciary in the bankruptcy case (or even to the fiduciary's representative). The fiduciary in a Chapter 7 case is, of course, the Chapter 7 panel trustee.

Sloppy thinking on my part. I was conflating client confidentiality with privilege. As you correctly state, there is no privilege for tax return preparation. I suppose in some circumstances where the attorney's production of the return would authenticate that the client actually filed this particular return with the IRS, the attorney's "act of production" could be subject to privilege. But as a general matter, you are correct.

Stay tuned next week for the mitigation quiz ...

[Famspear]

.......As you correctly state, there is no privilege for tax return preparation. I suppose in some circumstances where the attorney's production of the return would authenticate that the client actually filed this particular return with the IRS, the attorney's "act of production" could be subject to privilege......

But the Act of Production Doctrine relates to the Fifth Amendment privilege against being compelled to be a witness against oneself. I don't think the Doctrine relates to the attorney-client privilege.

So (assuming it's the client and not the lawyer who is the defendant), even if a prosecutor were, for some reason, wanting to establish existence, authenticity and custody of a particular document, only the taxpayer (not his attorney) would be able to assert the Fifth Amendment privilege.

What is contained in the tax return? The client's primary purpose for making the "communication" found in the tax return was not to secure (i) an opinion on law from a lawyer, or (ii) legal services from a lawyer, or (iii) assistance in some legal proceeding by a lawyer, but rather to communicate information to the Internal Revenue Service.

And the fact that the attorney has a copy of the tax return in his possession, and is being asked to produce it, would not violate the client's privilege against self-incrimination, since the client himself is not being asked to produce the document.

Information in documents not covered by the attorney-client privilege cannot be made to be covered by that privilege merely by being held by the client's attorney, and I would argue that the compelled production of the document by the attorney would not violate the client's privilege against self-incrimination.

[Arthur Rubin]

And the fact that the attorney has a copy of the tax return in his possession, and is being asked to produce it, would not violate the client's privilege against self-incrimination, since the client himself is not being asked to produce the document.

Information in documents not covered by the attorney-client privilege cannot be made to be covered by that privilege merely by being held by the client's attorney, and I would argue that the compelled production of the document by the attorney would not violate the client's privilege against self-incrimination.

The result might be different if the Trustee was asking for unfiled working papers, even if prepared by the client.

Also, could the Trustee request the information from the IRS?

[Famspear]

And the fact that the attorney has a copy of the tax return in his possession, and is being asked to produce it, would not violate the client's privilege against self-incrimination, since the client himself is not being asked to produce the document.

Information in documents not covered by the attorney-client privilege cannot be made to be covered by that privilege merely by being held by the client's attorney, and I would argue that the compelled production of the document by the attorney would not violate the client's privilege against self-incrimination.

The result might be different if the Trustee was asking for unfiled working papers, even if prepared by the client.

Unfiled working papers in the tax return preparer's possession..... requested by a bankruptcy trustee...... yeah, maybe that gets a little more complicated..... I'd have to think about that some more.

Also, could the Trustee request the information from the IRS?

I'm not sure this answers your question, but here goes....

Although the unfiled work papers would not be in the possession of the IRS, the IRS would have more information that just the "return" itself. The IRS would also have "return information" which the IRS would normally make available to the bankruptcy Trustee upon request.

"Return information" is not limited to the information in the tax return itself. Pararaph (7) of subsection (e) of section 6103 provides:

(7) Return information

Return information with respect to any taxpayer may be open to inspection by or disclosure to any person authorized by this subsection to inspect any return of such taxpayer if the Secretary determines that such disclosure would not seriously impair Federal tax administration.

So, what exactly is "return information"?? Paragraph (2) of subsection (b) of section 6103 provides (in part):

(2) Return information

The term “return information” means—

(A) a taxpayer’s identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, whether the taxpayer’s return was, is being, or will be examined or subject to other investigation or processing, or any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to the determination of the existence, or possible existence, of liability (or the amount thereof) of any person under this title for any tax, penalty, interest, fine, forfeiture, or other imposition, or offense.....

In bankruptcy cases, a trustee may obtain various IRS account transcripts, which show some of the "return information" for pre-bankrutpcy years not reflected in the tax returns themselves. Example: Account postings for penalties and interest charged by the IRS. An IRS account transcript is essentially a sort of ledger account, listing the debits and credits, for a particular taxpayer for a particular tax period for a particular kind of return.

And getting back to disclosure of the pre-bankruptcy tax returns by the IRS to the bankruptcy trustee (as already noted above), subsection (e) of section 6103 also provides (in part):

(e) Disclosure to persons having material interest

[ . . . ]

(5) Individual’s title 11 case

(A) In general

In any case to which section 1398 applies (determined without regard to section 1398 (b)(1)), any return of the debtor for the taxable year in which the case commenced or any preceding taxable year shall, upon written request, be open to inspection by or disclosure to the trustee in such case.

Section 1398 applies to a case of an individual under either chapter 7 of title 11 of the United States Code (chapter 7 of the Bankruptcy Code) or chapter 11 of title 11 of that Code.

Generally, since the Trustee has virtually an absolute right to see the pre-petition tax returns of an individual debtor in a section 1398 case, the Trustee has a pretty good chance to see "return information" as well. It would be an unusual case for the IRS to assert that the disclosure of certain "return information" would "seriously impair Federal tax administration", though of course I guess that could happen.

[Famspear]

As a side note, the bankruptcy trustee will almost always be able to obtain tax returns and return information even in cases to which section 1398 does not apply. (For example, section 1398 does not apply to individual bankruptcies under chapters 12 or 13. Section 1398 also does not apply to bankruptcies of corporations, partnerships, LLCs, etc.) Under section 6103(e)(4), the bankruptcy trustee apparently has a right to see returns and return information of any debtor in a case in which the trustee is serving as trustee, if the IRS "finds that such trustee ... in his fiduciary capacity, has a material interest which will be affected by information contained therein." As a practical matter, the IRS virtually never questions whether the trustee has a material interest. Indeed, the IRS would be hard-pressed to show that a bankruptcy trustee does NOT have a material interest in any tax return of a debtor in bankruptcy -- especially in the case of Form 1120 returns (regular C corporations), Form 1120S returns (for S corporations), and Form 1065 returns (partnerships), since those returns contain the carryforward data essential for the trustee to file the same kinds of returns during case administration. Also, federal tax returns contain data that may be relevant to the validity of an IRS proof of claim filed in the case, and the Trustee's job is to review such claims and object to them where appropriate.

If I recall correctly, the Internal Revenue Manual published by the IRS for its employees incorrectly implies that section 6103(e)(4) (where the trustee theoretically must show "material interest") does not apply if section 6103(e)(5) (where the Trustee has no obligation to prove a material interest) applies. I believe there is overlap: That is, (e)(4) applies to ALL bankruptcy cases -- so a Trustee could theoretically use (e)(4) to obtain copies of post-petition tax returns of an individual debtor that the trustee could not have obtained under (e)(5). I note, of course, that (e)(5) does cover the calendar year return for the entire year in which the case commences, and that return is by definition a "post-petition" return, since most debtors don't file bankruptcy right on December 31st. A return is denominated as "post-petition" if the closing date for the tax period is after the date of case commencement.

[Prof]

Famspear, as to any allegation of privilege, in a chapter 7 case, there is none. First, the trustee owns or controls any privilege. There is no CPA privilege in Texas. Only the attorney prepared returns would be protected, and that privilege belongs to the trustee. Next, since the return appears to be the most recent return, and was filed by an individual for the most recent tax year prior to the petition, the return must be delivered to the chapter 7 trustee within 7 days of the meeting of creditors scheduled under 11 U.S.C. sec. 341, or the case may be dismissed.

See 11 U.S.C. sec. 521, "Debtor's Duties," subsec. (e)(2)(A)(i); copies of the return must be provided to any creditor that timely requests a copy, subsection (e)(2)(A)(ii).