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Part 5. Collecting Process

Chapter 5. Insolvencies, Decedents Estates and Estate Taxes

Section 4. Proof of Claim Procedures in Decedent and Non-Bankruptcy Insolvency Cases

5.5.4  Proof of Claim Procedures in Decedent and Non-Bankruptcy Insolvency Cases

5.5.4.1  (06-23-2005)
Section Overview

  1. This section describes Technical Services Advisory (Advisory) or Insolvency actions common to decedent estate and non-bankruptcy insolvency proceedings.

  2. Use the information in this section to guide you in the filing and processing of Proofs of Claim (POC) and other collecting actions.

5.5.4.2  (06-23-2005)
Decision Strategy

  1. Filing a POC may subject the claim to action by the court where the proceeding is conducted. In a probate action, a state court can rule on the merits of a claimed federal tax liability. Do not file a POC in jurisdictions where there is a history of adverse decisions.

  2. Send Form 10492, Notice of Federal Taxes Due, with a letter to the personal representative or other fiduciary advising them of the taxes owed and of their potential personal liability under 31 U.S.C. § 3713. A copy of the letter may be filed with the court.

  3. Consider levy on assets that are exempt or abandoned by the court.

5.5.4.3  (06-23-2005)
Levy on Non-Court Controlled Assets

  1. Any property which is exempt from a proceeding by statute may be levied upon. Before levy, Advisory, in consultation with Counsel, must determine that the property is not subject to administration by the court.

  2. Since tax liabilities are not dischargeable in state court the determination to levy is based solely on whether the assets are subject to administration by the court. Amounts not collected in the proceeding may be collected from exempt, abandoned, or after acquired property.

5.5.4.4  (06-23-2005)
Establish Local POC Policy

  1. Advisory will draft an Area decedent filing guide that lists jurisdictions within the local area where POCs will not be filed. The guide should be updated every two years based on probate rulings within that period. Confer with Counsel for their input and concurrence on the original list and any periodic modifications.

  2. In jurisdictions where POCs are not filed, guidelines will be set for providing mailed or personal notification of amounts owed to the decedent’s personal representative or other fiduciary.

  3. In certain cases, Advisory will determine not to file a POC in a court where the area normally files them. In those instances, Advisory will communicate to Area Counsel the specific reasons why no POC should be filed in that particular case. If Area Counsel disagrees with Advisory, a POC will be filed.

5.5.4.5  (06-23-2005)
Comply With Bar Date

  1. The bar date (court deadline) for filing a POC in decedent cases is normally set by state law.

  2. Comply with the bar date when possible although the Service is not bound by it in the collection of taxes.

  3. Notify Counsel when a bar date is missed.

5.5.4.6  (06-23-2005)
Proof of Claim Procedures

  1. Use Form 4490, Proof of Claim for Internal Revenue Taxes, when filing a claim in probate or non-bankruptcy insolvency proceedings.

    1. File the POC in the location mandated by state law or court rules.

    2. Prior to the bar date, file the POC for the full assessed tax liability even when other action is pending that may alter the amount.

    3. When a bar date is missed, refer the case to Counsel.

5.5.4.6.1  (06-23-2005)
Preparation, Control, and Monitoring

  1. Delegation Order Number 51 establishes authority to sign Proofs of Claim. The signature should be notarized if required by state law or court rules.

  2. When related taxpayer entities are involved in separate proceedings, prepare a separate POC for each of them.

  3. When non-bankruptcy insolvency cases are controlled on the Automated Insolvency System (AIS), Form 4490 can be generated automatically.

  4. AIS has features specifically designed for controlling, processing, and monitoring non-bankruptcy insolvency cases. The functionality is similar to that used to process bankruptcy cases. Refer to the current revision of the AIS user guide for more details.

  5. IRC § 6503(b) suspends the period for collection in an any judicial proceeding when all or substantially all of the assets of a taxpayer are under the control of a court. If this condition is present, input Transaction Code (TC) 520, Closing Code (CC) 80 in the case of a probate, and TC 520 CC 81 in the case of any other non-bankruptcy insolvency.

5.5.4.6.1.1  (06-23-2005)
Claiming Interest

  1. In decedent estate proceedings, claim interest to the anticipated date of payment and interest on tax liabilities related to the administration of the estate.

  2. In insolvency proceedings, if a Notice of Federal Tax Lien (NFTL) has not been filed, claim interest to the beginning date of the proceeding.

  3. If a NFTL has been filed, compare the total tax liability (including accruals to the beginning date of the proceeding) to the value of property attached by the tax lien.

    1. If the tax liability is greater than the value of the property, claim interest to the beginning date of the proceeding.

    2. If it is less, claim interest to the date the proceeding began plus interest from that date to the date of anticipated payment.

    The additional interest claimed must not be greater than the difference between the value of the property and the tax liability. i.e. The (value of property) minus (tax liability) = maximum amount of additional interest that can be claimed.

  4. Claim interest on tax liabilities incurred related to the administration of the estate. If the estate proves to be solvent, claim interest to the anticipated date of payment.

  5. Claim all applicable penalties to the expected payment date. State statutes limiting penalty do not bind the Service.

5.5.4.6.1.1.1  (06-23-2005)
Distribution of Proof of Claim

  1. After completing the POC, distribute the parts according to the following table.

    If Then
    normal Proof of Claim filing with the court is indicated file part one with the clerk of the court and furnish part three to the fiduciary
    direct collection from the fiduciary is indicated file part one with the fiduciary and furnish part three to the clerk of the court

    Note:

    Part four may be furnished to the United States Attorney’s office unless their preference not to receive them was previously communicated through the Area Director.

5.5.4.6.1.1.1.1  (06-23-2005)
Methods of Service

  1. Mail or hand deliver parts one and two of the POC to the designated court official, or to the responsible fiduciary when appropriate. Use a transmittal letter when sending the POC to the court or fiduciary by mail.

  2. The court official will acknowledge receipt by stamping the time and place received on part two.

  3. Retain acknowledgment copy with the Advisory or Insolvency case file.

  4. Furnish part three to the fiduciary.

  5. Provide part four to the U.S. Attorney, unless that office previously advised the Area Director that they prefer not to receive a copy.

  6. If an acknowledged POC part two is not received from the court or the fiduciary within 21 days, take one of the following actions to secure one.

    1. Send Letter 985(DO) to the court or the fiduciary

    2. Issue an Other Investigation to the Field for an employee to either retrieve the acknowledgment copy or to personally deliver a duplicate and have it acknowledged.

  7. Request additional time to file a POC from the court when the bar date falls before:

    1. the Examination of a tax return is completed, or

    2. liability research is finished.

5.5.4.7  (06-23-2005)
Unliquidated Claims

  1. An unliquidated claim is a POC that is filed when the exact amount owed is still unknown.

  2. When Form 4490 includes both liquidated and unliquidated amounts, identify the unliquidated portion as "Estimated Liability " in the "Remarks" column. Show the amount due for each tax period
    separately.

  3. File an amended or supplemental POC as soon as the exact amount is determined.

5.5.4.8  (06-23-2005)
Amended, Supplemental, and Consolidated Claims

  1. After the bar date, file an amended POC to change the amount in a filed claim. Mark the front of Form 4490 as follows: "Amendment No.  ________________________ to Proof of Claim dated  ________________________ " Avoid filing repeated amendments whenever possible.

  2. File a supplemental POC when an additional liability is discovered before the bar date but after the original claim was filed. Mark the front of Form 4490 as follows: "Supplemental No.  ________________________ to Proof of Claim dated  ________________________"

  3. File a "consolidated " POC when two "amended" or "supplemental" claims have been filed and another change is needed unless the statement of taxes owed is extremely long and complex. "This claim consolidates Proofs of Claim dated   ________________________ and  ________________________ ."

5.5.4.9  (06-23-2005)
Application of Payments

  1. Apply payments as directed when a court order specifies how amounts must be credited.

  2. Otherwise, apply payments in this order:

    1. Accounts where the statutory period is about to expire

    2. Trust fund portion of accounts, only when the statutory period for assertion of the Trust Fund Recovery Penalty (TFRP) has expired without assessment of the TFRP.

    3. Non-trust fund portion of accounts or non-trust fund liabilities

    4. Other trust fund portion of accounts

  3. Do not apply payments received from a proceeding to any nonclaimable liability.

  4. Apply taxes paid by a fiduciary as an expense of administration only against taxes incurred by the fiduciary during the administration of the estate.

5.5.4.10  (06-23-2005)
Subsequent Actions

  1. Review the notice of distribution within five days of receipt to determine if the proposed payment is proper. If it is less than required, refer the matter to Counsel.

  2. When a state court determines that the Federal tax liability should be reduced and Counsel concludes that the court determination is binding, take necessary action to adjust the liability consistent with the specifics of the court order. Use Form 3870 Request for Adjustment

  3. Input TC 521 to reverse the systemic litigation freeze after insuring that a TC 550 updating the Collection Statute Expiration Date (CSED) has been input if the Closing Code used to input the TC 521 does not automatically update the CSED upon reversal.

  4. Close out any internal controls that are kept on the case such as those on the Automated Insolvency System (AIS), or the Integrated Collection System (ICS).


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