Bankrupt Taxpayers Need Better Protection from IRS

Taxpayers’ rights were violated when the Internal Revenue Service filed liens on their accounts while they were in bankruptcy, according to a new report by a government watchdog.

The Treasury Inspector General for Tax Administration issued a report recommending that the IRS do a better job of protecting taxpayer rights, as well as the government’s interests, during bankruptcy proceedings. The U.S. Bankruptcy Code’s automatic stay provision is designed to protect taxpayers from collection activities while they are in bankruptcy, TIGTA noted. Nonetheless, an estimated 495 potential taxpayer rights violations occurred between October 2005 and December 2007 because the IRS filed liens while taxpayers were in bankruptcy.

There were also 27,838 taxpayers at risk of having their rights violated because a bankruptcy freeze code was not posted to their accounts in a timely manner. The bankruptcy freeze code designates that the account is in bankruptcy status. The code protects taxpayer rights during bankruptcy proceedings by helping the IRS and its centralized insolvency operation function identify and address potential automatic stay violations.

TIGTA found controls need to be strengthened in two areas during the opening and closing of bankruptcy cases to ensure that taxpayers’ rights and the government’s interests are better protected. The centralized insolvency operation function could take better advantage of reports generated from IRS automated systems to identify and resolve potential stay violations. TIGTA identified cases in which taxpayers’ rights were violated because the IRS filed liens on taxpayers’ accounts while the taxpayers were in bankruptcy. TIGTA also identified taxpayers’ accounts that were at risk of having their rights violated because a bankruptcy freeze code was not posted to their accounts in a timely manner.

The second area where improvements are necessary involved holding managers more accountable for initiating bankruptcy-closing actions in a timely manner. Failure to initiate bankruptcy-closing actions in a timely manner affects the IRS’s ability to collect taxes and also can place undue hardship and burden on taxpayers by withholding refunds, said TIGTA. As of June 28, 2008, TIGTA identified 2,442 taxpayers’ accounts in which closing actions had not been initiated within 30 calendar days of the bankruptcy courts’ closing determination.

In response to the report, IRS officials agreed with TIGTA’s recommendations, and have taken or plan to take appropriate corrective actions.