Legislative Change Needed To Enable IRS To Assess Taxes Voluntarily Reported by Taxpayers in Bankruptcy

GGD-83-47: Published: Jun 20, 1983. Publicly Released: Jun 20, 1983.

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Pursuant to a congressional request, GAO was asked to examine the effects of bankruptcy laws on tax administration. GAO reviewed the impact that the 1978 Bankruptcy Reform Act's restriction on tax assessments is having on the Internal Revenue Service (IRS) and bankrupt taxpayers.

GAO believes that the assessment restriction should be amended to allow IRS to assess the taxes that bankrupt taxpayers report on their returns. Moreover, removing the assessment restriction would ensure consistent treatment for all bankrupt taxpayers. IRS needs to modify its collection procedure to ensure that it does not violate the legislative restriction on initiating collection action against bankrupt taxpayers. Some bankruptcy court districts permit IRS to assess taxes against bankrupt taxpayers, but IRS officials informed GAO that they cannot change the computerized collection procedures to stop collection notices from being sent to bankrupt taxpayers once taxes are assessed, but not paid.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Treasury's proposal was included in its fiscal year 1988 legislative package, which was submitted to the Office of Management and Budget in January 1987, but no further action was taken as of October 31, 1987.

    Matter: Congress should amend the Bankruptcy Code to allow IRS to assess the taxes reported by bankrupt taxpayers on their returns.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: A new computer program was implemented as part of a major reprogramming effort at the service centers. New bankruptcy closing codes are now in effect.

    Recommendation: The Commissioner of Internal Revenue should modify the automated IRS collection procedures to prevent sending collection notices that would violate the protection afforded taxpayers by the Bankruptcy Code.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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