Protecting Tax Revenue When Businesses File for Bankruptcy
GGD-86-20
Published: Feb 21, 1986. Publicly Released: Feb 21, 1986.
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Highlights
In response to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) procedures for protecting the government's interest when taxpayers go through bankruptcy proceedings, specifically: (1) detecting and minimizing the accumulation of employment tax delinquencies; and (2) filing claims for delinquent taxes with the bankruptcy court.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | The Commissioner of Internal Revenue should develop and include in the bankruptcy manual additional indicators for IRS personnel to use in deciding how often to monitor bankrupt businesses. One indicator that has been incorporated into the manual is the size of a business' payroll and another could be a prior delinquency history. |
Closed – Implemented
Instructions were prepared for the Internal Revenue Manual (IRM), which require employees to consider past delinquency history in determining how to monitor a business.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should make greater use of IRS authority to require businesses with employment tax liabilities to file monthly rather than quarterly returns. |
Closed – Implemented
IRM instructions were prepared to provide that monthly filing of tax returns be considered for those insurers whose past history warrants such action.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should develop and include in the bankruptcy manual minimum criteria for referral of cases to district counsel and the bankruptcy courts. The manual should also state that each referral must include information on the business' operating status and the size of its employment tax liability. |
Closed – Implemented
IRM instructions were written establishing such criteria.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should revise the bankruptcy manual to require that bankruptcy case files contain adequate documentation of claim computations and that supervisory or quality control reviews of these computations be made to ensure that claims are accurately prepared. |
Closed – Implemented
The bankruptcy manual was revised to require that case files contain adequate documentation of claim computations to facilitate more thorough reviews.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should periodically test the effects of the revised bankruptcy court rules' notification requirements to: (1) determine the extent to which liquidating businesses are not listing IRS as a creditor on bankruptcy petitions; and (2) provide the basis for developing corrective action if needed. |
Closed – Not Implemented
A study was conducted to determine the effects of the revised bankruptcy rule. This study was completed in March 1987. Based on its results, IRS decided not to seek a change to the current bankruptcy rule regarding notice to IRS of liquidating bankruptcies.
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BankruptcyClaimsDelinquent taxesFederal taxesGovernment collectionsIncome taxesReorganizationSocial security taxesTaxesData errors