TC 520: Bankruptcy and Litigation Codes, and What They Freeze

When a bankruptcy is filed, the IRS has to stop most collection. On the transcript, that stop shows up as TC 520. But TC 520 is not just a bankruptcy code. It covers several kinds of litigation, including Collection Due Process hearings, and the closing code is what tells you which.

The definition

Document 6209 titles TC 520 "IRS Litigation Instituted" and says the "freeze is released by TC 521 or 522. Some CCs suspend CSED." TC 521 is the reversal, and TC 522 reverses a TC 520 processed in error. For individual accounts, 6209 notes an optional indicator showing whether the collection statute suspension applies to the primary taxpayer, the secondary taxpayer or both.

The closing code chart

Document 6209, Section 11, contains a TC 520 closing code chart. A simplified version:

The chart also notes that closing codes 86 through 89 have not been available for new inputs since January 1, 2002, though open cases with them remain until reversed. The bankruptcy codes can carry indicator codes showing the chapter: 1 for Chapter 7, 2 for Chapter 9, 3 for Chapter 11, 4 for Chapter 13, 5 for Chapter 12 and 8 for other insolvency.

What the bankruptcy freeze does

Document 6209's freeze table describes the bankruptcy freeze, set by TC 520 with the appropriate closing code. Among its effects: some closing codes freeze assessment actions, some freeze refunds, some freeze offsets, and all of them suppress balance due notices and suspend the collection statute, according to the table. The section 11 notes add detail on credits: closing codes 60 through 63 allow only post-petition credits to offset to post-petition tax years, and codes 64 through 67 allow pre-petition credits to offset to pre-petition years and post-petition credits to post-petition years.

In plain terms, the transcript stops behaving normally. Notices stop. Refunds may be held. Credits may only move in certain directions. That is the automatic stay in IRS code form.

The statutory suspension

IRC 6503(h) says that in a case under title 11, the bankruptcy code, the running of the period of limitations in IRC 6501 or 6502 on assessment or collection is suspended for the period during which the IRS is prohibited by reason of the case from assessing or collecting, and "(1) for assessment, 60 days thereafter, and (2) for collection, 6 months thereafter."

Other deadlines pause too. IRC 6213(f)(1) suspends the 90-day period to petition the Tax Court on a deficiency while the debtor is prohibited by the bankruptcy from filing, plus 60 days. IRC 6330(d)(2) suspends the period for petitioning the Tax Court from a Collection Due Process determination while the person is prohibited by a bankruptcy case, plus 30 days.

This is why the dates on the TC 520 and TC 521 matter so much. The time between them, plus six months for collection, is generally added to the collection clock for affected periods.

Discharge codes

A bankruptcy discharge of tax debt does not show as an abatement of tax. Document 6209 lists TC 971 action code 031, "Full Bankruptcy Discharged," and action code 033, "Partially Bankruptcy Abatement." It says a TC 971 with action code 31 or 32, posting to a module with a debit balance, generates TC 604, "Assessed Debit Cleared," for the amount of the assessed balance, with the accrued interest and penalty fields posted and a restriction on further penalty and interest.

So a discharged year typically reads: TC 520 bankruptcy, then TC 971 AC 031, then TC 604 clearing the balance, then TC 521 closing the litigation freeze. Document 6209 also lists action code 100, "Bankruptcy case," which 6209 says will cause an MFT 31 module to be created.

Not every tax debt is dischargeable, and the transcript will not tell you which years qualify. It will tell you which years the IRS has treated as discharged.

Payments during bankruptcy

Payments through a bankruptcy plan carry their own designated payment codes. Document 6209 lists DPC 03, "Bankruptcy, undesignated payment," and DPC 11, "Bankruptcy payment, designated to trust fund." If you are in a Chapter 13 plan and want to see whether the trustee's payments are reaching the IRS, those labels are what to look for on the TC 670 lines.

The underreporter program has a matching pause. Document 6209 lists underreporter process code 98, "Bankruptcy Suspense." See TC 922.

Collection Due Process: closing codes 76 and 77

Not every TC 520 is a bankruptcy. A timely Collection Due Process request can post as TC 520 with closing code 76 for a lien hearing or 77 for a levy hearing. The Section 11 chart marks both as suspending the collection statute, consistent with IRC 6330(e)(1), which suspends levy actions and the running of the collection period while the hearing and appeals are pending, and provides that the period will not expire before the 90th day after a final determination.

The chart notes that if a closing code 76 or 77 posted before cycle 200101, it must be reversed with a TC 521 without a closing code. These codes usually travel with the TC 971 action codes for Collection Due Process: 275 for a timely request received, 276 and 277 for resolution. See TC 971 Action Codes.

Post-petition years

Bankruptcy does not freeze every year the same way. The Section 11 notes to the closing code chart say closing codes 60, 62, 64 and 66 "allow post-petition tax years to go to IDRS balance due notice or TDA/BAL DUE." In other words, a year that arises after the bankruptcy was filed can be billed and collected under those codes even while earlier years are frozen.

If you are in a Chapter 13 plan and a new year goes unpaid, expect notices on that year. The TC 520 on the older years does not protect it. Keeping current on new years is part of keeping the plan, and the transcript will show quickly if a new balance appears.

A worked example

The suspension runs from the TC 520 to the end of the period the IRS was barred from collecting, plus six months under IRC 6503(h). If the year had not been discharged, the clock would restart after that point with the suspension added. Because it was discharged, the balance was cleared and the account closed.

Compare that to a year that was not dischargeable. It would show the TC 520 and TC 521, but no AC 031 and no TC 604. The balance would still be there, and the collection clock would be longer by the suspension. See TC 291 and TC 301 for why a discharge does not appear as a tax abatement.

Litigation that does not stop the clock

The chart also shows that not every TC 520 suspends the collection statute. Closing code 70, general litigation, and the refund litigation and Tax Court case codes 71 through 75 are marked as not suspending it. Those codes freeze parts of the account for administrative reasons while a case is pending, but they do not, by themselves, add time to the collection clock. If you are computing the time left on a year, check the closing code before you add any suspension period.

Reading a TC 520

• Identify the closing code, or ask for it. Bankruptcy, CDP and other litigation are treated differently.
• Write down the TC 520 date and the TC 521 date, if any.
• For bankruptcy, look for discharge codes: AC 031, AC 033 and TC 604.
• Check whether refunds and offsets were frozen in the interval.
• Adjust your collection statute analysis for the suspension period.

A bankruptcy or a hearing changes the rules on the account while it lasts. The TC 520 and TC 521 dates mark exactly when the rules changed and when they changed back.