The IRS needs bankruptcy estates and individual chapter 11 debtors to allocate post-petition income and tax withholding between the estate and the debtor. The IRS will use the information in administering the internal revenue laws. Respondents will be individual debtors and their bankruptcy estates for chapter 11 cases filed after October 16, 2005.
The collection of information in the proposed notice is needed prior to the statutory time periods established under 44 U.S.C. § 3507 because the guidance in the notice is essential for individual chapter 11 debtors and bankruptcy estates to prepare accurate 2005 income tax returns by the due dates. The information required from taxpayers by the notice is necessary so that the Service can administer tax reporting and collection under the Internal Revenue Code. The information will also assist taxpayers in properly reporting gross income for 2005. The Service cannot reasonably comply with the provisions of the Paperwork Reduction Act regarding normal clearance procedures for the reasons stated below.
(i) Public harm. If the normal clearance procedures are followed harm to the public is likely to result. Individual taxpayers filing chapter 11 bankruptcy petitions after October 16, 2005, have to adjust how they report gross income on their individual income tax returns for 2005 to reflect the amount of their earnings that is includible, not in their gross income, but in the gross income of the bankruptcy estate created when the petition is filed. That adjustment will require the individual and the estate to split between the individualÂs income tax return and the bankruptcy estateÂs income tax return the compensation reported on Form W-2 and the gross income reported on other information returns using the individualÂs name and taxpayer identification number. Without the guidance in the notice as to how to make this allocation, individuals and estates could incur penalties and interest if they fail to make an allocation, or if they allocate incorrectly on their returns for 2005.
(ii) Unanticipated event. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 enacted new section 1115 of the Bankruptcy Code. New section 1115 applies to individuals filing chapter 11 bankruptcy petitions after October 16, 2005 and provides that the income earned by the individual after the petition is filed is the property of the bankruptcy estate. The interaction of new section 1115 of the Bankruptcy Code with section 1398 of the Internal Revenue Code, which directs how individuals and estates are taxed after a chapter 11 petition is filed, results in tax reporting obligations with respect to gross income earned after the petition that are different from the rules in effect for prior years and that are not well-understood by the public.
(iii) Necessary to avoid missed deadlines. Individual chapter 11 debtors and their bankruptcy estates are required to file income tax returns for 2005 by April 15, 2006. The use of normal clearance procedures for the notice would result in guidance on how individuals and bankruptcy estates are to determine their tax liabilities being delayed until after deadlines have passed for filing returns and making estimated tax payments.
On behalf of this Federal agency, I certify that the collection of information encompassed by this request complies with 5 CFR 1320.9 and the related provisions of 5 CFR 1320.8(b)(3).
The following is a summary of the topics, regarding the proposed collection of information, that the certification covers:
(i) Why the information is being collected;
(ii) Use of information;
(iii) Burden estimate;
(iv) Nature of response (voluntary, required for a benefit, or mandatory);
(v) Nature and extent of confidentiality; and
(vi) Need to display currently valid OMB control number;
If you are unable to certify compliance with any of these provisions, identify the item by leaving the box unchecked and explain the reason in the Supporting Statement.
Section 1398 notice.doc
Notice 2006-XX