Cite as: Keith M. Lundin, Lundin On Chapter 13, § 42.9, at ¶ ____, LundinOnChapter13.com (last visited __________).
The new tax return filing and providing duties imposed by BAPCPA1 on Chapter 13 debtors are a confidentiality nightmare come to real life. New § 521(e)(2)(A) requires Chapter 13 debtors to provide to the trustee and to any timely requesting creditor a copy or transcript of the federal income tax return for the year immediately preceding the petition for which the debtor has filed a return.2 On request of the court, the U.S. trustee or any party in interest, new § 521(f) requires a Chapter 13 debtor to file with the bankruptcy court federal income tax returns for each tax year during the pendency of the case and any federal income tax return that was not filed for any of the three tax years before the petition.3 These provisions put many personal tax returns (or transcripts) of Chapter 13 debtors into the hands of creditors and into the public records of the bankruptcy court—potentially accessible by anyone with a computer and the Internet.
As if these exposures were not enough, BAPCPA added this disturbing provision in new § 521(g)(2):
The tax returns [and] amendments . . . described in [§ 521(e)(2)(A)] and [§ 521](f) shall be available to the United States trustee (or the bankruptcy administrator, if any), the trustee, and any party in interest for inspection and copying, subject to the requirements of section 315(c) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.4
Section 521(g)(2) is fantastically broader than the new tax return filing and providing requirements it cross-references. Section 521(e)(2)(A)(ii) requires a Chapter 13 debtor to provide a copy or transcript of the specified federal income tax return only to “any creditor that timely requests such copy.”5 Without mention of any request—timely or otherwise—§ 521(g)(2) authorizes any party in interest to inspect and copy the same tax return described in § 521(e)(2)(A). The three years of prepetition federal income tax returns and all postpetition returns that must be filed with the court upon request under § 521(f)(1) and (2) are made available for inspection and copying by any party in interest by § 521(g)(2). The wholesale forfeiture of tax return confidentiality in § 521(g)(2) is tempered only by the cross-reference to an uncodified provision of the new law. Section 315(c) of BAPCPA states as follows:
(1) Not later than 180 days after the date of the enactment of this Act, the Director of the Administrative Office of the United States Courts shall establish procedures for safeguarding the confidentiality of any tax information required to be provided under this section.
(2) The procedures under paragraph (1) shall include restrictions on creditor access to tax information that is required to be provided under this section.
(3) Not later than 540 days after the date of enactment of this Act, the Director of the Administrative Office of the United States Courts shall prepare and submit to the President pro tempore of the Senate and the Speaker of the House of Representatives a report that—
(A) assesses the effectiveness of the procedures established under paragraph (1); and
(B) if appropriate, includes proposed legislation to—
(i) further protect the confidentiality of tax information; and
(ii) provide penalties for the improper use by any person of the tax information required to be provided under this section.6
The procedures for “safeguarding the confidentiality” of tax information were issued on September 20, 2005, in the form of “Interim Guidance” from the Director of the Administrative Office of the United States Courts.7 It is not clear what a “Guidance” from the Director of the Administrative Office of the United States Courts is. The Interim Guidance is not a rule of bankruptcy procedure and, though authorized by § 315(c) of BAPCPA, the Interim Guidance lacks the force of law. Perhaps bankruptcy courts will enact local rules to implement the Interim Guidance from the Director. Perhaps the Interim Guidance will show up as new rules in some future iteration of the Federal Rules of Bankruptcy Procedure. In the interim, we have Interim Guidance that should at least suggest to bankruptcy courts procedures for protecting the confidentiality of tax returns.
The Interim Guidance contains four principles for safeguarding the confidentiality of tax information required to be provided or filed under § 521. First, no tax information filed with the bankruptcy court or provided by the debtor will be available to the public over the Internet, through PACER or through the ECF system. This principle will not interfere with the electronic filing of tax information in a court’s database through ECF, but once filed, tax information will not be available to trustees, creditors and other parties in interest over the Internet.
The third principle is that any trustee, creditor or party in interest who wants access to tax information filed with the bankruptcy court under § 521(f) must file a written request and serve the request on the debtor and debtor’s counsel. The Interim Guidance states that this request should be in the form of a motion and the motion should include a description of the movant’s “status” in the case, a description of the specific tax information sought, a statement that the information cannot be obtained by the movant from any other source, and a statement showing a “demonstrated need” for the tax information. The Interim Guidance states that an order granting a motion for access to tax information should include a statement that the tax information obtained is confidential and may also prescribe sanctions for improper use, disclosure or dissemination of tax information.
Finally, the Interim Guidance instructs that local courts have authority to “determine procedures . . . for transmitting the tax information to the movant when access has been granted.” The bankruptcy courts are to record a docket event when tax information is transmitted to a movant so that the docket will show that access has been granted and to whom.
In a footnote, the Director’s Interim Guidance states that Interim Rule 4002(b)(5) provides that a debtor’s obligation to provide tax information to the trustee or to a timely requesting creditor pursuant to § 521(e)(2) is also “subject to the Interim Guidance.” By this route, neither the trustee nor a timely requesting creditor would have access to a debtor’s tax returns over the Internet. The “request” of a creditor for a tax return must be by motion. The debtor would be responsible for redacting personal information before providing a copy or transcript of a tax return. A timely requesting creditor must include in its motion the specific information listed above to demonstrate need for tax information. An order must be entered with respect to a timely requesting creditor’s access to a tax return or transcript under § 521(e)(2)(A)(ii).
Given that the Director’s Interim Guidance is not a statute, the bankruptcy courts may have to wrestle with inconsistencies between the Interim Guidance and § 521(g)(2) (quoted above). Most obviously, there is no requirement in § 521(g)(2) that a trustee or party in interest file a request—by motion or otherwise—or prove “need” for inspection and copying of a tax return described in § 521(e)(2)(A) or (f). Perhaps the provision for “requirements” under § 315(c) of BAPCPA will be broadly interpreted to support the restrictions in the Director’s Interim Guidance.
If tax returns required to be provided or filed are mishandled, bankruptcy cases become an open invitation to identity theft and other completely undeserved consequences. Without robust confidentiality protections, the information risks become a huge deterrent to filing a consumer bankruptcy case based on nothing whatsoever to do with a debtor’s honesty or need for debt relief. The Director’s Interim Guidance is a step in the right direction. The addition of significant sanctions for failure to follow the Guidance or for any misuse of tax information should be a next step.
2 11 U.S.C. § 521(e)(2)(A), discussed in § 390.1 [ Tax Return Duties Seven Days before First Scheduled Meeting of Creditors ] § 42.5 Tax Return Duties Seven Days before First Scheduled Meeting of Creditors.
3 See 11 U.S.C. § 521(f), discussed in § 392.1 [ Tax Return Duties—On Request ] § 42.7 Tax Return Duties—On Request.
4 11 U.S.C. § 521(g)(2).
5 11 U.S.C. § 521(e)(2)(A)(ii), discussed in § 392.1 [ Tax Return Duties—On Request ] § 42.7 Tax Return Duties—On Request.
6 Pub. L. No. 109-8, § 315(c), 119 Stat. 23 (2005).
7 See App. HH.