The Internal Revenue Service’s (IRS) Master File computer system uses coding to identify special situations, commonly referred to as freeze conditions. This term identifies a condition that either requires special handling by the IRS or for which the IRS is awaiting the outcome of a future event before returning to normal processing. There are more than 60 freeze conditions that may apply to a taxpayer’s tax module within the Business Master File (BMF) or the Individual Master File (IMF). This article examines the three most common freeze conditions.
No Return With Satisfying Transaction
This freeze condition indicates that the IRS has suspended enforcement action for securing a return that was not filed by the taxpayer. The reason for suspending enforcement action, commonly called a satisfying transaction, is one of the following IRS determinations:
(1) the taxpayer was not liable;
(2) the taxpayer owes little or no tax;
(3) the IRS was not able to locate or contact the taxpayer;
(4) the return was previously filed using a different account;
(5) the issue was referred to another compliance function for consideration;
(6) IRS resources are not available at this time to pursue the case; or
(7) a return has been secured that is being processed.
If the tax module has a credit balance, this freeze will systemically prevent refunding or transferring the credit to another account until the occurrence of one of the following events:
(1) a return is posted to the tax module;
(2) the tax module is reactivated for enforcement action;
(3) a payment correction is made to the tax module; or
(4) sufficient time has elapsed after the expiration of the refund statute of limitations and the credit is systemically moved to the Excess Collections File.
Advance Payment for Audit Adjustment
This freeze condition indicates that the taxpayer made a payment before a proposed additional assessment was applied to the account. This can be a timing issue between receiving payments from the taxpayer and the posting of assessments by the IRS; however, some taxpayers may do this to stop or minimize the amount of interest to be paid on a proposed assessment and/or may be planning to challenge the proposed assessment in future litigation. This freeze will systemically prevent refunding or transferring the advance payment credit to another account until the proposed assessment is posted or, if necessary, a litigation determination is made to the account.
Taxpayer in Bankruptcy
This freeze condition indicates that the taxpayer has filed a petition for bankruptcy, causing the IRS to suspend enforcement actions, with some exceptions, until the bankruptcy court decides to dismiss the case or issue a discharge. If the court dismisses the case, the account is returned to prebankruptcy status subject to accrued interest and penalties; if the court issues a discharge, the account is updated based on the court order. The Bankruptcy Code, not the Internal Revenue Code, is the prevailing authority when a taxpayer files for bankruptcy. For tax modules with credit balances, this will systemically prevent refunding or transferring the credit to another account until the bankruptcy case is concluded or, if necessary, a correction is made to the tax module that is allowed by the Bankruptcy Code.