How Does the Automatic Stay in a Bankruptcy Case Affect Taxes?

 Posted on September 21, 2021 in Bankruptcy

A person who is struggling to pay their debts can gain many benefits by filing for bankruptcy, and the automatic stay is one of the most helpful of these benefits. This stay will go into effect as soon as a petition is filed in bankruptcy court, and it will prevent creditors from taking any actions to collect debts owed by the debtor. In addition to private creditors, such as mortgage lenders or credit card companies, the automatic stay applies to the IRS. Taxpayers who owe tax debts will want to understand what types of actions the IRS can and cannot take during the bankruptcy process.

The Automatic Stay and Tax Levies

There are a variety of methods that may be used to collect taxes. IRS tax levies may involve the garnishment of a person’s wages, the seizure of funds in a person’s bank accounts, or the offsetting of tax refunds that are due to a debtor. When a person files for bankruptcy, the automatic stay will prohibit the IRS from the beginning or proceeding with any of these tax levies. 

Specifically, the IRS is prohibited from:

• Beginning new proceedings or continuing existing proceedings to recover taxes that are owed. This includes administrative proceedings conducted by the IRS and judicial proceedings in Tax Court to address tax liabilities in a tax period that ended before the date the taxpayer filed for bankruptcy.

• Enforcing a judgment against a taxpayer.

• Taking actions to take possession or control of a taxpayer’s property.

• Creating or enforcing a tax lien.

• Contacting the taxpayer and verbally requesting that they pay taxes owed.

• Sending the taxpayer a notice of the balance due.

• Filing a new Notice of Federal Tax Lien.

• Offsetting certain types of tax refunds. A tax refund that was due to the taxpayer prior to when they filed for bankruptcy may still be offset based on tax debts that existed before the petition was filed. The IRS may also freeze a refund while a bankruptcy case is ongoing, and the outcome of the bankruptcy case will determine whether the refund should be offset or paid to the taxpayer.

While the automatic stay will prevent the IRS from collecting taxes, it may still contact a taxpayer to address certain issues or take other actions. The IRS can conduct a tax audit to determine the amount owed by the taxpayer, and it can ask a taxpayer to submit a tax return. It may also begin or continue with a criminal tax evasion case against a taxpayer.

Contact Our Kerrville Bankruptcy Tax Debt Attorney

Understanding your rights and options as a taxpayer during a bankruptcy case can be complicated. To ensure that you are taking the correct steps to resolve these issues correctly and receive relief from debts, you can work with an experienced Boerne, TX bankruptcy and taxes lawyer. Contact our office today at 210-342-3400 to set up a free consultation and get the legal help you need.

Sources:

https://www.irs.gov/irm/part5/irm_05-017-008#idm140659811659104

https://www.irs.gov/businesses/small-businesses-self-employed/declaring-bankruptcy

https://www.irs.gov/irm/part5/irm_05-009-004r