The Tax Exceptions to the Automatic Stay

 Posted on October 24, 2016 in Income Taxes

In spite of you filing bankruptcy, the taxing authorities can still take certain very specific actions as exceptions to the automatic stay.

The last few blog posts have been about bankruptcy’s automatic stay protection from the collection actions of creditors. The last couple of them have been about exceptions to that protection—when certain creditors can take certain actions.

Today we focus on a set of very limited exceptions to the automatic stay which applies specifically to taxes.

What Taxing Authorities CAN’T Do

The automatic stay protections are designed to immediately stop virtually all debt collection activity against you and your assets. The point is to have all creditors stop going after you so that everybody can shift to applying the bankruptcy laws to your financial situation.

Those bankruptcy laws may result in the discharge of a particular tax debt if that tax meets certain conditions. (A “discharge” is a legal, permanent erasing of a debt in bankruptcy.) And if those conditions aren’t met, the tax is not discharged in bankruptcy.

But regardless whether or not a tax is going to be discharged, the automatic stay prevents the taxing authorities from taking the usual actions to collect that tax. The automatic stay tax exceptions do NOT allow them to take any action to get your money or assets. The IRS and state taxing authorities can’t start or continue garnishing (“levying on”) your paychecks. They can’t levy on (take away) anything else you own. They can’t call you to pay the tax. They can’t mail you notices that you must pay the tax (except as stated below).

The Tax Exceptions to the Automatic Stay

What the taxing authorities CAN DO is take certain administrative actions related to DETERMINING the amount of tax you owe, NOT to COLLECTING the tax. So, in spite of you filing bankruptcy, they can do the following:

• Start or finish a tax audit “to determine tax liability.” (See Section 362(b)(9)(A) of the Bankruptcy Code.)
• Send you a notice about the amount of tax that you owe—a “notice of tax deficiency.” (Section 362(b)(9)(B).)
• Demand that you file your tax returns, a legal requirement understandably not affected by your bankruptcy filing, and which indeed is often necessary to be able to administer your bankruptcy case. (Section 362(b)(9)(C).)
• Make an “assessment” of your taxes and issue a “notice and demand for payment.” (Section 362(b)(9)(D).)
• Under certain limited circumstances the assessment a tax lien can attach to your personal property and real estate. (Section 362(b)(9)(D).)

Again, other than these limited actions, it’s a violation of the automatic stay and so is illegal for the taxing authorities to take any other collection action against you once you file bankruptcy.