The “Automatic Stay” Stops the IRS

Law Office of Robert L. Firth Oct. 31, 2016

The IRS is just another creditor when it comes to stopping its collection action by filing bankruptcy. There ARE some sensible exceptions.

The “Automatic Stay”

When you file a bankruptcy case, doing so triggers one of the most powerful tools of bankruptcy—the “automatic stay.” That’s the strongly protective law that:

  • automatically goes into effect the instant your bankruptcy lawyer files your case at the bankruptcy court

  • stays—which means stops—all collection activity against you and anything you own

What Creditors Can’t Do

The Bankruptcy Code includes a list of what creditors cannot do because of the “automatic stay.” Focusing on those applicable to the IRS/state, creditors can’t:

  • start or continue a lawsuit or administrative proceeding to recover your debt

  • take possession or exercise control over your property

  • create or enforce a lien against your property

  • collect any debt that exists as of the time your bankruptcy is filed

As Applied to the IRS/State

Income taxes are not treated like most debts as to their discharge (legal write-off) in bankruptcy. Taxes are not discharged unless they meet a series of conditions. But the IRS and state tax agencies ARE in most respects treated the same as other creditors when it comes to the “automatic stay.”

The Bankruptcy Code says that the “automatic stay” “operates as a stay, applicable to all entities.” (Section 362(a) of the U.S. Bankruptcy Code.) So are the IRS and state tax agencies “entities”? The Code defines an “entity” to include a “governmental unit.” (See Section 101(15).) So the IRS and all tax-collecting “governmental units” are indeed governed by the “automatic stay.”

If the IRS/State Tries to Collect Anyway

Just like any other creditors, the IRS and state tax agencies act illegally if they violate the “automatic stay” by continuing to collect on a debt or taking any other of the forbidden actions.

If you are “injured by any willful violation of [the automatic] stay… [you] shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages” against the IRS/state. (See Section 362(k).) The truth is that the IRS and various state tax agencies have violated the “automatic stay” on occasion. And they’ve had to literally pay the consequences. They now tend to follow the law and respect the “automatic stay” appropriately.

Special Exceptions to the “Automatic Stay” for “Governmental Units”

The IRS and state tax agencies do have some specialized exceptions—things they can continue doing in spite of your bankruptcy filing. (See Section 362(b)(9).) But these are generally sensible exceptions, applying more to the determination of a tax amount than to its collection.

The tax agencies can:

  • demand that you file your tax returns

  • make an assessment of the tax and tell you how much you owe

  • do an audit to figure out the amount you owe

They cannot take any actions to force you pay the tax.