Bankruptcy's Automatic Stay and Tax Debts

When you file for bankruptcy, the IRS must stop its collection of back taxes. Find out if the stay is temporary or permanent.

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The Internal Revenue Service (IRS) will have to stop most collection activities when you file for Chapter 7 or Chapter 13 bankruptcy. Whether the reprieve is temporary or permanent depends on whether the tax debt can be discharged or paid in the bankruptcy.

(To learn how Chapter 7 and Chapter 13 bankruptcy work, visit our Bankruptcy center.)

Bankruptcy's Automatic Stay

When you file your bankruptcy petition, bankruptcy's automatic stay goes into effect. The stay temporarily stops most types of collection actions, including all tax collection efforts for pre-bankruptcy taxes. (You can learn more about how this works in our Bankruptcy's Automatic Stay topic.)

To obtain full protection of the automatic stay, the IRS must be notified of the bankruptcy filing. The court will notify the IRS of your bankruptcy filing if you list the IRS as a creditor in your bankruptcy schedules. However, if there is a tax sale scheduled or other action pending, you should also provide the IRS with proof of your bankruptcy filing yourself.

How Long Will the Stay Last?

Whether your bankruptcy will stop the IRS from collecting tax debts temporarily or permanently depends on whether those debts will be discharged, or not, in your bankruptcy.

Taxes That Can Be Discharged in Bankruptcy

If the tax is dischargeable in the bankruptcy proceeding, and you receive a discharge, the IRS will be permanently enjoined (stopped) from pursuing collection of the debt.

(To determine whether tax debts are dischargeable, see Eliminating Tax Debts in Bankruptcy)

Taxes That Are Not Discharged in Bankruptcy

If the tax is not dischargeable, the IRS is allowed to continue collection efforts against you and your exempt property as soon as your receive your discharge. However, if there is property that the trustee is administering in your bankruptcy case and it is likely that creditors, including the IRS, will receive a distribution from the bankruptcy, the IRS may abate, or temporarily stop, collection efforts until it receives a distribution from the bankruptcy trustee.

Actions the IRS Can Take in the Bankruptcy Case

In your bankruptcy case, the Internal Revenue Service has the same rights as other creditors. The IRS can:

  • file a proof of claim
  • participate in court hearings
  • object to your Chapter 13 plan
  • move to dismiss your case
  • object to your discharge, and
  • conduct a 2004 examination (similar to a deposition).

What if the IRS Does Not File a Proof of Claim?

If the IRS does not file a proof of claim in your case, and the IRS does not hold a tax lien, the trustee will not disburse any of the funds it collects in your bankruptcy to the IRS. You can, however, file a proof of claim on behalf of the Internal Revenue Service if the IRS does not file a proof of claim within the time allowed. You have 30 days after the government claims bar date to do this. The government claims bar date is generally 180 days after the date you file your bankruptcy petition.

Disputing Tax Debt in the Bankruptcy Court

You can dispute a tax debt in your bankruptcy proceeding by filing an objection to the IRS's proof of claim or by filing a lawsuit in the bankruptcy court, called an adversary proceeding, to determine your tax liability. Bankruptcy courts have the authority to determine tax debts.

Tax-Related Actions That Are Not Stayed

Certain tax related actions are not stopped by the filing of a bankruptcy petition. These include the following:

  • a tax audit
  • a demand for tax returns
  • the issuance of a notice of tax deficiency
  • the making of a tax assessment, including a notice and demand for the taxes assessed
  • the prosecution of tax crimes, and
  • the interception of tax refunds to satisfy child support obligations.

Learn more about how tax debts are treated in Chapter 7 and Chapter 13 bankruptcy in our Tax Debts in Bankruptcy topic area.

by: , Attorney

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