Bankruptcy's Automatic Stay and Tax Debts

By , Attorney

The Internal Revenue Service (IRS) will have to stop most collection activities when you file for Chapter 7 or Chapter 13 bankruptcy. But for how long will depend on whether you can discharge (wipe out) the tax debt and whether funds will be available to pay the IRS in the bankruptcy.

Bankruptcy's Automatic Stay

When you file your bankruptcy petition, bankruptcy's automatic stay goes into effect. The stay temporarily stops most collection actions, including collection efforts for taxes owed before the bankruptcy filing.

To obtain full protection of the automatic stay, you must list the IRS as a creditor so the court will notify the IRS of your bankruptcy filing. However, you'll want to notify the IRS yourself if you're filing shortly before the IRS is scheduled to sell your property in a tax sale or if some other action pending. Be prepared to provide your bankruptcy case number and date as proof of the filing.

You can learn more about how this works in bankruptcy's automatic stay.

How Long Will the Bankruptcy 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 You Can Discharge 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 the debt collection.

Find out whether tax debts are dischargeable in eliminating tax debts in bankruptcy.

Taxes You Can't Discharge in Bankruptcy

If the tax is not dischargeable, the IRS can continue collection efforts against you and your exempt property as soon as you receive your discharge. However, sometimes the IRS will be entitled to receive money in your bankruptcy case if the trustee can sell some of your property. In that situation, the IRS might abate or temporarily stop collection efforts until it receives a bankruptcy trustee's distribution.

The Automatic Stay Doesn't Stop Everything in Bankruptcy

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).

Tax-Related Actions The Automatic Stay Doesn't Stop

Particular tax-related actions aren't stopped by a bankruptcy filing, including:

  • a tax audit
  • tax return demands
  • 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.

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 a lawsuit in the bankruptcy court to determine your tax liability called an adversary proceeding. Bankruptcy courts have the authority to assess tax debts.

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

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