If you are either currently being hounded by the tax authorities or are worried that you will be soon, you will be glad to hear that filing bankruptcy that will immediately stop them. This can be very important because the IRS and ODR have legal collection tools that are potentially much more aggressive than those of conventional creditors.
Knowing this, people often act in ways that hurt themselves in the long run when it comes to taxes—like avoiding filing tax returns when they are due—because they justifiably fear what will happen when they can't pay the taxes they owe. The first step in addressing this is understanding that the "automatic stay" protects you against these creditors.
The "Automatic Stay"
Your filing of any kind of bankruptcy case immediately triggers the "automatic stay," one of the most powerful tools of bankruptcy. It is goes into effect 1) automatically simultaneously with the filing of your bankruptcy case at court 2) to stay—or stop—all collection activity against you and against any of your assets.
The Bankruptcy Code provides a list of actions forbidden by creditors by the automatic stay, including (as applicable to the tax authorities):
- starting or continuing an administrative proceeding to a tax debt,
- seizing your property or possessions to pay a debt,
- recording a tax lien, or enforcing such a lien against any of your possessions or property, or
- collecting any tax debt that legally existed at the time of your bankruptcy filing.
Definitely Applies to the Tax Authorities
Income taxes are certainly not treated like your conventional debts when it comes to the discharge (legal write-off) of your debts. You have to meet a series of conditions to discharge a tax debt—mostly having to do with how old it is. But when it comes to the automatic stay, the IRS and the ODR are for most purposes treated just about like any other creditor.
The Bankruptcy Code says that the automatic stay “operates as a stay, applicable to all entities.” (11 U.S.C. Section 362 (a).) So the simple question is whether the IRS and ODR are both an"entity" that the automatic stay applies to. The Code explicitly defines "entity" to include "governmental unit." The IRS and ODR are clearly "governmental units" and so ARE both subject to the automatic stay.
Consequences If the IRS/ODR Don’t Obey the Automatic Stay
The automatic stay has teeth to it. If any creditor, including the IRS and ODR disregards the law and 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 or the ODR, or any other tax collecting governmental agency. (Section 362(k).) In practice, the tax creditors usually do follow the law and respect the automatic stay.
Minor Exceptions to the Automatic Stay
There are some LIMITED exceptions to the automatic stay that apply to governmental units—actions the IRS and ODR can take regardless of your bankruptcy filing. (Section 362(b)(9).) These are sensible exceptions that relate to their legal function of accurately determining the amount of your tax debt, not to the collecting of that debt. So, tax agencies can:
- demand that you file your tax returns,
- assess your tax and tell you how much you owe, and
- audit you to figure out the amount you really owe.
Again, they cannot take any action against you or your possessions to collect any tax debt.
The Automatic Stay Isn't the Full Story
To be sure, the automatic stay provides protection only during the length of your bankruptcy case—which is usually about three or four months with a Chapter 7 bankruptcy case, or three to five years with a complete Chapter 13 case.
In the former case, if you have any taxes that survive the bankruptcy, you have to make arrangements to pay them through monthly installments or to settle them in some other way. Under Chapter 13, your repayment plan has to provide for paying those taxes that are not being discharged. But either way, the stay provides immediate protection, often when you most need it, so that you can use the benefits of bankruptcy to get the overall relief you need.