Which is more powerful—tax collection or bankruptcy protection? Most of the time, bankruptcy is.
Here’s What the IRS Can Do to You
- Take aggressive collection action against you and your assets, all without first needing to sue you.
- Levy on (seize) your wages, salary or commission—a single IRS levy continues in effect until the tax debt is fully paid.
- Seize money in any of your bank accounts or at any other kind of financial institution.
- Seize your home, car, or other property; sell it, applying the proceeds to the taxes owed (but only after first paying the costs of the sale).
- Send a levy to anyone who owes you money requiring them to pay the IRS instead of you, including anyone who’s ever issued a 1099 to you.
- Record a Notice of Federal Tax lien against your home and other real estate, as well as against your vehicle and other personal possessions, which applies to your current and also future property (and is usually noted on your credit report).
- Send you—or someone who may have information about you—a Summons, compelling you or the other person to meet with the IRS to provide information, documents, or testimony, either to determine the amount of your tax debt or to help the IRS collect on a tax previously determined.
Most state tax collection agencies have similar powers, and indeed sometimes tend to be even more aggressive than the IRS.
Bankruptcy Stops Almost All IRS and State Collections
In most respects the IRS is just like any other creditor when it comes to what it can’t do during the time you are in a bankruptcy case. The same “automatic stay” that goes into effect to stop almost all collection actions against you and your property as to other creditors also applies to the IRS and the state tax agencies. So immediately upon the filing of your bankruptcy case, the federal and state tax collectors cannot:
- Start or continue to send you tax billing notices, or contact you by phone or otherwise to collect the taxes you owe.
- Start or continue to garnish your paycheck or any of your sources of income, including contacting third parties who owe you money.
- Start or continue levying (seizing) anything—your home, vehicle, other possessions.
- Record a tax lien on anything.
- Send you or anyone else a Summons for the purpose of collecting a tax you owe.
What the IRS and State Tax Collectors CAN Still Do
As we all know, the federal and state tax collectors are NOT just like any other creditors. So they are NOT treated just like your other creditors. There are some special exceptions to the “automatic stay” protection—actions that tax agencies may do in spite of you filing bankruptcy. But these are sensible exceptions related to the special role of these agencies. These exceptions permit them to:
- Demand that you file tax returns, since the bankruptcy system itself needs to know the amount of your tax liability.
- Start or continue a tax audit, again because the amount of tax due is unclear until determined by the audit.
- Send you the initial notice of tax deficiency (but then take no further to collect on that debt).
- “Assess” your tax, which is the technical step taken to fix the amount of your debt (but again, not to take any action to collect on that tax debt).
