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How Does an Automatic Stay Affect IRS Debt?

The automatic stay in a bankruptcy case is a court order that stops creditors from collecting debt. This order also applies to revenue agents from the Internal Revenue Service (IRS). The automatic stay prevents the IRS agents from:

  • Garnishing your wages
  • Filing a lawsuit against you
  • Demanding payment
  • Seizing your assets
  • Issuing tax liens
  • Taking other collection actions against you

Usually, the IRS holds any tax refund until after the bankruptcy discharge occurs. While the bankruptcy is in effect, no interest on unpaid taxes accrues. However, this does not stop the IRS from reassessing a remaining balance after the bankruptcy case closes.

Under federal bankruptcy law, once IRS employees find out that a debtor has filed bankruptcy, they must end all demands and enforcement actions against the debtor. If the IRS officials are involved in a seizure, before proceeding they must work with the Field Insolvency office and Associate Area Counsel, which are divisions within the IRS that handle legal services, collection and bankruptcy work. If a revenue agent fails to work with these other areas of the IRS, a debtor could sue the IRS for damages and attorney's fees. However, the IRS can also file a motion of relief from stay, which is a request that the bankruptcy court lift the stay and allow them to proceed with their collection actions.

Filing for bankruptcy often requires you to file any past tax returns, and when filing those returns, penalties and interest apply if you carry a balance owed to the IRS.

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