Bankruptcy is a serious decision with consequences well beyond your tax debt. This guide does not tell you whether to file, or whether your taxes can be discharged; those are separate questions that turn on rules outside the scope of this site. It covers one narrow issue: what a bankruptcy filing does to an IRS wage levy that is already taking your pay.
The automatic stay
When a bankruptcy petition is filed, 11 U.S.C. 362(a) creates a stay “applicable to all entities.” Among the acts it stays are “any act to obtain possession of property of the estate” under 362(a)(3) and “any act to collect, assess, or recover a claim against the debtor” under 362(a)(6). The IRS is an entity. A wage levy is an act to collect a claim.
What the IRS must do
IRM 5.11.2.3.1 says that Section 362(a) of the Bankruptcy Code prohibits levy on the property of a taxpayer in bankruptcy, and that generally, levying on property when the taxpayer is in bankruptcy violates the automatic stay and the levy must be released. IRS employees must contact the IRS Insolvency function immediately if a levy is inadvertently placed on property of a taxpayer in bankruptcy, and the IRS must initiate corrective action within two workdays of learning of an actual or potential stay violation.
Two workdays. That is a fast clock by IRS standards, and it starts when the IRS learns of the problem. Make sure it learns quickly.
Make sure the IRS knows
Your bankruptcy attorney will list the IRS as a creditor, and the court sends notices. Do not rely on that alone to stop the next payday. Practical steps:
- Get your case number and the filing date.
- Call the IRS number on your levy or your revenue officer and tell them you filed. Ask that the wage levy be released and that the Insolvency unit be notified.
- Give your employer’s payroll department a copy of the bankruptcy notice. The employer still needs an IRS release to stop paying the IRS under the levy, but payroll should know what is coming.
- Follow up within a couple of days to confirm the Form 668-D went out.
What the stay does not stop
11 U.S.C. 362(b)(9) lists IRS acts that are not stayed, including an audit to determine tax liability, issuing a notice of tax deficiency, a demand for tax returns, and certain assessments. So the IRS can still examine and assess during the case. What it cannot do, while the stay is in effect, is collect by levy.
The collection statute pauses
IRC 6503(h) suspends the collection statute for the period the IRS is prohibited from collecting because of the bankruptcy case, plus six months. If your plan was to let the 10-year clock run out, bankruptcy extends it. See wage levies and the collection statute.
If the IRS keeps levying after you file
A levy that continues after the petition is filed violates the stay. Money collected in violation of the stay is something your bankruptcy attorney will want to address in the bankruptcy court. IRC 7433(e) provides that if an IRS employee willfully violates the automatic stay in connection with collection of federal tax, the taxpayer may petition the bankruptcy court to recover damages against the United States.
Willful is the operative word. Most continued levies after a filing are the result of the IRS not knowing yet. That is why the notification steps above matter.
After the case
The stay does not last forever. When it ends, what the IRS can collect depends on what happened in the bankruptcy: which taxes were discharged, which were not, and any plan terms. If tax debt survives, the IRS can resume collection, subject to the normal pre-levy notice rules for any new levy. Have a plan for whatever survives: an installment agreement, CNC status or full payment.
Bankruptcy is not the only stop
People sometimes file bankruptcy primarily to stop a wage levy, when the Code’s own release grounds would have done it with far less collateral damage. A levy that is causing hardship must be released under IRC 6343(a)(1)(D) once the IRS determines the hardship. An installment agreement requires release under IRC 6343(a)(1)(C). Before you file to stop a levy, make sure you have looked at the release options and talked to a bankruptcy lawyer about the whole picture.
Bankruptcy can be the right tool when there are other debts, other creditors and a real need for a fresh start. It is a heavy tool for one levy.
An example
Andre’s wages have been levied for four months. He has substantial credit card and medical debt as well, and after meeting with a bankruptcy attorney, he files a petition on a Monday. His next payday is Friday.
That afternoon he calls the IRS number on his levy, gives his case number and filing date, and asks that the levy be released and Insolvency notified. He hands payroll a copy of the court’s notice. On Wednesday, he calls again to confirm a Form 668-D was sent. Friday’s paycheck arrives without a levy deduction.
Had he waited for the court’s mailing to work its way to the right IRS office, Friday’s check might have gone out under the levy. The stay would still have applied, and the money would have been an issue for his attorney to pursue, but the fastest fix is the one that keeps the money from leaving.
The IRS can still audit Andre during the case under 11 U.S.C. 362(b)(9). It cannot levy while the stay is in effect.
Questions to ask your bankruptcy attorney about the levy
- Which of my tax years, if any, may be affected by the case, and which will survive it?
- Who will notify the IRS, and how quickly, so the levy is released before my next payday?
- How does the case affect the collection statute on each tax year, given IRC 6503(h)?
- What happens to any wages the IRS received after the filing date?
My firm’s main site has a separate discussion of Chapter 13 and tax debt if you want background before that meeting.
A word on timing
The stay protects paychecks payable after the petition. Wages already sent to the IRS before you filed are a different issue, and generally not covered by the stay itself. If you are considering bankruptcy and a levy is running, the timing conversation with your bankruptcy attorney is worth having sooner rather than later.
The automatic stay stops the levy. It does not decide what happens to the tax. Know both answers before you file.