When Bankruptcy Can Stop IRS Collection Actions

Overview

Bankruptcy can be a powerful tool to stop aggressive IRS collection actions, but it’s not a universal remedy. When you file a bankruptcy petition, federal law usually creates an “automatic stay” that pauses creditor collection activity immediately. That means the IRS must stop garnishing wages, levying bank accounts, and pursuing many other collection actions while your bankruptcy case moves forward (11 U.S.C. § 362; see U.S. Courts: Bankruptcy Basics).

This article explains when the automatic stay applies to IRS collections, which tax debts can be discharged, how liens and refunds are treated, practical steps to take if you owe the IRS, and common mistakes I see in practice. The guidance below reflects current federal rules and IRS guidance as of 2025 (IRS: Bankruptcy; U.S. Courts: Bankruptcy basics).

How the automatic stay affects IRS collection actions

• Immediate effect: The automatic stay takes effect the moment you file a bankruptcy petition in federal bankruptcy court. The IRS must cease most collection actions, including wage garnishments, bank levies, and collection phone calls, until the stay is lifted or the case is resolved (U.S. Courts).
• Limited exceptions: The stay does not automatically remove federal tax liens that were properly recorded before filing. The IRS can still hold a tax lien against property even after discharge unless the lien is avoided or paid. In addition, certain collection actions may proceed if the IRS obtains relief from the bankruptcy court (a motion for relief from stay).
• Relief from stay: If the IRS believes the stay should not apply (for example, to enforce a properly perfected tax lien), it can file a motion asking the court to lift the stay. Courts evaluate those motions on the facts of the case.

Authoritative sources: IRS — Bankruptcy (https://www.irs.gov/businesses/small-businesses-self-employed/bankruptcy); U.S. Courts — Bankruptcy basics (https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics).

Which tax debts can be discharged in bankruptcy?

Not all tax debts are dischargeable. For federal income taxes to be dischargeable in Chapter 7 (and often treated similarly in Chapter 13), the debt must meet several statutory and case-law tests. In practice, courts and the IRS look for three timing rules plus a lack of fraud:

1. The tax return’s due date (including extensions) must be at least 3 years before the bankruptcy filing date.
2. The tax return must have been filed at least 2 years before the bankruptcy filing date.
3. The tax assessment must have been made at least 240 days before the bankruptcy filing (or the 240‑day period must be extended by a previous bankruptcy or offer-in-compromise stay).
4. The tax must not be the product of fraud or willful evasion, and it must be for an income tax (trust fund taxes, payroll withholding taxes, and recent assessments are generally non-dischargeable).

These rules are explained in both IRS guidance and bankruptcy practice materials; see IRS: Bankruptcy and U.S. Courts: Bankruptcy basics. If you don’t meet the timing tests or if the IRS proves fraud, the liability survives the bankruptcy discharge.

Differences between Chapter 7 and Chapter 13 for IRS collections

• Chapter 7 (liquidation): Chapter 7 invokes the automatic stay and can discharge qualifying tax debts if the timing and non-fraud requirements are met. Chapter 7 does not generally allow you to restructure tax debts over time; it’s a liquidation approach and may require surrender of non-exempt assets to pay creditors.

• Chapter 13 (reorganization): Chapter 13 creates a 3–5 year repayment plan. It stops IRS collection actions while you are in the plan and can allow you to pay priority taxes through the plan. Some tax obligations that are non-dischargeable in Chapter 7 may effectively be reduced or managed under Chapter 13 by treating back taxes as part of the plan payment. Completing a Chapter 13 plan can also discharge certain unsecured tax debt remaining after plan payments.

U.S. Courts provides summaries of both chapters and their treatment of taxes (U.S. Courts: Bankruptcy basics).

Liens, refunds, and other practical effects

• Tax liens: Filing bankruptcy does not automatically eliminate properly perfected tax liens. A tax lien survives discharge and continues to encumber the property unless the lien is avoided by the bankruptcy process or paid. If you plan to strip or avoid a lien, consult a bankruptcy attorney about whether lien avoidance is possible in your jurisdiction.

• Tax refunds: If you file bankruptcy before the IRS issues a refund for a tax year included in the bankruptcy estate, the trustee may assert a claim to the refund because refunds can be estate property. Conversely, if you filed and discharged the tax for that year, the refund treatment becomes complex — work closely with counsel.

• Trust‑fund and payroll taxes: Employer withholding taxes and trust‑fund taxes (e.g., payroll taxes) are usually priority, non-dischargeable debts and can result in personal liability for responsible persons. These rarely disappear in bankruptcy.

• Penalties and interest: Penalties that function as part of the tax debt (e.g., failure-to-pay penalties) are typically treated as part of the underlying tax liability. Interest and penalties can continue to accrue unless and until discharge applies.

IRS and CFPB resources: IRS — Bankruptcy; CFPB — Bankruptcy information for consumers (https://www.consumerfinance.gov/consumer-tools/bankruptcy/).

Step-by-step checklist if the IRS is collecting from you

1. Don’t ignore notices. Open and respond to IRS letters promptly.
2. Gather documents: tax returns, IRS notices and assessments, bank statements, pay stubs, and any prior correspondence about offers in compromise, installment agreements, or liens.
3. Consult a bankruptcy attorney who has experience with tax debt — in my practice advising clients for 15+ years I’ve found early consultation preserves options and prevents common filing errors.
4. Consider alternatives (installment agreement, offer in compromise, currently not collectible status) before filing; bankruptcy is a major legal step with long-term credit and financial consequences.
5. If you file, file immediately to trigger the automatic stay; then notify the IRS and send a copy of the petition and schedule listing tax debts.
6. Work with counsel to determine whether Chapter 7 or Chapter 13 better fits your goals, and to address tax liens or potential motions from the IRS.

For a detailed comparison of bankruptcy versus other resolutions for tax debt, see FinHelp’s guide: When to Use Bankruptcy as a Tax Debt Strategy.

Common mistakes I see

• Assuming all taxes are dischargeable. Many taxpayers incorrectly assume a bankruptcy wipeout frees them from payroll taxes, recent assessments, or taxes tied to fraud.
• Waiting too long to file. Missing the timing rules that affect dischargeability (the 2-year, 3-year, and 240-day rules) can be decisive.
• Failing to list IRS debts accurately on bankruptcy schedules. Omissions can lead to denial of discharge or allegations of fraud.
• Not accounting for refunds. Filing too early in the season can let the trustee claim a future refund as estate property.

Frequently asked questions

• Can the IRS still levy my bank account after I file bankruptcy? No — the automatic stay requires the IRS to release levies made after the petition. If the IRS refuses, your attorney can file a motion for sanctions and compel compliance; however, tax liens recorded before filing still attach to property.

• How long does the automatic stay last? The stay generally lasts for the duration of the bankruptcy case unless the court lifts it. In Chapter 13, the stay continues through the repayment plan; in Chapter 7, the stay continues until the case is closed, dismissed, or the court lifts it.

• Will bankruptcy hurt my ability to settle future tax debts? Bankruptcy affects credit and financial records, but in some cases it can improve negotiating power because it changes the IRS’s collection posture. Always coordinate with a tax attorney or enrolled agent.

Alternatives to bankruptcy

Bankruptcy should be considered alongside alternatives: installment agreements, offers in compromise, currently not collectible status, or an administrative appeal of an assessment. Each option has pros and cons. See FinHelp’s discussion of alternatives: Alternatives to Bankruptcy for Resolving Large Tax Debts.

Closing advice and professional disclaimer

In my practice, bankruptcy is often the most effective option when tax debts are old, qualify under the discharge timing rules, and the taxpayer has no realistic pathway to pay. However, because the rules are technical and consequences significant, consult a qualified bankruptcy attorney and tax professional who can analyze your filings, timing, and the nature of the tax debt.

This content is educational and does not constitute legal or tax advice. For case-specific guidance, consult a licensed bankruptcy attorney and a tax professional (CPA, enrolled agent, or tax attorney). Authoritative resources: IRS — Bankruptcy (https://www.irs.gov/businesses/small-businesses-self-employed/bankruptcy); U.S. Courts — Bankruptcy basics (https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics); CFPB — Bankruptcy (https://www.consumerfinance.gov/consumer-tools/bankruptcy/).

Additional FinHelp resources:

• See how bankruptcy affects tax debts, liens, and refunds: How Bankruptcy Affects Tax Debts, Liens, and Refunds.
• Compare bankruptcy to other tax-debt strategies: When to Use Bankruptcy as a Tax Debt Strategy.

If you need help preparing documentation or understanding how the automatic stay will affect your specific IRS collection actions, reach out to a qualified practitioner to discuss next steps.