Federal law, in 11 USC § 362(a) of the Bankruptcy Code, provides that an automatic stay arises by operation of law immediately upon the filing of a bankruptcy petition, whether voluntary or involuntary. This stay prohibits most collection activity. The Internal Revenue Code (IRC or the “tax Code”)) creates a cause of action for taxpayers who suffer damages when the IRS willfully violates the automatic stay or provisions of a bankruptcy debtor’s discharge.
Additionally, the Bankruptcy Code at 11 USC § 362(k) allows an individual who is injured by a willful stay violation to recover damages. A seasoned bankruptcy attorney may explain all the applicable procedures and requirements to help any taxpayer and bankruptcy debtor determine whether they want to file an adversary case and pursue damages against the IRS.
The filing of a claim with the Internal Revenue Service is a prerequisite for seeking damages and attorney fees under the Tax Code for violations of the automatic stay. A claim must be submitted in writing to the Local Insolvency Unit for the judicial district in which the taxpayer filed the underlying bankruptcy case where the alleged violation of the stay occurred.
Some actions the IRS must avoid after bankruptcy has been filed because of the automatic stay are the following:
- A verbal request for payment of pre-petition taxes;
- Sending by mail balance due notices on pre-petition taxes other than a first or new assessment notice allowable under the Bankruptcy Code;
- Issuing Form 668-A, Notice of Levy, or Form 668-W, Notice of Levy on Wages, Salary, and Other Income, for pre-petition tax periods;
- All seizure and levy action directed at the property of the bankruptcy estate;
- Issuing or continuing to enforce a collection summons or filing any collection lawsuit;
- Making certain refund offsets, other than offsets allowed in BAPCPA cases; and
- Filing a new post-petition Notice of Federal Tax Lien.
Also, it is the policy of the IRS not to continue most collection due process proceedings during bankruptcy. Nonetheless, the automatic stay does not prohibit the IRS from engaging in the following actions:
- Commencing or continuing a criminal action or proceeding against the debtor;
- Commencing or continuing an action or proceeding by a governmental unit to enforce police or regulatory power;
- An audit to determine tax liability;
- The issuance of a notice of deficiency;
- Demand for a tax return;
- Refiling a Notice of Federal Tax Lien.
- Intercepting certain tax refunds to set them off against past-due support obligations; and,
- For cases filed on or after October 17, 2005, the effective date of BAPCPA, setting off pre-petition income tax refunds against pre-petition income tax liabilities.
Even if setoff is not permitted under BAPCPA, temporary retention of refunds, rather than actual offsets, is permitted.
The cost of filing a Chapter 7 bankruptcy case is often less than $2,000, which is an efficient, effective, and economical way to solve burdensome financial problems and gain a fresh start. Theron Morrison and the Morrison Law Group may help any Utah resident better understand their bankruptcy options. Call 801.456.9933 today to schedule a FREE consultation. We have locations in Ogden, Logan, Sandy, and St. George to serve the residents of the counties of Weber, Cache, Salt Lake, Utah, Morgan, Davis, Washington, and surrounding areas.