8.6 Automatic Bankruptcy Stay

The automatic bankruptcy stay applies to IRS collection actions. A Chapter 7 bankruptcy will even stay collection of nondischargeable taxes for a few months. The IRS can be sued for violating the 11 U.S.C. § 362(a) stay. Generally, collection activity in violation of the stay will be void.1  A § 362(a) bankruptcy stay will also stay the commencement or continuation of a Tax Court proceeding.2

During the pendency of a bankruptcy proceeding, the IRS may take the following actions without violating the stay:

• Set-off a pre-petition tax refund against pre-petition income tax debt
• Intercept an income tax refund for payment of past due child support
• Assess the tax
• Issue a Notice and Demand for Payment of an Assessment
• Issue a Notice of Deficiency3
• Conduct an audit to determine a tax liability

• 1Smith v. Comm’r, 124 T.C. 36 (2005).
• 211 U.S.C. § 362(a)(8); Prevo v. Comm’r, 123 T.C. 326 (2004).
• 311 U.S.C. § 362(b)(9); In re Luongo, 259 F.3d 323 (5th Cir. 2001) (IRS right to offset); I.R.M. 5.9.2.6.