Stopping an IRS Garnishment or Levy With a Bankruptcy Filing

It’s possible to immediately stop an IRS bank levy or wage garnishment with a bankruptcy filing.  In fact, the IRS would be forced by the Bankruptcy Court to withdraw any existing enforcement action, and the IRS would be required to wait for the Bankruptcy Court to rule on the case.

The key to stopping a wage garnishment or IRS levy is the use of the “automatic stay” of the Bankruptcy Code.  The automatic stay immediately stops any enforcement action on the part of a creditor.  In other words, this stay can immediately stop a garnishment or a sheriff’s sale or a bank levy.   The term “automatic” means that the Debtor is not required to

Some observers are surprised that the IRS would have to take a back seat to a Bankruptcy Court, but the Bankruptcy Code treats the IRS like other creditors–in other words, they must wait for bankruptcy trustees and judges to make their decisions.

An IRS Wage Garnishment Case Study

Several years ago, a local CPA friend emailed me to say that one of his friends (I will refer to her as Debbie, but that is not her real name) had been served with an IRS wage garnishment.  Debbie feared that she was going to lost her job as a result of the IRS problem.  She met with me on a Tuesday evening for the first time, and I got her to sign the necessary IRS power of attorney so that I could speak with the IRS.  I discovered that her IRS tax debts were for balances owed for 2007 through 2010 in the amount of $35,000 (it was then 2015).

There are 3 requirements under the law to see if income tax debts can be discharged (“wiped out) in a bankruptcy case:

  1. The IRS tax debts must be for taxes incurred more than 3 full years prior to filing the bankruptcy case;
  2. The taxpayer must have actually filed his or her tax returns substantially on time.  In other words, in many cases, the iRS will file a “substitute for return”, which for Bankruptcy Court purposes does not constitute an actual return.  Please note that in States other than Pennsylvania, certain Bankruptcy Courts have ruled that if a taxpayer is even a day late in filing his or her return, then the tax debts can never be dischargeable.  Fortunately, in Pennsylvania, the Courts are not so draconian.  Nevertheless, if the IRS record shows that it has filed a SFR return, then the tax debts are generally not going to be discharged, and
  3. The IRS must have “assessed” the taxes owed at least 240 days prior to filing the bankruptcy case.  A tax “assessment” means that the IRS has properly reviewed the tax return in question, and has agreed with the return, and then placed the taxable amount on its books.

So, back to Debbie’s case.  After meeting with her on Tuesday evening, I was able to contact the IRS early on Wednesday morning, and got them to fax me her IRS account transcripts, which clearly showed that the taxes owed met all 3 requirements (they were more than 3 years old, she had actually filed her returns on time, and the taxes were assessed several years prior).

After meeting with Debbie on Thursday morning to sign her bankruptcy paperwork, I was able to file her case, and then contact the IRS to stop her wage garnishment.  By Noon on Thursday, the IRS had faxed a Notice to Terminate Garnishment to Debbie’s payroll department.

The Rest of Debbie’s Case

Debbie filed a Chapter 7 bankruptcy case, and it proceeded fairly normally.  In addition to eliminating $35,000 of IRS debt, she was also able to wipe out a car repossession and about $10,000 in credit card and medical debts.   Her case took approximately 4 months from start to finish, and she was able to begin to rebuild her credit rating after receiving her bankruptcy discharge order.

 

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