Bankruptcy is a powerful tool in solving IRS problems – but can it stop the IRS from auditing you?
A centerpiece of bankruptcy law is the concept of an “automatic stay.” The automatic stay stops creditors from calling and writing to enforce or collect a debt from you. The “stay” on your creditors – including the IRS – starts the minute you file bankruptcy.
The automatic stay is why the IRS will immediately release a levy if you file for bankruptcy protection.
But can bankruptcy stop the IRS from conducting an audit?
Bad news first: Although bankruptcy can be pretty absolute on the IRS, it falls short of being able to slow down an IRS audit. The bankruptcy stay does not apply to IRS audits and will not stop them (Bankruptcy Code section 362(b)(9)).
Here’s the good news: Bankruptcy can, however, eliminate any taxes, interest and penalties you might end up owing after an audit is completed. The timing of the filing of the bankruptcy is important – among other conditions, you have to wait 240 days after the audit is final to be able to bankrupt an audit result.
IRS audits are often painstaking, but there can be light at the end of the tunnel. You may not be able to stop the machine, but bankruptcy can clean up the damage.