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Bankruptcy attorneys often advise clients that filing their bankruptcy petition will put an end to collections efforts by creditors. However, tax attorneys know that the IRS does not give up so easily. A recent bankruptcy court case shows that an automatic stay may not be enough to shield your clients from collection of a tax lien.
When a U.S. resident files a bankruptcy petition, it triggers an automatic stay under the U.S. Bankruptcy Code. It prohibits creditors from collecting on the taxpayer’s debt while the bankruptcy is pending. This stay is automatic, but it is not absolute. A creditor can request that the stay be lifted if, among other reasons, the creditor’s interest in the petitioner’s property is not adequately protected. When a request for relief of stay is filed, the bankruptcy court can exercise discretion to lift the stay to the extent it deems appropriate.
That is what happened in Pansier v United States, a bankruptcy case filed in the Eastern District of Wisconsin. Gary and Joan Pansier, ages 70 and 82 respectively, were pursuing bankruptcy relief when the Internal Revenue Service (IRS) filed a request for relief from stay. It asked the bankruptcy court to allow it to collect Gary Pansier’s pension to pay off the parties’ delinquent tax debt.
According to the IRS, the Pansiers owed more than $250,000 in unpaid income taxes from 1995 through 2006 and 2014. The IRS had filed federal tax liens to recover the unpaid amounts. This allowed the IRS to seize a portion of Gary Pansier’s pension through a tax levy. When the Pansiers filed for bankruptcy the automatic stay put a temporary stop to the IRS’s tax collection efforts. However, the IRS said those efforts needed to continue. It argued that the automatic stay allowed the Pansiers to use $2,309.33 that should have been going to their tax debt for personal expenses instead. It said that the tax debts were inadequately protected since the Pansiers were too old, and the full tax amount would never be collected before they died and their pension benefits expired with them.
But the Pansiers said the IRS couldn’t collect on all of their tax debts anyway. Anything prior to 1998 was beyond the Internal Revenue Code’s statute of limitations and therefore uncollectible.
The bankruptcy trial court partially agreed with both sides. It lifted the stay and allowed the IRS to collect on its tax liens from 1998 forward, but said the enforceability of the earlier tax debt was “for another day in another forum.”
The U.S. Federal District Court agreed. It said that it is not the bankruptcy court’s job to weigh the validity of a creditor’s claim. All the IRS or any creditor must do is establish a “colorable claim” to the bankruptcy petitioner’s property. The district court noted that Gary Pansier’s new pension income was not part of the bankruptcy estate and could not be distributed to other creditors. Even if the U.S. Tax Court eventually found the 1995 through 1998 claims to have expired, it said the IRS could still collect on over $136,000 in unpaid taxes which were secured by federal tax liens. Therefore, the District Court said the automatic stay was appropriately lifted and the IRS could continue to levy the Pansiers’ pension income to satisfy the tax liens.
This case demonstrates what many tax attorneys already know: the IRS does not give up on collecting its unpaid taxes easily. Where, as here, tax liens make up a significant portion of a debtors’ liabilities, it may not be wise to rely on an automatic stay to free up discretionary income or pay for personal expenses. Taxpayers must be prepared for the IRS to come into their bankruptcy case and seek to lift the automatic stay. In these cases, it may be wise to simultaneously enter into negotiations with the IRS for installment payments that coordinate with a debtor’s household needs and bankruptcy payment plan.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding IRS tax liens and collections practices and how they may affect your client’s bankruptcy case, contact Joe Viola to schedule a consultation.