IRS Contempt of Court in Bankruptcy

There was a time the IRS and State taxing agencies could not be sued for overzealous or unlawful collection pre or post bankruptcy;  this was the doctrine of sovereign immunity. On October 22nd, President Clinton signed the Bankruptcy Reform Act of 1994.   This law contained amendments that unequivocally waived sovereign immunity for governmental units at all levels under the Bankruptcy Code.

When the IRS or a State tax agency continues to collect while the Taxpayer is under an automatic stay or continues to collect after a discharge by the Bankruptcy Court, the Taxpayer may sue for damages including attorney’s fees and costs;  in some cases a tax collector may be jailed for contempt of court.

If the tax debt is not discharged in a chapter seven case, we can sue the tax agency and the individual tax collector and all who signed off on the levy per automatic stay 11 U.S.C Sect 362.  If the Taxpayer has been discharged, we ask for the Court for contempt for violating the “post discharge injunction.”

We first send notices to the Special Procedures Unit who is the internal IRS group who handles bankruptcy issues.  The person and his or her Identification number are located who has been assigned the case.  A letter is sent certified mail explaining these taxes are dischargeable and provide appropriate statutory authority or case law, if necessary.  In addition, we put them on notice that we will take enforcement action in the Bankruptcy Court against the IRS or the tax agency, if they levy, file a lien or do anything in violation of the automatic stay or “post discharge injunction.”  We will ask them to confirm that we are correct and that the taxes or dischargeable; or in the alternative what authority they feel supports the position the taxes are not dischargeable.

If the Special Procedures stonewalls us, we do not fool around.  A Motion For An Order to Show Cause Re: Contempt is immediately filed with the Court.  Depending upon the outcome of the Show Cause hearing, jail may be an option for renegade tax collector.

Regards,

Dana M. Ronald, Tax Crisis Institute

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