The IRS has the ability to file lien notices and to garnish paychecks, levy bank accounts and a myriad of other nasty things to collect a debt. It can do this all without a court order. Once the debt is “assessed” the collection arm of the IRS is able to begin the collection process.
There are a number of ways to stop the IRS from collecting without resorting to bankruptcy. Negotiation of a payment plan, filing an offer in compromise, appealing a final notice of intent to levy are all examples. Sometimes people aren't great candidates for an offer in compromise, or can't come to a reasonable agreement with the IRS on a payment plan or have missed an appeal deadline. In these circumstances and many others, the IRS will continue to collect.
Bankruptcy will stop IRS levy and IRS seizure immediately. Yes, the instant the bankruptcy is filed. The filing of a bankruptcy case creates what is called a “stay” and unless that stay is changed or modified by a bankruptcy judge, it continues the entire time the bankruptcy case is open. Read Section 362 of the Bankruptcy Code.
This stay applies even if the IRS has already issued a wage garnishment, a bank levy or has seized property. Those types of collection actions have to stop and be released immediately upon the filing of the bankruptcy case.
My favorite part of this is that there is no need to negotiate with the IRS in order to stop the collection activity. The stay is imposed by operation of bankruptcy law and trumps the administrative power the IRS has.
Now…just because the bankruptcy filing will stop the collection activity doesn't mean it should be filed. Filing for bankruptcy is the result of a detailed analysis of all the facts, pros and cons by an experienced attorney and a lengthy discussion(s) between you and that attorney.
If after that process, a bankruptcy makes long term sense, filing it will stop the IRS collection machine.