Yes. Filing for Bankruptcy will stop the IRS levy. That's an easy one. The bankruptcy code trumps the tax code…every time it is tried.
Why? The filing of the bankruptcy case creates an “automatic stay” This automatic stay applies to ALL creditors, and this includes the IRS. The law literally places a hold on activity and as a result the IRS is required to stop the process of levying or seizing property. It's purpose is to provide some breathing room in order to use the bankruptcy code to start over or gain a “fresh start” as so many are fond of saying.
The IRS is very aware of the automatic stay. When notified of the bankruptcy filing the IRS will, at least in my experience, immediately start the levy release process. If it doesn't it can be sanctioned by the bankruptcy judge.
Here is the important thing to understand.
In most cases, the IRS has discretion about whether it has to release a levy. Section 362(a) of the bankruptcy code demands that the levy or seizure end and quickly. i.e. that discretion is removed, i.e. gone.
And…the IRS is also forbidden from filing any tax lien notices related to the pre-bankruptcy filing tax debt.
Stopping IRS collection activity is only the beginning of what bankruptcy can do in relation to tax debt problems. Chapter 7 Bankruptcy can actually eliminate the tax debt. At a minimum, chapter 13 bankruptcy can stop the IRS from adding new interest and penalty to the debt, discharge penalty and related interest, and in many cases, dramatically reduce or eliminate the tax debt as well.
For many with serious income tax debt, bankruptcy makes the most sense in the end. Not just because it stops the levy.