Tax Debt and Bankruptcy: When IRS Debt Can Be Discharged
Many people assume tax debt cannot be discharged in bankruptcy. In reality, some income tax debt can be discharged in Chapter 7 bankruptcy — but only if it meets strict age, filing, and assessment requirements. Understanding these rules can make bankruptcy a powerful tool for resolving old tax debt.
The Basic Rule: Some Taxes Are Dischargeable
Federal income taxes can potentially be discharged in Chapter 7 bankruptcy if they meet all of the following: the taxes are more than 3 years old (counting from the original due date, usually April 15); the return was filed more than 2 years before bankruptcy; the tax was assessed more than 240 days before bankruptcy; the return was not fraudulent; and there was no willful tax evasion.
The 3-2-240 Rule Explained
3 years: the tax return due date must be more than 3 years before you file bankruptcy. 2 years: you must have filed the tax return more than 2 years before filing bankruptcy. 240 days: the IRS must have assessed the tax more than 240 days before you file bankruptcy. All three conditions must be met simultaneously. If any are not met, the debt is not dischargeable.
What Suspends the Timing Periods
The timing periods are suspended (extended) during: prior bankruptcy filings; OIC pending periods; and CDP hearing pending periods. This means that if you filed an OIC that was pending for 18 months, your 3-year period is extended by 18 months. Calculating the exact timing requires knowing the history of your account.
Taxes That Are Never Dischargeable
Some taxes cannot be discharged regardless of age: trust fund taxes (employee payroll withholding); taxes on fraudulent returns; taxes where the taxpayer willfully evaded payment; payroll taxes (employer share of FICA); excise taxes; and recently assessed income taxes that do not meet the 3-2-240 rule.
Bankruptcy vs. IRS Resolution Alternatives
Bankruptcy is a serious step with long-term financial consequences. Before pursuing bankruptcy for tax debt, evaluate whether an OIC, installment agreement, or CSED strategy might achieve similar results without a bankruptcy on your credit history. For very old income tax debts meeting all timing requirements, bankruptcy can provide a clean slate.
Frequently Asked Questions
Can I discharge all my tax debt in bankruptcy?
Only income taxes meeting all timing requirements are dischargeable. Payroll taxes, trust fund taxes, and recent income taxes are not dischargeable regardless of bankruptcy chapter.
Does Chapter 13 work differently than Chapter 7 for tax debt?
Yes. In Chapter 13, non-dischargeable priority taxes must be paid in full through the plan (3–5 years). Dischargeable taxes can be treated as general unsecured claims and may receive pennies on the dollar.
Does a federal tax lien survive bankruptcy?
Yes. Even if the underlying tax debt is discharged, the federal tax lien remains attached to property that existed before bankruptcy. Lien avoidance actions may be possible in some circumstances.
What if I never filed the tax return?
Unfiled returns cannot be discharged. You must file the return more than 2 years before bankruptcy for the discharge to apply.
Can the IRS still audit me after bankruptcy?
Yes. Bankruptcy does not prevent the IRS from auditing returns or assessing new liabilities for non-discharged tax years.
Should I consult both a bankruptcy attorney and a tax professional?
Yes. Tax discharge in bankruptcy sits at the intersection of tax law and bankruptcy law. Both types of professionals are needed for a complete analysis.
Tax Debt and Bankruptcy: When IRS Debt Can Be Discharged Services in Los Angeles
Calculus Tax, Inc. provides tax debt and bankruptcy: when irs debt can be discharged services to individuals and businesses throughout Los Angeles County. Our licensed CPAs are based in Burbank and serve clients in Los Angeles and surrounding communities.
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