Key Takeaways
| Key Point | Details |
|---|---|
| Some taxes can be discharged | Income taxes may be wiped out if they meet certain conditions. |
| Tax discharge rules vary by bankruptcy chapter | Chapter 7 and Chapter 13 treat tax debts differently. |
| IRS has strict criteria for tax discharge | Taxes must be old enough, properly filed, and meet other requirements. |
| Tax liens are not wiped out | Even if taxes are discharged, IRS tax liens may still remain on property. |
| Filing bankruptcy can stop tax collections | The automatic stay prevents IRS collection actions temporarily. |
Introduction
Dealing with tax debt can be overwhelming, and many people wonder if filing for bankruptcy can help wipe out taxes owed to the IRS or state tax agencies. While bankruptcy can eliminate some types of debt, tax debt is treated differently from credit cards or medical bills.
The ability to discharge tax debt depends on:
- The type of tax owed
- Whether you filed tax returns on time
- The age of the tax debt
- The bankruptcy chapter you file under
In this guide, we’ll break down when taxes can be discharged in bankruptcy, what rules apply, and what happens to IRS collections and tax liens.
🔗 Related: Types of Debts Not Wiped Out in Bankruptcy
Can Tax Debts Be Discharged in Bankruptcy?
Not all tax debts can be eliminated in bankruptcy. The U.S. Bankruptcy Code (11 U.S. Code § 523) classifies tax debt as a priority debt, meaning that it’s generally not dischargeable unless specific criteria are met.
When Tax Debt CAN Be Discharged in Bankruptcy
You may be able to wipe out federal or state income taxes in bankruptcy if all of the following are true:
✅ The tax return was due at least 3 years ago – The original due date of the tax return must be at least three years old before filing bankruptcy.
✅ The tax return was filed at least 2 years ago – You must have filed the tax return for the debt at least two years before bankruptcy. If you never filed a return, the tax debt will not be wiped out.
✅ The tax was assessed at least 240 days ago – The IRS must have assessed the tax at least 240 days before you file.
✅ No fraud or tax evasion – If the IRS believes you filed fraudulent returns or willfully avoided paying, the debt won’t be dischargeable.
🔗 Related: Do My Taxes Have to Be Filed Before Filing Bankruptcy?
When Tax Debt CANNOT Be Discharged in Bankruptcy
🚫 Recent tax debts – If the tax debt is from the past three years, it cannot be wiped out.
🚫 Unfiled tax returns – If you never filed a tax return, bankruptcy cannot erase the debt.
🚫 Payroll taxes & fraud penalties – Business payroll taxes and penalties for tax fraud or evasion can never be discharged.
🚫 IRS tax liens – Even if you qualify for a tax discharge, pre-existing IRS tax liens on your property will not go away.
🔗 External Resource: Cornell Law – Bankruptcy & Tax Debts
Chapter 7 vs. Chapter 13 for Tax Debt
Chapter 7 Bankruptcy and Tax Debt
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is the most common type for individuals seeking to discharge unsecured debts. However, tax debt can only be discharged under strict conditions.
When Chapter 7 Can Discharge Tax Debt
✅ 3-2-240 Rule applies
✅ Tax return was filed on time
✅ No fraud or tax evasion involved
When Chapter 7 Does NOT Discharge Tax Debt
🚫 Recent tax debt (less than 3 years old)
🚫 Unfiled tax returns
🚫 IRS tax liens remain in place
🔗 External Resource: IRS – Chapter 7 Bankruptcy Overview
Chapter 13 Bankruptcy and Tax Debt
Unlike Chapter 7, Chapter 13 bankruptcy does not erase tax debt immediately, but it allows you to repay tax debt over a 3-5 year period while stopping IRS penalties.
✅ Stops IRS collections
✅ No new penalties
✅ Some tax debt may be discharged after the plan ends
🔗 Related: What Happens If I Owe Taxes While in a Chapter 13 Bankruptcy?
The Impact of Bankruptcy on IRS Collections
When you file bankruptcy, the automatic stay temporarily stops:
✅ IRS wage garnishments
✅ Bank levies
✅ Tax lien enforcement
🔗 Related: Filing Bankruptcy to Stop Garnishments
📌 Important: The automatic stay does NOT remove existing IRS tax liens. It only pauses enforcement actions during bankruptcy.
Should You File Bankruptcy for Tax Debt?
When It Makes Sense
✅ Your tax debt meets the 3-2-240 Rule
✅ You need to stop IRS collections
✅ You can’t afford an IRS payment plan
Alternatives to Bankruptcy for Tax Debt
1️⃣ IRS Installment Agreement – A monthly payment plan with the IRS.
2️⃣ Offer in Compromise (OIC) – A settlement where the IRS accepts less than you owe.
🔗 External Resource: IRS – Declaring Bankruptcy
Final Thoughts
- Bankruptcy can wipe out tax debt, but only if it meets strict conditions.
- IRS tax liens stay in place, even if taxes are discharged.
- Chapter 7 works best for older tax debt, while Chapter 13 is better for repayment plans.
- If bankruptcy isn’t right for you, IRS alternatives may provide relief.
🔗 Related: Credit Report After Filing Bankruptcy
Frequently Asked Questions (FAQs) About Taxes and Bankruptcy
Can bankruptcy wipe out tax debt?
Yes, but only income tax debt that meets the 3-2-240 Rule (tax return due at least 3 years ago, filed at least 2 years ago, and assessed at least 240 days ago).
Does Chapter 7 bankruptcy eliminate IRS tax debt?
It can, but only if the tax debt meets the eligibility criteria. Payroll taxes, fraud-related taxes, and recent tax debts cannot be discharged.
What happens to IRS collections after filing for bankruptcy?
Filing bankruptcy triggers an automatic stay, which stops IRS wage garnishments, levies, and collection actions temporarily.
Will bankruptcy remove an IRS tax lien?
No. Bankruptcy does not remove tax liens placed before filing. The lien remains attached to your property even if the tax debt is discharged.
Can Chapter 13 help with tax debt?
Yes. Chapter 13 allows you to repay tax debt over a 3-5 year period while stopping IRS penalties and collection efforts.
Can I file bankruptcy if I haven’t filed my tax returns?
No. Unfiled tax returns make tax debt non-dischargeable. You must file at least two years before bankruptcy for tax debts to be considered.
Will the IRS audit me if I file for bankruptcy?
Filing bankruptcy does not trigger an audit, but if you are already under audit, the IRS can continue investigating your tax history.
Can I get rid of tax penalties and interest in bankruptcy?
In Chapter 13, penalties and interest may be reduced, but in Chapter 7, only the tax itself is discharged—interest and penalties may still apply.
Should I file bankruptcy for tax debt or set up an IRS payment plan?
If you can afford an IRS Installment Agreement or Offer in Compromise, that may be a better option. Bankruptcy is best for severe financial hardship.
Can I discharge state taxes in bankruptcy?
Yes, if state income tax debt meets the same 3-2-240 Rule used for federal income tax discharge.
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