Overview

Bankruptcy can wipe out or reorganize many unsecured debts, but tax debts are treated specially. Dischargeability depends on the type of tax and three core timing and filing rules derived from bankruptcy law and IRS guidance (see IRS, “Bankruptcy and Taxes”). Important authorities: IRS guidance on bankruptcy and U.S. Courts’ bankruptcy basics (U.S. Courts).

Key rules that make income tax potentially dischargeable

  • Age of the tax assessment (the “240‑day” rule): The IRS generally must have assessed the tax more than 240 days before the bankruptcy filing date, unless the 240‑day period was extended by offer-in-compromise considerations or by a tolling agreement. (See 11 U.S.C. § 523(a)(1) and IRS guidance.)
  • Three‑year rule: The tax return’s due date (including extensions) must be at least three years before the bankruptcy petition date.
  • Two‑year rule: The return for that tax year must have actually been filed at least two years before the bankruptcy filing.

All three timing conditions must be satisfied for standard income tax liabilities to be dischargeable in a typical consumer bankruptcy. (For statutory detail, see 11 U.S.C. § 523(a)(1) and the IRS page “Bankruptcy and Taxes”.)

Which taxes are dischargeable and which are not

  • Potentially dischargeable: Older federal or state income taxes that meet the three timing tests and were honestly filed (no fraud).
  • Non‑dischargeable: Payroll (trust fund) taxes withheld from employees, most penalties tied to fraud or tax evasion, and taxes for which no return was filed. Fraudulent tax liabilities are never dischargeable.

Practical differences: Chapter 7 vs Chapter 13

  • Chapter 7 (liquidation): If the income taxes meet the discharge rules they can be wiped out when the trustee closes the estate.
  • Chapter 13 (repayment plan): Taxes can be paid through the 3‑ to 5‑year plan; qualifying old income taxes may still be discharged at plan completion if they meet the discharge tests and plan terms.

What to do to check eligibility (step‑by‑step)

  1. Order IRS transcripts for the tax years in question (Get Transcript or call the IRS). Transcripts show assessment dates and return filing dates.
  2. Confirm the tax return filing date and whether an extension was filed. Only filed returns count toward the two‑ and three‑year tests.
  3. Check whether the IRS assessed the tax more than 240 days before your bankruptcy filing or whether that period was tolled.
  4. Confirm there’s no fraud or misrepresentation on the return. Fraud findings block dischargeability.
  5. Consult a bankruptcy attorney and a tax professional before filing; incorrect assumptions about dischargeability can make relief impossible.

Common mistakes to avoid

  • Not filing back returns: Unfiled returns make debts non‑dischargeable.
  • Relying on approximate dates: Small date errors can prevent discharge—verify dates with transcripts.
  • Treating payroll/trust fund taxes as dischargeable: These are almost always non‑dischargeable and can lead to personal liability for business owners.

Practical tips from practice

In my experience helping clients, the most impactful steps are filing missing returns and getting IRS transcripts before filing bankruptcy. For many people, Chapter 13 also creates breathing room to resolve priority tax claims while protecting exemptions.

When bankruptcy is not the best first move

If taxes are recent, or you can qualify for an Offer in Compromise or an installment agreement, those options sometimes preserve exemptions and credit better than immediate bankruptcy. See our guide “When to Use an Offer in Compromise vs Bankruptcy: Decision Framework” for comparisons.

Resources and next steps

Authoritative citations

Disclaimer

This entry is educational and does not constitute legal or tax advice. Consult a qualified bankruptcy attorney or tax professional about your specific facts before filing bankruptcy.