Overview

Bankruptcy offers a fresh start for many kinds of debt, but tax debts follow special rules. In my 15 years as a CPA helping clients with IRS liabilities and bankruptcy filings, I’ve seen how a few timing details and the tax type make the difference between full discharge, repayment through a plan, or no relief at all. For official guidance see the IRS’s Bankruptcy and Taxes page and the U.S. Courts’ bankruptcy resources (IRS: https://www.irs.gov/businesses/small-businesses-self-employed/bankruptcy-and-taxes; U.S. Courts: https://www.uscourts.gov/services-forms/bankruptcy).

When income taxes can be discharged (the key tests)

Income tax debt may be dischargeable in Chapter 7 (and—under narrower conditions—treated as dischargeable in Chapter 13) only if all of the following are true:

  • The tax return was due (including extensions) at least three years before you filed bankruptcy.
  • The tax return was actually filed at least two years before the bankruptcy filing.
  • The tax was assessed by the IRS at least 240 days before the bankruptcy filing (this period may be extended while certain tax proceedings are pending).
  • The return was not fraudulent and there was no willful tax evasion.

These rules come from bankruptcy law as applied to federal tax claims; they are summarized by the IRS and explained in bankruptcy practice guides (see IRS guidance above and general bankruptcy law resources at U.S. Courts).

Which taxes are typically non‑dischargeable

  • Payroll taxes and trust‑fund taxes (employer withholdings) — usually never discharged.
  • Fraudulent tax liabilities or taxes from false returns — non‑dischargeable.
  • Recent income taxes that fail the timing tests — treated as non‑dischargeable priority claims.

How Chapter 7 and Chapter 13 differ

  • Chapter 7: If the income tax meets the discharge tests above, it can be wiped out. Liquidation of non‑exempt assets pays creditors; qualifying tax debts behave like other unsecured debts that pass through discharge.
  • Chapter 13: You repay some or all debts via a 3–5 year plan. Older income taxes that meet the discharge tests may be treated as unsecured and discharged at plan completion; however, priority taxes generally must be paid in full through the plan. Payroll and trust‑fund taxes remain non‑dischargeable.

Tax liens and bankruptcy

Filing bankruptcy does not automatically remove a tax lien. Liens generally survive bankruptcy unless you strip or avoid them under specific exemption‑impairment rules or redeem the liened property. If a lien impairs your bankruptcy exemptions, a lien avoidance motion may be possible — an issue to raise with your attorney.

Practical steps to protect discharge eligibility

  1. File all required tax returns—even if you can’t pay. An unfiled return usually prevents discharge.
  2. Track key dates: return due date, filing date, and assessment date. Those determine dischargeability.
  3. Keep records that show you filed in good faith (copies of returns, mail/IRS correspondence).
  4. Consult both a bankruptcy attorney and a CPA before filing. I routinely coordinate with bankruptcy counsel to confirm the timing and classification of tax claims.
  5. Evaluate alternatives such as an Offer in Compromise, installment agreement, or an IRS collection alternative before choosing bankruptcy (see When to Consider Bankruptcy vs IRS Debt Relief Options).

What bankruptcy will and won’t stop

  • Will stop most IRS collection actions (an automatic stay) while the case is active, giving immediate relief (see When Bankruptcy Can Stop IRS Collection Actions).
  • Will not automatically erase tax liens or discharge payroll/trust‑fund taxes or fraudulent tax debts.

Real‑world example

A small business client faced large self‑employment income tax liabilities from several years earlier. Because the returns had been filed more than two years before the bankruptcy filing, the due dates were three or more years prior, and there was no fraud, much of the income tax was discharged in a Chapter 7. Payroll taxes and a small lien, however, required separate handling.

Common mistakes to avoid

  • Assuming all tax debt is dischargeable.
  • Filing bankruptcy before becoming current with late returns you want discharged.
  • Ignoring liens: a discharged tax claim does not always clear a lien attached to property.

Where to read more (authoritative and related FinHelp coverage)

Final note and disclaimer

This article explains general rules as of 2025 but does not substitute for personalized legal or tax advice. Specific outcomes turn on facts, exact dates, and local law. Consult a licensed bankruptcy attorney and a CPA to confirm how the rules apply in your situation.