Quick answer

Bankruptcy can be a tool to discharge older, qualifying income tax debts or to reorganize tax liabilities into an affordable Chapter 13 plan. However, strict timing tests and exclusions mean most recent assessments, payroll/withholding taxes, and fraud‑based liabilities will survive bankruptcy. (See IRS guidance: https://www.irs.gov/businesses/small-businesses-self-employed/bankruptcy-and-taxes.)

How dischargeability works (the key tests)

To be discharged under the Bankruptcy Code, federal (and often state) income taxes generally must meet these tests:

  • Return due date: the tax return was due at least three years before you file bankruptcy.
  • Return filing: the tax return was actually filed at least two years before your bankruptcy filing.
  • Assessment age: the IRS must have assessed the tax at least 240 days before you file.
  • No fraud or willful evasion: the return must not have been false and fraudulent.

These timing rules come from Section 523 of the Bankruptcy Code and are summarized by the IRS. If you haven’t filed required returns, those taxes typically aren’t dischargeable until returns are filed and the timing rules are satisfied (IRS: Bankruptcy and Taxes).

Chapter 7 vs Chapter 13 — practical differences

  • Chapter 7: A straight liquidation that may discharge qualifying income taxes that pass the timing tests. It usually offers a faster route but won’t stop an IRS tax lien from attaching to exempt or nonexempt property.
  • Chapter 13: A repayment plan (3–5 years) that can fold tax debts into monthly payments. Some older income taxes that meet discharge tests may be discharged at plan completion, while recent or priority tax claims generally must be paid through the plan.

Remember: tax liens survive a bankruptcy discharge unless separately avoided or the statute of limitations on collection expires. Bankruptcy generally clears the personal liability but not an IRS lien on property.

Common exclusions and non‑dischargeable taxes

  • Trust fund taxes (withheld income and payroll taxes) and recent employment taxes are almost always nondischargeable.
  • Fraudulent tax returns and penalties tied to fraud or willful evasion are nondischargeable.
  • Criminal tax liabilities and certain trust obligations aren’t erased by bankruptcy.

Practical checklist before considering bankruptcy for tax debt

  1. File missing returns now — unfiled returns block dischargeability tests. (In my practice, filing delinquent returns early often creates options.)
  2. Get written IRS account transcripts and notices to verify assessment dates and lien filings.
  3. Consider alternatives: installment agreements, an Offer in Compromise, or an innocent spouse claim. See our guide comparing bankruptcy and compromise options: When to Consider Bankruptcy vs Offer in Compromise for Tax Relief.
  4. Confirm whether state taxes are subject to the same timing rules — rules and lien treatment can vary by state; for an overview: How Bankruptcy Affects Federal and State Tax Debts.
  5. Consult a bankruptcy attorney and a CPA experienced with tax liens and discharge issues before filing.

Consequences beyond discharge

  • Credit impact: bankruptcy will lower your credit score and remain on your credit report for years, but it can provide a path to rebuild (Consumer Financial Protection Bureau explains long‑term effects).
  • Loss of some property: Chapter 7 may require surrender of nonexempt assets; exemptions vary by state.
  • Collection stays: filing triggers an automatic stay that stops most collection actions and levies while the case is active.

Professional perspective

In my 15+ years working on tax and bankruptcy cases, clients who prepare—by filing overdue returns, securing documentation of assessments, and exploring alternatives—have the best outcomes. Bankruptcy can give a fresh start when the timing rules align, but it rarely replaces tax planning or negotiation with the IRS.

Bottom line

Consider bankruptcy for tax debt only after confirming the dischargeability tests, evaluating liens and withholding taxes, and comparing alternatives such as installment agreements or Offers in Compromise. Early coordination with a tax‑savvy bankruptcy attorney and a CPA is essential to avoid surprises and protect assets.

Sources and further reading

Disclaimer: This article is educational and does not constitute legal or tax advice. For personalized guidance, consult a licensed bankruptcy attorney or a CPA who specializes in tax controversy.