Can Tax Debt Be Discharged in Bankruptcy?
Some older income tax debts can be wiped out in bankruptcy. Here are the three timing rules that determine whether yours qualifies.
Quick Answer
Some income tax debts can be discharged in Chapter 7 or Chapter 13 bankruptcy if they meet the 3-year rule (return due at least 3 years before filing), the 2-year rule (return filed at least 2 years before), and the 240-day rule (assessed at least 240 days before). Taxes that don't meet all three, plus payroll trust fund taxes and recent returns, are not dischargeable.
Bankruptcy as tax relief
Bankruptcy is rarely the first choice for tax debt, but for large, old income tax debts it can be a real option. Whether a tax can be discharged depends on three timing rules, the type of tax, and whether the return was actually filed.
The three timing rules
3-year rule: the return must have been due (including extensions) at least 3 years before the bankruptcy filing.
2-year rule: the return must have been filed at least 2 years before the filing (matters for late-filed returns).
240-day rule: the tax must have been assessed at least 240 days before filing (matters for audit adjustments).
All three must be met for an income tax to be dischargeable.
What is not dischargeable
Trust fund taxes (payroll withholding), recent income tax (returns due within the last 3 years), taxes on returns filed late within the last 2 years, fraud penalties, and taxes from unfiled returns are not dischargeable. If you didn't file the return at all, the debt generally can't be discharged even if it's old.
Chapter 7 vs. Chapter 13
Chapter 7 discharges qualifying tax debt entirely. Chapter 13 puts you on a 3–5 year repayment plan that may include some tax debt, with remaining dischargeable tax wiped at the end. Chapter 13 also stops IRS collection during the plan.
The automatic stay
Filing bankruptcy triggers an automatic stay that stops IRS collection temporarily. Note that bankruptcy also tolls the 10-year collection statute, extending the time the IRS has to collect on any non-dischargeable balance.
Get the transcripts first
Before considering bankruptcy for tax debt, get your account transcripts to confirm the assessment dates and filing dates. The three rules are date-driven, and a tax professional (often working with a bankruptcy attorney) can determine whether your taxes qualify before you file.
Frequently Asked Questions
Answers to the questions taxpayers ask most about this topic.
Can I wipe out tax debt in bankruptcy?
Some income tax debts can be discharged if they meet the 3-year rule (return due 3+ years before filing), the 2-year rule (return filed 2+ years before), and the 240-day rule (assessed 240+ days before). All three must be met. Trust fund taxes, recent income tax, and taxes from unfiled returns are not dischargeable.
Does bankruptcy stop IRS collection?
Filing bankruptcy triggers an automatic stay that temporarily stops IRS collection. However, bankruptcy also tolls the 10-year collection statute, extending the time the IRS has to collect any non-dischargeable balance. Chapter 13 keeps collection paused during the 3–5 year repayment plan.
What taxes cannot be discharged in bankruptcy?
Trust fund (payroll) taxes, income tax from returns due within the last 3 years, taxes from returns filed late within the last 2 years, taxes from unfiled returns, and fraud penalties are not dischargeable. Income tax that meets all three timing rules can be discharged.