Sometimes. Older federal income taxes can be discharged in bankruptcy if they are not "priority" taxes, a valid return was filed and was not filed late within the 2 years before the bankruptcy, and there was no fraudulent return or willful evasion. In rough terms, the return must have been due more than 3 years before the petition, the tax assessed more than 240 days before it, and any late return filed more than 2 years before it. Many tax debts do not meet these tests, and a federal tax lien can survive on your property even when the personal debt is discharged.
The rules sit in the Bankruptcy Code, 11 U.S.C. 523 and 507, and they interact with the IRS collection rules in ways that are easy to get wrong. Kathryn Meyer's page on IRS collections and enforcement notes that bankruptcy is one tool among several; this page explains how federal income taxes fare in it.
How to test each tax year, step by step
- Get the transcripts. Your IRS account transcript for each year shows when the return was received and when each amount was assessed.
- Apply the 3-year rule. Count from the return's last due date, including any extension, to the planned petition date.
- Apply the 240-day rule. Count from each assessment, including audit assessments, adding back time an offer or earlier bankruptcy suspended it.
- Check the return. Was a return you filed on record, and if late, was it filed more than 2 years before the petition? An IRS substitute return does not count.
- Rule out fraud and withheld taxes. Fraudulent returns, evasion and trust fund taxes stay with you.
- Look at the lien. Even a discharged year can still be collected from property a filed lien attached to.
Which tax debts are not discharged?
| Not discharged | The rule | Source |
|---|---|---|
| Recent income taxes (the 3-year rule) | The return was last due, including extensions, within 3 years before the petition | 11 U.S.C. 507(a)(8)(A)(i); 523(a)(1)(A) |
| Recently assessed taxes (the 240-day rule) | The tax was assessed within 240 days before the petition | 11 U.S.C. 507(a)(8)(A)(ii) |
| Taxes not yet assessed but still assessable | The IRS could still assess them when the case begins | 11 U.S.C. 507(a)(8)(A)(iii) |
| Withheld or collected taxes | Taxes required to be collected or withheld, such as payroll trust fund taxes | 11 U.S.C. 507(a)(8)(C) |
| No return filed | A required return was never filed | 11 U.S.C. 523(a)(1)(B)(i) |
| Late return within 2 years (the 2-year rule) | The return was filed late, and within 2 years before the petition | 11 U.S.C. 523(a)(1)(B)(ii) |
| Fraud or evasion | A fraudulent return, or a willful attempt to evade or defeat the tax | 11 U.S.C. 523(a)(1)(C) |
Two definitions matter. For these purposes a "return" must meet the filing requirements of tax law, and a substitute return the IRS prepares on its own under section 6020(b) of the Internal Revenue Code does not count as your return. And because payroll trust fund taxes are priority taxes, a trust fund recovery penalty generally falls in the group that survives.
How do the timing rules work together?
Take a hypothetical. A return for a tax year was due on April 15 of the following year, was filed on time, and the tax was assessed shortly after. A bankruptcy petition filed more than 3 years after that due date passes the 3-year rule, the assessment is well over 240 days old, and the return was not filed late, so the 2-year rule does not apply. If there was no fraud, that year's income tax is a candidate for discharge. Change one fact, for example an extension that moved the due date to October, or an audit assessment made 6 months before the petition, and the answer changes.
The Bankruptcy Code also stretches these periods. Under section 507(a)(8), the 240-day period does not count time when an offer in compromise was pending (plus 30 days) or an earlier bankruptcy stay was in effect (plus 90 days). The look-back periods are also suspended while the IRS was barred from collecting because you requested a Collection Due Process hearing and appeal, and during an earlier bankruptcy case, each plus 90 days.
What happens to IRS collection when you file?
IRS Publication 908 explains that filing a petition creates the automatic stay, which suspends most collection activity, including levies and lien notices aimed at pre-bankruptcy debts. It does not stop the IRS from auditing, demanding returns, issuing a notice of deficiency, or assessing tax. Under section 6503(h) of the Internal Revenue Code, the IRS's 10-year collection period is suspended while collection is barred by the case, plus 6 months, as explained in how long the IRS has to collect a tax debt. The IRS adds that if a case is dismissed, the time spent in bankruptcy extends its time to collect what remains.
An open bankruptcy also affects other options: the IRS does not accept offers in compromise from taxpayers in an open bankruptcy proceeding, and payment plan requests generally are not available either.
Does a discharge remove a federal tax lien?
Not necessarily. Publication 908 says that if the IRS filed a Notice of Federal Tax Lien before the petition, the lien generally passes through the bankruptcy unaffected, so the discharged tax may still be collected from your pre-bankruptcy property even though you are no longer personally liable. If no notice was filed, the lien is removed from property you exempted from the bankruptcy estate, but a lien may remain on property excluded or abandoned from the estate. Options for dealing with a lien are covered in whether a federal tax lien can be released or discharged.
How do Chapter 7 and Chapter 13 differ for taxes?
| Chapter 7 | Chapter 13 | |
|---|---|---|
| Purpose | Liquidation by a trustee | Repayment plan for individuals, including sole proprietors |
| Usual length | About 90 to 120 days, the IRS says | 5 years, or 3 in hardship cases |
| Returns | Returns for the last four tax periods must be filed | All returns for periods ending within four years of the filing; current returns filed and current taxes paid during the case, or it may be dismissed |
| Tax discharge | Tax debts older than three years, unless returns were filed late | Taxes paid in the plan, and tax debts older than three years unless returns were filed late |
Businesses organized as corporations or partnerships do not receive a discharge in Chapter 7, because they are liquidated.
What changes the answer
- Extensions. The 3-year period runs from the extended due date, so an extension pushes the first possible date back by about six months.
- Later assessments. An audit or amended return creates a new assessment that starts its own 240 days.
- Earlier offers, hearings and bankruptcies. They suspend the look-back periods under section 507(a)(8), each with added days.
- How the return was filed. A late return within 2 years of the petition, or no return, keeps the tax from being discharged.
- Penalties. A tax penalty is generally dischargeable if it relates to a tax that can be discharged, or if the event behind it occurred more than three years before the petition (11 U.S.C. 523(a)(7)).
- The chapter. Chapter 13 pays priority taxes through the plan; Chapter 7 liquidates assets and, for individuals, the IRS treats the bankruptcy estate as a separate taxpayer with its own return.
For example: three tax years, three different answers
For example, suppose a taxpayer files a petition on June 1, 2027. Her 2022 return was due in April 2023, filed on time, and assessed that spring: more than 3 years have passed since the due date and far more than 240 days since assessment, so if there was no fraud, 2022 is a candidate for discharge. Had an audit added more 2022 tax assessed in December 2026, that added amount would fall within 240 days of the petition and survive, even though the original 2022 tax could be discharged. Her 2023 return was extended to October 2024 and filed then: the 3-year period from that due date runs to October 2027, after the petition, so 2023 is a priority tax that survives. Her 2021 return was filed late, in March 2026: because that is within 2 years before the petition, 2021 is not discharged either, despite its age. And if the IRS had filed a lien notice for 2022 before the petition, the lien could still reach property she owned then. This is a hypothetical, not a real case.
Common mistakes with taxes in bankruptcy
- Counting from the tax year instead of the due date. The 3-year rule runs from when the return was last due.
- Forgetting the audit assessment. A recent assessment restarts the 240-day test for that amount.
- Relying on an IRS substitute return. It is not your return for these rules.
- Filing late returns just before the petition. The 2-year rule then keeps those years out.
- Assuming discharge removes the lien. A lien filed before the petition generally survives on pre-bankruptcy property.
What to do this week
- Download your account transcripts for every year with a balance.
- For each year, write down the due date with extensions, the date filed and each assessment date.
- List any offers, Collection Due Process hearings or earlier bankruptcies, with dates.
- Check whether a notice of federal tax lien has been filed, and where.
- File any missing returns, knowing how the 2-year rule treats late returns.
- Compare bankruptcy with a payment plan, an offer and the collection deadline before deciding.
Frequently asked questions
Are payroll taxes ever discharged?
Withheld and collected taxes are priority taxes under section 507(a)(8)(C) and generally survive, which is why the trust fund recovery penalty usually does too.
Does bankruptcy stop an IRS audit?
No. Publication 908 says the automatic stay does not stop audits, demands for returns, notices of deficiency or assessments.
Can the IRS keep my refund during bankruptcy?
Publication 908 says the automatic stay generally prevents the IRS from offsetting refunds, though it may freeze a refund until the stay is lifted.
What happens to the IRS collection deadline?
It is suspended while collection is barred by the case, plus 6 months, under section 6503(h).
Could an innocent spouse request work better?
If the debt comes from a spouse's items on a joint return, it may; see innocent spouse relief.
What if I cannot pay anything and bankruptcy does not fit?
Hardship status pauses collection without a court case; see what currently not collectible status means. A payment plan is the other common route; see IRS payment plan options.
Before you decide
Bankruptcy is one tool among several, and for old balances the IRS's own collection deadline, a payment plan or an offer are worth comparing first. Knowing the exact filing, due and assessment dates for each year is the starting point. Kathryn Meyer spent more than two decades in the IRS Office of Chief Counsel and can review your IRS transcripts and dates so the tax picture is clear before any bankruptcy decision. To discuss an old tax debt, contact the firm or call (571) 560-8674.