For people overwhelmed by IRS balances, wage garnishments, and mounting penalties, many wonder how bankruptcy affects tax debt. While bankruptcy is widely known for eliminating credit card balances, medical bills, and certain personal loans, tax debt operates under a different set of rules. In some cases, older income tax debts can be wiped out entirely. In others, the IRS retains full collection of power, even after the bankruptcy case ends.
Understanding when tax debt can be discharged, how Chapter 7 and Chapter 13 treat IRS balances, and what alternatives exist is essential before deciding how to get out of tax debt.
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How Bankruptcy Treats Tax Debt
Bankruptcy law categorizes debts based on priority and security status. Tax debt may be classified as priority, nonpriority, or secured depending on the type of tax, how old it is, and whether the IRS filed a tax lien. This classification determines whether the debt can be discharged or must be paid.
Only certain income tax debts are potentially dischargeable. Payroll taxes, trust fund taxes, sales taxes, excise taxes, and taxes tied to fraud or evasion are never dischargeable under bankruptcy law.
Can Tax Debt Be Discharged?
To answer whether tax debt can be discharged, taxpayers must meet strict legal criteria. These requirements are often referred to as the 3–2–240 rules, and all must be satisfied.
The 3–2–240 Timing Rules
First, the three-year rule requires that the tax return was due at least three years before filing bankruptcy, including extensions. If the tax return is too recent, it cannot be discharged.
Second, the two-year rule requires that the tax return was filed at least two years before bankruptcy filing. Late-filed returns can still qualify, but only if the IRS did not prepare a Substitute for Return on your behalf.
Third, the 240-day rule requires that the IRS assess the tax at least 240 days before bankruptcy filing. This assessment date may be delayed by audits, appeals, or amended returns.
If any one of these rules is not met, the tax debt will survive bankruptcy.
Additional Discharge Requirements
Even if the timing rules are satisfied, bankruptcy will not discharge tax debt if fraud or willful tax evasion occurs. Filing false returns, hiding income, or intentionally avoiding payment disqualifies the debt from discharge. The return must also have been filed by the taxpayer—not created by the IRS through an SFR process in most federal circuits.
Does Chapter 7 Discharge IRS Debt?
Chapter 7 bankruptcy can discharge qualifying income tax debt if all legal requirements are met. When successful, the tax debt is wiped out entirely, often within a few months.
Chapter 7 works best when most of the tax debt is older income tax that satisfies the 3–2–240 rules. However, Chapter 7 does not help with recent taxes, payroll taxes, or debts tied to fraud. It also does not remove IRS tax liens, even when the underlying tax is discharged.
Can IRS Debt Be Discharged in Chapter 13?
Chapter 13 provides a structured repayment plan that lasts three to five years. Under this plan, priority tax debts must be repaid in full, usually without additional penalties and sometimes with reduced or frozen interest. Older, qualifying nonpriority tax debts may be discharged at the end of the repayment period, giving taxpayers a path to reduce some of their IRS obligations while protecting assets from levies and garnishments during the plan. Chapter 13 is often effective for people with a mix of dischargeable and nondischargeable taxes.
What Taxes Cannot Be Discharged in Bankruptcy?
Even when people ask, can tax debt be discharged, the reality is that many tax obligations are permanently nondischargeable. These include:
- Payroll and trust fund taxes
- Sales and excise taxes
- Recent income tax debt
- Taxes resulting from fraud or evasion
- Most penalties unrelated to dischargeable income tax
These debts survive both Chapter 7 and Chapter 13 and remain collectible by the IRS.
How Tax Liens Affect Bankruptcy
A major misconception is that bankruptcy removes IRS tax liens. While bankruptcy may eliminate your personal obligation to pay qualifying taxes, tax liens survive bankruptcy if they were filed before the case began.
This means the IRS may still have a claim against your property, such as a home or vehicle, even after the tax debt itself is discharged. The lien must generally be paid or resolved before selling or refinancing the asset. Chapter 13 can sometimes reduce the practical impact of liens, but it does not automatically remove them.
Special Issues: Substitute for Return (SFR) Tax Debt
Tax debt assessed through an IRS-prepared Substitute for Return is one of the most common barriers to discharge. In most federal circuits, SFR-based tax debt is treated as nondischargeable, even if the taxpayer later files a correct return.
This issue alone disqualifies many taxpayers who believe their tax debt qualifies for bankruptcy relief. Filing all missing returns before considering bankruptcy is critical.
How to Get Out of Tax Debt Without Bankruptcy
Bankruptcy is not the only way to resolve IRS debt. For many taxpayers, alternatives may be faster, less disruptive, and more flexible.
IRS Installment Agreements
Payment plans allow taxpayers to pay balances over time while avoiding aggressive collection of actions. If payments are made, levies and garnishments are generally suspended.
Offer in Compromise
An Offer in Compromise allows eligible taxpayers to settle tax debt for less than the full amount owed. Approval depends on income, expenses, asset equity, and ability to pay. While not guaranteed, it can provide substantial relief.
Currently Not Collectible Status
When financial hardship is severe, the IRS may place an account in Currently Not Collectible status. This temporarily halts collection efforts while interest continues to accrue.
Understanding how to get out of tax debt involves evaluating all available options—not just bankruptcy.
When Bankruptcy Makes Sense for Tax Debt
Bankruptcy may be the right solution when tax debt is part of a larger financial crisis, particularly when older income taxes qualify for discharge and other unsecured debts are overwhelming. It is also useful when immediate protection from wage garnishment or bank levies is necessary.
However, bankruptcy is not a shortcut. The rules are strict, and filing at the wrong time can prevent tax debt from being discharged.
Final Thoughts
So, can tax debt be discharged in bankruptcy? Yes, but only under specific circumstances. Chapter 7 can discharge qualifying older income taxes, while Chapter 13 can eliminate nonpriority tax debt after repayment of priority balances. Recent taxes, payroll taxes, fraud-related debt, and tax liens generally survive.
Careful timing, complete filing history, and a clear understanding of IRS rules are essential. Whether through bankruptcy or IRS relief programs, choosing the right strategy can make the difference between long-term financial strain and a genuine fresh start.
