Bankruptcy and tax debt: what can be discharged

Federal income tax can generally be discharged in Chapter 7 or Chapter 13 only if all of these are true: The timelines can be suspended by earlier bankruptcies and other events, which is why an account transcript review matters.

• Three-year rule: the return was due (including extensions) more than three years before the bankruptcy filing.
• Two-year rule: you actually filed the return more than two years before the bankruptcy. Late returns and IRS substitute returns raise complex issues that vary by court.
• 240-day rule: the tax was assessed more than 240 days before filing; offers in compromise and prior bankruptcies can extend this.
• No fraud or willful evasion.

Trust fund taxes — income and employment tax withheld from employees — and the Trust Fund Recovery Penalty aren't discharged. Neither are taxes on fraudulent returns, taxes for years with no return filed, or recent taxes that fail the timing rules. Penalties tied to non-dischargeable taxes generally follow the tax, while penalties on very old events may be discharged; interest follows the tax it accrued on.

A discharge eliminates your personal liability, but a federal tax lien filed before bankruptcy generally stays attached to property you owned at filing, including retirement accounts. That means the IRS may still collect from that pre-bankruptcy property up to its value. Timing a filing before or after a lien is recorded can matter a lot.

Filing bankruptcy triggers an automatic stay that generally stops IRS levies and most collection while the case is open. The IRS can still audit, assess tax, issue notices and apply refunds in some cases. IRS Publication 908 explains how the stay works and how the IRS handles bankruptcy cases.

Chapter 7 liquidates non-exempt assets and discharges qualifying debts in a few months; non-dischargeable tax remains afterward. Chapter 13 sets up a three- to five-year repayment plan. Priority tax claims — generally recent income taxes — must be paid in full through the plan, usually without ongoing penalties, while older dischargeable taxes may be paid only in part. Chapter 13 can be a structured way to handle priority tax alongside other debts.

Bankruptcy affects credit and all your debts, not just taxes. If taxes are your main problem, IRS programs — an installment agreement, Offer in Compromise or Currently Not Collectible status — may be simpler. If you have large non-tax debts too, or tax that meets the discharge rules, bankruptcy may be worth discussing with a bankruptcy attorney. Our bankruptcy vs. offer in compromise guide compares them.

Suppose your 2021 return was due April 18, 2022, you filed it on time, and the IRS assessed the tax when it processed the return in May 2022. The three-year rule is met for a bankruptcy filed after April 18, 2025; the two-year rule after the filing date in 2024; and the 240-day rule well before that. If instead you filed the 2021 return late in March 2025, the two-year rule wouldn't be met until March 2027. Extensions to file push the three-year date later. Real cases often involve amended returns, audits and prior bankruptcies, so this is only an illustration.

1. File every missing return — unfiled years generally can't be discharged.
2. Get account transcripts for each year and note filing and assessment dates.
3. Check whether a lien has been filed.
4. Talk to a bankruptcy attorney about timing; waiting a few months can change which taxes qualify.