Tax Debt in Bankruptcy

Tax debt — income tax to the IRS or to a state — is dischargeable in some bankruptcy cases and not others. The dischargeability depends on three rules and which chapter is filed. This educational reference covers the core framework.

Three core rules for dischargeability

Income tax debt is potentially dischargeable in Chapter 7 (and certain other) bankruptcies if all three of these rules are satisfied:

1. The 3-year rule (§ 507(a)(8)(A)(i)): the tax return for the year was due (including extensions) more than 3 years before the bankruptcy filing
2. The 240-day rule (§ 507(a)(8)(A)(ii)): the tax was assessed more than 240 days before the bankruptcy filing
3. The return-filing rule (§ 523(a)(1)(B)): the debtor actually filed a return (not just a substitute-for-return assessed by the IRS), and the return was filed more than 2 years before the bankruptcy filing

If ALL three rules are satisfied AND the tax isn't otherwise excepted (no fraud, no priority status), the tax is dischargeable.

The fraud exception

Under § 523(a)(1)(C), tax debt is non-dischargeable if the debtor:

• Made a fraudulent return, or
• Willfully attempted to evade or defeat the tax

This exception applies regardless of timing. Tax debts associated with fraud penalties or fraud-based audits typically don't qualify for discharge.

Priority vs. dischargeable

Tax debt that doesn't satisfy all three rules is "priority debt" under § 507(a)(8). Priority tax debt:

• Is NOT dischargeable
• Must be paid in full in Chapter 13 (within plan period)
• Survives Chapter 7 discharge
• Continues to accrue interest post-petition (in some cases)

Tax debt satisfying all three rules is "general unsecured" and treated like any other unsecured debt.

Read more

• The 3-year rule
• The 240-day rule
• The return-filing requirement
• Tax liens and bankruptcy