Discharging Taxes in Bankruptcy – Part Two

Income taxes can be discharged in Chapter 7 bankruptcy, but only if they pass a five-part test — and every condition has to be met. If any one fails, that tax debt survives the bankruptcy.

This post is for people who have already read the general overview of taxes and bankruptcy and want to know whether their specific liabilities actually qualify. The short version: the test is mechanical, but the tolling rules make the calculations more complex than they look. You need actual IRS account transcripts to do this correctly, not estimates.

The Five-Part Discharge Test

All five conditions must be satisfied simultaneously. Failing one condition means that tax survives as if the bankruptcy never happened.

Condition 1 — Income taxes only. The discharge rules in 11 U.S.C. § 523(a)(1) apply to income taxes. They do not apply to payroll taxes, employment trust fund taxes, excise taxes, or fraud penalties. If you have a Trust Fund Recovery Penalty assessed against you personally as a responsible party of a business, that liability is not dischargeable regardless of how old it is.

Condition 2 — Three-year rule. The tax return for the year at issue must have been due at least three years before your bankruptcy petition date. A 2020 income tax return was due April 15, 2021. A bankruptcy filed before April 15, 2024 does not discharge 2020 tax liability — the three-year window hasn’t opened yet. Extensions matter here: if you filed a Form 4868 extension for 2020, the return was due October 15, 2021, and the three-year clock runs from October 2021, not April.

Condition 3 — Two-year rule. You must have actually filed the return at least two years before the bankruptcy petition. Filing late is allowed — it just moves the discharge window. If you finally filed your 2019 return in March 2022, the two-year clock runs from March 2022. A bankruptcy filed in January 2024 would not discharge the 2019 tax because the return was filed fewer than two years before the petition. A substitute return that the IRS files on your behalf under IRC § 6020(b) does not count as a return you filed — you have to file the actual return yourself.

Condition 4 — 240-day rule. The IRS must have assessed the tax at least 240 days before the bankruptcy petition. Assessment typically happens when the IRS processes your return, but it also happens as a result of an audit closing, a CP2000 notice you agreed to, or a deficiency notice you didn’t contest. If the IRS completed an audit and assessed additional tax for 2019 in June 2023, that additional assessment is not eligible for discharge until February 2024 — 240 days later. The original assessment from when you filed the return and the additional assessment from the audit are treated separately.

Condition 5 — No fraud or willful evasion. The return in question cannot have been fraudulent, and the tax cannot be one you willfully attempted to evade. If either is true for a specific tax year, the liability for that year is permanently non-dischargeable under § 523(a)(1)(C). This applies year-by-year — a clean 2019 return is unaffected by a fraudulent 2018 return.

Tolling: Why the Calculations Get Complicated

The three-year and 240-day periods can be paused — ‘tolled’ — by certain IRS proceedings, and most people don’t know their periods have been extended.

Prior bankruptcy filings toll both periods. If you filed a Chapter 13 three years ago that was dismissed, the time that bankruptcy was pending gets added back to the three-year window. If the dismissed bankruptcy kept you in collections limbo for 18 months, the three-year period doesn’t expire until 18 months later than you’d expect.

Pending Offers in Compromise toll the 240-day assessment period plus 30 days. If the IRS was considering your OIC for eight months before rejecting it, add eight months and 30 days to the 240-day clock before calculating your discharge eligibility.

Collection Due Process (CDP) hearings also toll the collection period. The IRS cannot collect while a CDP hearing is pending under IRC § 6330, and those tolling periods carry over into the discharge calculations.

The practical consequence is that two people with the same tax year and the same assessment date can have very different discharge eligibility dates depending on their IRS history. You cannot calculate this from memory. You need the actual IRS account transcript showing assessment dates and the record of any tolling events.

Priority vs. Non-Priority Tax Claims in Bankruptcy

Taxes that pass the five-part test become non-priority unsecured claims and are dischargeable. Taxes that fail are priority claims and are not.

In Chapter 7, non-priority unsecured tax claims are discharged along with general unsecured debt at the end of the case — you pay nothing on them. Priority tax claims survive the Chapter 7 discharge; you still owe them in full when the case closes.

In Chapter 13, priority tax claims must be paid in full through the plan — typically over three to five years. Non-priority tax claims are treated like credit card debt and get paid only to the extent the plan pays unsecured creditors generally. In a typical Chapter 13, unsecured creditors receive pennies on the dollar or nothing, depending on disposable income and asset values. The advantage of including priority tax debt in a Chapter 13 plan is that the IRS generally cannot continue accruing interest and penalties on those claims while the plan is active, reducing the total payoff.

Tax Liens and What Discharge Doesn’t Fix

A discharge eliminates your personal obligation to pay the tax, but a previously filed Notice of Federal Tax Lien survives and stays attached to your pre-petition property.

The technical term is the distinction between in-personam liability (personal obligation to pay) and in-rem interest (the lien’s claim against specific property). Discharge wipes out the former. It does not remove the latter.

If the IRS recorded a federal tax lien before your bankruptcy petition, that lien is a secured interest. After discharge, the IRS cannot come after you personally for the money — but if you still own the property the lien attaches to, the IRS’s interest in that property remains. You may need to avoid the lien through a 11 U.S.C. § 522(f) motion or an adversary proceeding in the bankruptcy court. Whether that’s available depends on whether the lien impairs an exemption you’re entitled to claim.

This is the most common post-bankruptcy surprise for tax debtors. Don’t assume a discharge resolved the lien until you’ve pulled the county recorder and confirmed it’s no longer on title.

How to Check Whether Your Taxes Qualify

Pull your IRS account transcripts before filing — the transcript shows assessment dates, filing dates, and any tolling events that affect your eligibility calculation.

The most useful document is the Record of Account (Form 4506-T, which you can request online through the IRS’s Get Transcript tool at IRS.gov or by filing Form 4506-T by mail). The transcript shows: the date you filed, the original assessment date, any audit assessments and their dates, and the balance including accrued interest and penalties. Cross-reference this against your bankruptcy petition date using the five conditions above and any applicable tolling.

If the calculation is borderline — if you’re within a few months of meeting the three-year window, or if you have a prior OIC or bankruptcy in your history — the tolling analysis needs to be done carefully before you file. Filing a week too early can cost you a discharge you would have had if you’d waited.

Frequently Asked Questions

How old do taxes have to be to be discharged in bankruptcy?

The return must have been due at least three years before your bankruptcy filing, and actually filed at least two years before. So for a return due April 15, 2021 that you filed on time, the earliest discharge eligibility is April 2024. If you filed the return late or there are tolling events in your history, the window shifts further out. There is no single ‘X years old’ answer — all five conditions must be checked.

Do I have to file my tax returns before filing bankruptcy?

Yes, for the years you want discharged. Under the two-year rule, you must have actually filed the return at least two years before the petition. The IRS’s substitute return under IRC § 6020(b) does not count. For the discharge to apply, you have to have filed the return yourself. In practice, people with unfiled returns should file them first, wait out the two-year clock, then file bankruptcy if the other conditions are also met.

What is tolling and why does it matter for tax discharge?

Tolling means the clock on the three-year or 240-day period is paused for a defined period. Prior bankruptcies, pending Offers in Compromise, and Collection Due Process hearings all toll the relevant periods. If your history includes any of these, your discharge eligibility window is later than the raw dates would suggest — sometimes by a year or more. You need actual IRS transcripts and your filing history to calculate this correctly.

If you want to run through whether your specific tax years qualify, our taxes and bankruptcy overview covers the broader framework — or see our page on tax debt resolution outside of bankruptcy if you’re exploring alternatives. Book a free 15-minute call to talk through the numbers before you file anything.