In an Arizona bankruptcy, you can include certain income tax debts for discharge, but only if you meet applicable rules. Arizona follows the federal bankruptcy code, which means your key considerations are the type of tax debt and its age.
Can you file bankruptcy on back taxes? The short answer is that tax debts older than three years may qualify for discharge under Chapter 7 or Chapter 13.
Stone Rose Law bankruptcy attorneys are experienced in navigating the intersection between federal tax laws and how they affect your tax debts and other tax liabilities.
To speak with one of our experienced bankruptcy lawyers, call us at (480) 739-2448 or contact us online.
In this article, we discuss:
Many people ask: Does bankruptcy clear tax debt? The answer depends on the type of tax liability, how old the federal tax debt is, and whether you meet the eligibility rules under federal tax laws.
You can discharge certain federal and Arizona income tax debts—and in some cases related penalties or interest—if all discharge rules are met. You can discharge these qualifying income tax debts under Chapter 7 or Chapter 13 as long as you meet the requirements to do so.
Not all tax debts are dischargeable, and filing bankruptcy will not eliminate every kind of tax liability. Under both Chapter 7 bankruptcy and Chapter 13, the following tax debts cannot be discharged:
The test to see if you can discharge a tax debt is called the “3-2-240” test. You must meet all three of the following requirements to discharge federal income taxes or Arizona state income taxes through a bankruptcy filing.
Your tax return must have been due at least three years (including extensions) before you file for bankruptcy. This rule examines the applicable tax periods to confirm that your bankruptcy tax debt is old enough to qualify for discharge.
You must have filed your tax return at least two years before filing for bankruptcy. Note that IRS “substitute for return” filings do not count toward this requirement. You must file tax returns yourself for each of the tax periods you want to discharge.
The Internal Revenue Service (IRS) or the Arizona Department of Revenue must have assessed your tax at least 240 days before you file for bankruptcy.
In addition to these three fundamental requirements, your tax debt must not involve fraud, a false return, or intentional tax evasion. If you are subject to fraud penalties, you will not be able to discharge the associated income taxes.
Two circumstances that can have a bearing on what you can discharge are IRS tax liens and cases in which you used a credit card to pay a non-dischargeable tax debt.
If the IRS has already recorded a dischargeable tax lien on your property before you file for bankruptcy, then the lien will remain in place.
Sometimes people use credit cards to pay income tax amounts they owe. If you have used a credit card to pay a nondischargeable tax debt, then under Chapter 7 bankruptcy, this credit card debt may not be dischargeable.
Under 11 U.S.C. § 523(a)(14), credit card debt incurred to pay a nondischargeable federal tax is itself nondischargeable in Chapter 7 without the need for an adversary proceeding. The credit card issuer may also challenge dischargeability under § 523(a)(2) by alleging fraud or pretenses.
In Chapter 13, though, you can discharge a credit card balance that you incurred in paying a nondischargeable tax debt.
The type of bankruptcy you choose can affect how you discharge eligible tax debts. We consider Chapter 7 bankruptcy and Chapter 13 considerations below.
Filing for bankruptcy under either chapter triggers an automatic stay that stops most IRS collection actions, including wage garnishment and bank levies. The automatic stay gives you immediate breathing room while your case proceeds.
The most significant benefit of Chapter 7 bankruptcy is that it discharges eligible unsecured debts, including qualifying income taxes, in about 4 to 6 months without requiring payment to creditors.
If you have tax debts in Chapter 7, and the bankruptcy trustee liquidates non-exempt property from the debtor’s assets in your bankruptcy estate, the sales proceeds go first to paying priority debts, including federal taxes. While corporations file for bankruptcy under other chapters of the bankruptcy code, individuals typically file under Chapter 7 or Chapter 13.
Liquidation bankruptcy works best when you have older qualifying income taxes that are eligible for discharge under the 3-2-240 test, you have no fraud penalties or tax evasion problems, and you want a fast discharge.
Does filing for bankruptcy eliminate tax debt in every case? Not necessarily—only income taxes that pass the eligibility tests qualify as dischargeable debt, while payroll taxes, trust fund taxes, property taxes, and other nondischargeable debts survive your bankruptcy case.
If the IRS owes you a tax refund when you file for Chapter 7, then you must be able to protect it with a bankruptcy exemption. This is true even if you have not yet filed an income tax return. If you cannot exempt your refund, the trustee will seize it for your creditors’ benefit.
In this situation, you should delay filing for bankruptcy until after you receive the refund and allocate it to necessities like living expenses. If you choose this approach, be sure to keep records of your expenditures.
The main difference between Chapter 7 and Chapter 13 is the debt repayment plan, which lasts 3 to 5 years in Chapter 13. Under Chapter 13, the trustee distributes debtor payments to creditors in accordance with the bankruptcy plan.
Chapter 13 treats income taxes in one of two ways:
During the plan period, IRS levies, bank levies, and wage garnishments stop. Your non-dischargeable tax debts will continue to accrue interest during your plan period, but you generally will not incur additional penalties.
During your Chapter 13 case, you must promptly complete your tax filings each year. The trustee will review, at a minimum, your last two years of tax returns leading up to filing. Your creditors can also request copies. Then you must timely file your tax returns each year after the commencement of your bankruptcy, and provide the Trustee with a copy to review, with all attachments, 14 days after submitting the returns to the IRS and State. Failure to timely file your taxes will result in dismissal of your Chapter 13 bankruptcy.
If any tax return shows you are making more money than expected, the trustee may file a motion with the bankruptcy court to increase your monthly payment under your repayment plan. The amount you pay each month is based in part on your discretionary income—what remains after necessary living expenses.
Suppose you receive a tax refund while in Chapter 13, the trustee may require turnover of the tax refund to apply as a supplemental payment to your creditors. These are additional funds paid in addition to your base Chapter 13 plan. This requirement is usually outlined in your confirmation order.
Chapter 13 can be a good choice if:
The following table summarizes how Chapter 7 and Chapter 13 each handle tax debts.
| Issue | Chapter 7 (Liquidation) | Chapter 13 (Repayment Plan) |
|---|---|---|
| Primary purpose | Eliminate qualifying debts quickly | Repay debts over 3–5 years |
| How income taxes are handled | Qualifying income taxes can be fully discharged | Some taxes must be paid through the plan; others may be discharged later |
| Which taxes can be eliminated | Only older income taxes that meet the 3‑2‑240 rules | Same discharge rules for older income taxes |
| Recent income taxes | Not discharged | Treated as priority debt and paid through the bankruptcy plan |
| Payroll/sales / trust‑fund taxes | Never discharged | Must be paid in full |
| Tax penalties & interest | Discharged only if tied to a dischargeable tax | Same treatment (depends on the underlying tax) |
| Tax liens | Lien survives even if the tax is discharged | Lien survives, but payments may be structured to be paid off |
| Payment flexibility | None — either discharged or still owed | Can stretch payments over 3–5 years |
| IRS collections during the case | Automatic stay stops collections temporarily | Stay continues during the entire plan |
| Length of case (tax impact) | 4-6 months | 36–60 months |
| Best for | Wiping out old qualifying taxes quickly | Managing recent or non‑dischargeable taxes |
Arizona is a community property state, which means that most assets and debts you and your spouse acquire during your marriage belong equally to both of you, regardless of which spouse’s name is on the income, return, account, or debt.
When you file your taxes jointly with your spouse, then both of you are fully liable for the entire tax debt, regardless of who earned the income used to pay income tax.
If you file taxes separately from your spouse, then community income is split evenly between both of you unless an exception applies, and each of you may still be liable for tax liabilities connected with community income.
The IRS can also collect against the separate property of a spouse who owes income tax. It generally will not be collected from the separate property of a spouse who is not liable to pay it, unless you file a joint return or the IRS debt is converted into a community obligation.
Under Arizona law, if one spouse files for bankruptcy and receives a discharge, then the community discharge rule means that the IRS cannot collect discharged taxes from your community property, even if the non-filing spouse is otherwise still personally liable for it.
Community discharge rules do not change your eligibility for discharge, but rather how creditors, including the IRS, can attempt to collect against discharged taxes.
You must have the last four years of tax returns filed to obtain a bankruptcy discharge. It is advisable to have at least the last four years filed before you commence your bankruptcy. You may run into a delay if you choose to prepare returns simultaneously with your Chapter 7 bankruptcy filing.
If you are exempt from filing taxes, you can expect the trustee to ask you for a written explanation why that is.
If you are filing under Chapter 13, then you must be current on your tax filings and provide tax returns for the previous four tax years to the trustee before the meeting of creditors. The IRS and State will file a claim to notify the Trustee and Court of your unfiled returns. The bankruptcy court will dismiss your case if you don’t give the trustee the required returns.
Will bankruptcy clear your tax debt? If you are eligible under the 3-2-240 test, your taxes are old enough, and you are not subject to fraud penalties, then you may be able to discharge qualifying tax debt under Chapter 7 or Chapter 13.
Each bankruptcy chapter has its advantages and possible drawbacks when it comes to discharging IRS tax debt, and you may have some strategic considerations about when to file your taxes and when to time your bankruptcy filing.
A Stone Rose Law Arizona bankruptcy attorney can help you understand which bankruptcy option may be best for you under federal and Arizona tax laws, and how community property considerations may apply if you are married.
We can also help you evaluate whether an alternative to bankruptcy, such as an IRS payment plan or an Offer in Compromise, is suitable for your federal tax debt situation. Filing bankruptcy is not always the only path to debt relief—but when it is the right choice, it can provide significant relief from overwhelming IRS debt.
To speak with an experienced bankruptcy lawyer, call us at (480) 739-2448 or use our online contact form to schedule a free consultation.
