As a general rule, although bankruptcy can eliminate many kinds of unsecured and secured debts, there are a few kinds of debts that will survive a Chapter 7 or Chapter 13 bankruptcy under the US bankruptcy code. Tax debts are usually among those that federal bankruptcy protection will not eliminate.
Still, it may be possible in some circumstances to discharge tax obligations in bankruptcy.
At Stone Rose Law, we can help if you owe past-due taxes and are contemplating bankruptcy protection. To learn more, call us at (480) 498-8998 to speak with an Arizona bankruptcy lawyer and to arrange a free consultation.
In this article, we go over some of the ways that you may be able to eliminate tax obligations under federal bankruptcy laws.
Eliminating some tax debts under Chapter 7 bankruptcy is possible if you meet all of the following requirements:
If you meet these five requirements, then your tax debt can be discharged. This discharge will also include any penalties and interest related to the tax debt.
However, if you do not meet all of these criteria, the tax debt will not be discharged.
We consider each of these requirements in more detail below.
Only income taxes are eligible for elimination under Chapter 7 bankruptcy. Your total income tax liability is the combination of taxes you owe from income tax, capital gains, self-employment, penalties or interest, and past-due taxes.
Other kinds of taxes, like payroll taxes, property taxes, employee trust taxes, Social Security and Medicare withholding taxes, and other types of tax debt do not qualify.
The tax debt in question must come from a tax return you filed at least three years before filing for Chapter 7 bankruptcy. For example, if you file for Chapter 7 bankruptcy in 2025, then the tax debt must have arisen in 2022 or before.
You will typically be required to provide a copy of your most recent tax return. The tax debt must relate to a tax return you filed at least two years before filing for bankruptcy. This time is measured from the date you actually filed a return.
If you requested and received an extension of your filing deadline and filed by the extension date, this is still considered to be an on-time filing. If, however, you file a late return, including a return filed after an extension date, then such a return may not be considered valid.
Tax debts from unfiled tax returns cannot be discharged under bankruptcy.
The requirement that the IRS assess your tax debt at least 240 days before you file for bankruptcy is known as the “240-day rule.” The IRS assessment must come from a self-reported balance due, an IRS final audit determination, or an IRS final proposed assessment.
However, if the IRS suspends its collection efforts because of a compromise or a previous tax filing, this period of time may be extended.
The tax return under which the tax debt arose must be an honest and lawful one. You cannot have engaged in any intentional act of tax evasion.
Chapter 13 bankruptcy is a common way to pay off eligible tax debt.
Compared to a Chapter 7 liquidation bankruptcy, a plan is filed to repay some or most of your creditors under Chapter 13 bankruptcy. This repayment plan takes three to five years to complete and includes your tax debts. Some tax debts must be repaid through the plan, and those that qualify for discharge under the same five criteria outlined above will be discharged at the end of the Chapter 13 plan.
The scope of the tax debt included in your repayment plan widens to more than income taxes, but the discharge eligibility remains limited to income tax debts. Under the repayment plan, you will pay a portion of the tax debt owed depending on when the debt was incurred. The remaining balance may be discharged when you complete the repayment plan. During the repayment plan, you must continue to file tax returns and pay all new income taxes due under these returns.
Chapter 13 filers must complete tax returns promptly each year by the April 15th deadline or provide a copy of the filing extension. If an extension is filed, returns must be filed by the October 15th deadline. You must provide copies of your federal and state tax returns to the Trustee within 14 days of filing. The Chapter 13 trustee will review your future tax filings to confirm income. If a return shows you are making more money than originally disclosed, the trustee could demand an increase in your future monthly payment.
One advantage of bankruptcy filing is the protection it provides from creditors and debt collectors. This “automatic stay” applies to IRS and state tax authority efforts to collect past-due tax amounts. While the stay is in effect, they cannot send you collection notices, seize your property, garnish your wages, levy against your bank accounts, or file new tax liens on your property. However, their collection efforts can resume for tax debts not discharged in your bankruptcy and for any new tax debts owed after your case is filed.
Although it will prevent the IRS and state tax authorities from harassing you, the bankruptcy automatic stay still allows the following activities:
Not all tax debts can be discharged under bankruptcy. Here are some tax debts that will remain even if you are able to discharge some tax debts under Chapter 7 or Chapter 13.
Bankruptcy only discharges debts you incurred before filing your bankruptcy petition.
Sometimes, the IRS will put a tax lien on your real property for past-due taxes. Although filing for Chapter 7 bankruptcy may eliminate your obligation to pay the underlying tax and prevent the IRS from attempting to go after those taxes by garnishing your wages or withdrawing funds from your bank accounts, the tax lien will remain.
When you sell the property subject to a lien, you must pay it off before you can transfer the title to the purchaser.
If you used a credit card to pay off income tax debt more than three years old, and you filed your original return on time, then this debt qualifies for discharge under bankruptcy.
If, however, you use a credit card to pay off income tax debt less than three years old, and the credit card issuer challenges the dischargeability of that sum and prevails in an adversary proceeding, then this debt becomes non-dischargeable under Chapter 7.
Generally, you can receive tax funds after filing for bankruptcy. As noted above, however, if you owe past-due spousal or child support, the IRS may withhold refund amounts to pay these obligations.
Note that if the IRS owes you a tax refund when you file for Chapter 7 bankruptcy and you cannot protect it with a bankruptcy exemption, the trustee in bankruptcy may seize it for the benefit of your creditors.
In Chapter 13, the trustee can keep tax refunds in every year of the prepayment plan, while that can only happen once in Chapter 7.
Your bankruptcy attorney can help you determine whether your anticipated tax refund will be more than the allowable exemption. If this is the case, you may want to delay filing for bankruptcy until you receive your refund and then spend the refund on living expenses. If you do this, be sure to keep a record of those expenses you allocated your tax refund to, because the trustee may want to review it.
Dealing with the IRS or the Arizona Department of Revenue can be stressful enough, even when you do not owe back taxes.
If you owe federal or Arizona tax debts and need guidance on satisfying them in bankruptcy, call Stone Rose Law at (480) 498-8998 to discuss your potential bankruptcy case. An experienced bankruptcy law attorney can give you the guidance you need to resolve your tax debts with confidence.
