Taxes in Bankruptcy: What Gets Wiped

"Can bankruptcy get rid of my tax debt?" has a real answer, and it is more generous than most people expect and more mechanical than most explainers admit. Older income tax can be discharged. Recent income tax cannot. Payroll taxes withheld from employees can never be discharged by anyone. Whether a specific tax year falls on the right side of the line comes down to three dates and two conditions written into the Bankruptcy Code.

Key points

• Three timing tests, all found in §507(a)(8) and §523(a)(1): the 3-year rule, the 2-year rule, and the 240-day rule. All three must be met.
• The 240-day clock stops while an offer in compromise is pending (plus 30 days) and while a prior bankruptcy stay was in effect (plus 90 days). The 3-year clock is extended by any filing extension.
• Tax that meets the tests is ordinary unsecured debt. Tax that fails them is a priority claim, paid before general creditors and in full in Chapter 13.
• Trust-fund taxes, unfiled-return taxes, and taxes tied to fraud or evasion are excluded from every discharge, including the Chapter 13 discharge.
• The discharge removes personal liability only. A Notice of Federal Tax Lien filed before the case stays attached to property the filer owned at filing.

The three timing rules

Worked example with made-up dates. A person files Chapter 7 on September 4, 2026.

1. Tax year 2022

   The 2022 return was due April 18, 2023. Three years later is April 18, 2026, which is before the filing date. The 3-year rule passes. If the return was filed on time and the tax was assessed shortly after, the 2-year and 240-day rules pass too. The 2022 income tax is dischargeable.

2. Tax year 2022 with an extension

   The same return was extended to October 16, 2023. Three years later is October 16, 2026, which is after the filing date. The 3-year rule fails. The 2022 tax is a priority claim and survives.

3. Tax year 2020, filed late

   The 2020 return was due May 17, 2021, but the person did not file it until December 2024. The 3-year rule passes, but two years from December 2024 is December 2026, after the filing date. The 2-year rule fails. The 2020 tax survives.

4. Tax year 2021, recently audited

   The 2021 return was filed on time, but an audit produced an additional assessment on March 1, 2026. That is 187 days before filing. The 240-day rule fails for the audited amount. Waiting until roughly November 2026 would let it pass.

The 240-day clock has two pauses

Section 507(a)(8)(A)(ii) excludes from the 240 days:

• Any time an offer in compromise was pending or in effect, plus 30 days. A person who submitted an offer, waited eight months for a rejection, and then filed bankruptcy has not used up the 240 days; the clock was paused the whole time.
• Any time a stay from a prior bankruptcy case was in effect, plus 90 days. A dismissed earlier case does not shorten the government's window in the new one.

The 3-year rule has its own extension: the statute's "including extensions" language means an October extension pushes the due date, and therefore the three-year mark, by six months. The 2-year rule has a trap of its own. Several circuits treat a return filed after the IRS has already prepared a substitute return, or filed very late, as not a "return" at all for §523(a)(1)(B), which makes the tax permanently non-dischargeable. That question is unsettled and circuit-dependent.

Priority tax versus dischargeable tax

The same three tests decide two things at once. Tax that fails them is an eighth-priority claim under §507(a)(8). Priority status has consequences in each chapter:

For someone with a large recent tax bill and steady income, Chapter 13 often works as a court-supervised installment agreement: the priority tax is paid over up to five years, interest generally stops accruing, and the IRS cannot levy while the plan is in place. Chapter 13 covers the plan mechanics.

What never discharges

Some tax debt is excluded from every discharge, in every chapter:

• Trust-fund taxes. Section 507(a)(8)(C) covers any tax "required to be collected or withheld." That includes employee income tax withholding, the employee share of FICA, and sales tax collected from customers. A business owner assessed the trust fund recovery penalty personally is in this category.
• Taxes for unfiled returns. Section 523(a)(1)(B)(i). No return, no discharge, no matter how old the tax.
• Fraud and willful evasion. Section 523(a)(1)(C). A fraudulent return or a willful attempt to evade or defeat the tax bars discharge permanently.
• Debt borrowed to pay a non-dischargeable tax. Sections 523(a)(14) and (14A). Paying the IRS with a credit card does not convert priority tax into dischargeable card debt.
• Property taxes payable within a year of filing. Section 507(a)(8)(B).

Tax liens survive the discharge

In practice that means a person with a recorded federal tax lien and a house or car keeps the debt attached to those assets even after the tax itself is discharged. The IRS cannot garnish wages or levy a bank account for the discharged tax, but it can enforce the lien against the property when it is sold or refinanced, up to the value the property had at filing. Publication 908 also notes that a lien from an assessment may survive on property that was excluded from or abandoned by the estate even without a filed notice.

Chapter 13 handles this differently. A tax lien is a secured claim to the extent of the property's value, and the plan pays that secured portion, after which the lien is released.

During the case: stay, refunds, and returns

The automatic stay stops IRS levies and new lien filings for pre-petition taxes the moment the case is filed. It does not stop the IRS from auditing, assessing tax, or issuing a notice and demand, which the Code specifically allows. Two practical points from Publication 908:

• Refunds can be frozen. The stay prevents the IRS from offsetting most refunds, but the IRS can offset a pre-petition income tax refund against a pre-petition income tax debt even during the stay, and may freeze other refunds until the stay lifts.
• Returns must be filed. Section 521(e)(2) requires the most recent federal return to be given to the trustee at least seven days before the 341 meeting, and a taxing authority can ask the court to convert or dismiss a case when a post-petition return is not filed.

Common mistakes to avoid

• ✕Counting three years from the tax year instead of from the return due date, including any extension. An October extension moves the date by six months.
• ✕Filing bankruptcy shortly after an audit assessment. The 240-day rule runs from the assessment, not the original return.
• ✕Assuming the 240-day clock ran while an offer in compromise was pending. The statute pauses it, plus 30 days.
• ✕Paying a tax bill with a credit card before filing. Under §523(a)(14), that card balance inherits the tax's non-dischargeable status.
• ✕Expecting the discharge to remove a recorded tax lien. Personal liability ends; the lien on pre-petition property does not.
• ✕Filing several years of missing returns the week before the petition. Those taxes fail the 2-year rule and may fail the return test entirely.

Frequently asked questions

Can bankruptcy discharge IRS tax debt?

Yes, for income tax that meets three timing tests: the return was due more than three years before filing, was filed more than two years before filing, and the tax was assessed more than 240 days before filing, with no fraud or evasion. Tax that fails any test is a priority claim that survives Chapter 7 and must be paid in full in Chapter 13.

What is the 3-year rule for taxes in bankruptcy?

Under 11 U.S.C. §507(a)(8)(A)(i), income tax keeps priority status, and stays non-dischargeable, if the return for that year was last due, including extensions, within three years before the bankruptcy petition. Once the due date is more than three years old, that test is passed. An extension to October pushes the date by six months.

What is the 240-day rule?

Under §507(a)(8)(A)(ii), tax assessed within 240 days before the petition keeps priority status. The clock excludes any period an offer in compromise was pending, plus 30 days, and any period a prior bankruptcy stay was in effect, plus 90 days. Audit assessments restart the 240 days for the additional amount.

Does a tax lien go away in bankruptcy?

No. A Notice of Federal Tax Lien filed before the petition survives the discharge and remains attached to property the filer owned at filing, according to IRS Publication 908. The discharge ends personal liability and stops levies and garnishment for the discharged tax, but the lien can be enforced against the property. In Chapter 13, the lien is paid as a secured claim through the plan.

Are payroll taxes dischargeable in bankruptcy?

No. Taxes required to be collected or withheld, such as employee withholding, the employee share of FICA, and collected sales tax, are excluded under §507(a)(8)(C) and §523(a)(1)(A) from every discharge, including the Chapter 13 discharge. That includes a trust fund recovery penalty assessed against a business owner personally.

How does Chapter 13 handle tax debt?

Priority tax that fails the timing tests must be paid in full through the plan, generally over three to five years, and interest usually stops accruing on the unsecured priority portion. Tax that passes the tests is paid alongside other unsecured debt, often at a small percentage, and the balance is discharged when the plan is completed. Trust-fund and fraud taxes are still excluded.

When to talk to a professional