Discharging Income Tax Debts in Chapter 7: What Is Dischargeable?

Some Income Taxes are Dischargeable in a Bankruptcy Case. Getty Images

In a Chapter 7 straight bankruptcy case, the filer, or the person we refer to as the debtor, generally seeks to eliminate liability for paying certain debts. We call that discharging the debt. While many debts can be discharged in a Chapter 7 case, some debts cannot be discharged.

Likewise, Income taxes are like other debts in some ways and differ from other debts in other, significant ways. One of the most important differences is that the bankruptcy laws have placed certain restrictions on discharging newer income tax debts versus older income tax debts.

There are also other criteria that must be met.

Disclaimer:  Of course, your facts are unique and unlike any other taxpayer. The rules we state here may or may not apply to you. We caution against anyone relying solely on this list or anything else you may find on this site or any other website to help you determine if you can discharge any particular tax debt. If you owe income taxes or any other complicated debt, please consult with a qualified consumer bankruptcy attorney or tax professional who can evaluate your personal tax issues and advise you accordingly. The stakes are too high.

The General Rules for Discharging Income Taxes in a Chapter 7 Case

*Note that property taxes can sometimes be discharged, too, but those are different rules. See Discharging Debts: Business, Sales, and Property Taxes to learn more about how property taxes are treated in bankruptcy.

They are income taxes. In Chapter 7, generally only taxes based on wages, commissions or other income or gross receipts are eligible for discharge.

The Three-Year Rule. The return was due at least three years ago. Most returns are due on April 15 for the previous tax year. If the taxes were due from a return filed on April 15, 2010, they would be eligible for discharge (provided all other criteria are met) after April 15, 2013.

Be careful of extensions, because they must be accounted for, also.

Let’s say you knew you would owe taxes on your 2008 income. You asked for an extension to July 2009 to file your return. Then you asked for another extension to October 15, 2009. The tax debt from the 2008 tax year would not be eligible for discharge until October 15, 2012.  

The Two-Year Rule. You must have filed the return at least two years before you filed your bankruptcy case. If you don’t file a return, sometimes the IRS will file one for you. Many bankruptcy courts do not consider that a return for purposes of fulfilling this rule.

The Taxes Were Assessed at Least 240 Days Ago. When the taxing authority enters the liability on its records, they have “assessed” it. That doesn’t necessarily happen the minute you file your return. It could take weeks or months. In some cases, the taxing authority will audit your return and assess additional taxes years after the return is filed.

To qualify for discharge, the taxes must have been assessed at least 240 days before the bankruptcy was filed. This period could be tolled or extended if you filed an offer in compromise with the IRS or if you filed a bankruptcy case during that period that was discharged or dismissed.

No Fraud or Willful Evasion.

Finally, if your return was fraudulent or frivolous, or you intended to evade the tax laws, the taxes due from that return are not dischargeable.

How to Find Information on the Taxes You Owe

If you are unsure when your tax return was filed, whether you requested extensions for a given tax year, or how much tax, interest and penalties were assessed and when they were assessed, you can find out from the IRS by requesting a tax transcript online or calling 1-800-908-9946.