What Happens to My IRS Tax Debt if I File for Bankruptcy?

If you’re considering filing for bankruptcy, your debts have piled up to the point where you simply have no idea how you’re going to climb out from under. It doesn’t matter how you got into this situation, or how long you’ve been trying to get caught up: what does matter is that you’re taking a concrete step to start over and give yourself a new chance.

One of the first things that people who file for bankruptcy ask is whether the filing will eliminate all of their debt. Many people have medical debt or credit card debt, and those can almost always be discharged in a Chapter 7 bankruptcy. But IRS tax debt is a different thing entirely. Income tax can be discharged, but only when certain criteria are met. Those include:

  • You must not owe your income tax as a result of having willfully evaded paying or filing a false tax return. Any income tax return that you’ve filed and owe money on must have been legitimate and legal.
  • Your income tax debt must have existed for at least three years prior to your bankruptcy filing. You can’t discharge a 2021 or 2022 income tax debt in 2023.
  • Whatever your tax debt, you have to have filed a tax return for it within two years of your bankruptcy filing.
  • Your debt must either not have been assessed by the IRS yet or have been assessed 240 or more days prior to your bankruptcy filing.

Note that these rules only apply to income tax. If you owe other tax such as payroll tax, or owe penalties on previous tax problems, you cannot discharge them through your Chapter 7 bankruptcy.

The same criteria as those listed above apply if you are filing for Chapter 13 bankruptcy. The three-year-old tax debts can be discharged, but newer tax debts can’t. However, under a Chapter 13 bankruptcy, those newer debts can be wrapped up within your payment plan, providing you with three to five years to pay them off.  Chances are that the terms of your bankruptcy payment plan will be a lot more attractive than what would have been offered to you by the IRS.

For guidance on how best to approach your particular situation, contact our experienced, knowledgeable bankruptcy attorneys today.