Tax Debts in Chapter 7 Bankruptcy

You can discharge federal income tax debt in Chapter 7 bankruptcy if you meet certain requirements, but most other types of taxes are not dischargeable. Learn more about bankruptcy and clearing tax debt.

By , Attorney · Loyola Law School

It is a common misconception that you cannot get rid of tax debts in Chapter 7 bankruptcy. This is not true. You can "discharge" or wipe out income tax debts if they meet the qualifications, limitations, and restrictions explained below. To learn more about what happens to your debts in Chapter 7 bankruptcy, including which debts are discharged and which are not, read Eliminating Tax Debts in Bankruptcy.

The Requirements for Discharging Income Tax Debt

You will be able to get rid of your tax debts in Chapter 7 bankruptcy if you meet the following requirements:

  • The taxes are income-based. Income taxes are the only kind of debt that Chapter 7 can discharge. The tax debt must be for federal or state income taxes or taxes on gross receipts.
  • The return was due at least three years ago. The taxes must be from a tax return that was due (including all valid extensions) at least three years before you filed for bankruptcy. For example, if taxes were disclosed in a 2015 income tax return for which extensions to file the return expired on October 15, 2016, the tax return due date test will be satisfied if the bankruptcy petition is filed after October 15, 2019.
  • You filed the return at least two years ago. You must have filed the tax return at least two years before filing for bankruptcy. In most courts, a late return does not count as a "return," and you won't be able to discharge the taxes (late means your extensions have expired, and the IRS filed a substitute return on your behalf). In other courts, you can discharge tax debt even if you file a late return, assuming you meet the other criteria.
  • The taxes were assessed at least 240 days ago. The taxing authority must have assessed the tax (entered the liability on the taxing authority's records) against you at least 240 days before you filed for bankruptcy. This time limit may be extended if there was an offer in compromise between the taxing authority and you or if you had previously filed for bankruptcy.
  • No fraud or willful evasion. The tax return must not be fraudulent or frivolous, and you cannot be guilty of any intentional act of evading the tax laws. If you file a joint return, the taxing authority must prove that you and your spouse committed fraud related to the applicable return or willfully attempted to evade the tax for the court to deny the discharge of the tax debt.

Nondischargeable Tax Debts

You cannot get rid of most non-income-related tax debts. The following debts won't be discharged in Chapter 7 bankruptcy:

  • Tax liens. A Chapter 7 bankruptcy discharge of income taxes wipes out the personal obligation to pay the tax and prevents the taxing authority from going after your bank account or wages. However, tax liens, or secured taxes, will remain attached to your property. This rule applies only to tax liens recorded against your property before you file for bankruptcy. Although you might not be personally liable for the tax debt, you'll have to pay the lien from any profits when you sell the property.
  • Recent property taxes. If a property tax is incurred before you file for bankruptcy, the tax is nondischargeable. However, this only applies to property taxes last payable within one year of your bankruptcy filing. You can discharge your personal liability for property taxes that were payable (without penalty) more than one year before your bankruptcy filing. Remember, though, that many counties attach a lien to your property upon assessment or one year afterward. If you have a lien against your property for the property tax, that lien will remain after your Chapter 7 discharge (although your personal liability will be removed). T
  • Taxes that a third party is required to collect or withhold. This covers the so-called "trust fund" taxes such as FICA, Medicare, and income taxes that an employer must withhold from the pay of employees and sales taxes paid by the debtor's customers that the debtor is required to send to a governmental unit.
  • Certain employment taxes, excise taxes, and customs duties, depending on specific time periods.
  • Non-punitive tax penalties on nondischargeable taxes if the transaction or event that sparked the penalty occurred less than three years before filing the bankruptcy petition.
  • Erroneous tax refunds or credits relating to nondischargeable taxes.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we want to ensure you find what you need. Below, you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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