Yes, Bankruptcy Can Discharge Tax Debt. Here Are the Rules.

One of the most persistent myths in tax is that bankruptcy never touches tax debt. It is wrong. Older income taxes are discharged in bankruptcy courts every day. What is true is that the rules are technical, the timing is everything, and getting it wrong by a single day can leave the debt alive on the other side.

The Three Timing Rules

Income tax is generally dischargeable when three clocks have all run. The return for the year was due, including extensions, more than three years before the bankruptcy filing. The return was actually filed more than two years before. And the tax was assessed more than 240 days before. Practitioners call it the 3-2-240 analysis, and it runs on dates pulled from your IRS account transcripts, not from memory.

Events along the way can pause these clocks - a prior bankruptcy, an offer in compromise, certain collection holds all add time. That is why the analysis has to come off the transcripts. The difference between dischargeable and not is sometimes a matter of weeks, and weeks can be waited out.

What Bankruptcy Does Not Discharge

Payroll trust fund taxes and the trust fund recovery penalty survive bankruptcy, period. Fraud-based liabilities survive. Recent income taxes that fail the timing tests survive. And here is the trap that catches people from certain parts of the country: in some federal circuits, a return filed late after the IRS has already assessed the tax may never count as a 'return' for discharge purposes at all. The earlier you file delinquent returns, the more doors stay open.

The federal tax lien also deserves respect. Discharge wipes out your personal liability, but a lien recorded before the bankruptcy survives against property you owned at filing. Planning around lien timing is part of doing this right.

Chapter 7, Chapter 13, and Strategy

Chapter 7 wipes qualifying taxes out. Chapter 13 can pay non-dischargeable taxes over five years while stopping penalties and most interest, which sometimes beats anything the IRS itself offers. The right chapter depends on what passes the timing tests, what assets are in play, and what the rest of your debt picture looks like.

I run discharge analyses from transcripts regularly, and the answer is often 'not yet, but in eight months.' Knowing the date is the whole game. Get me your transcripts and I will find it.