Income Tax Debt in Chapter 7 Bankruptcy

Most tax debts won't be wiped out by Chapter 7 bankruptcy, but some older tax obligations might.

In most cases, recent income tax obligations are considered nondischargeable  priority debts  in Chapter 7 bankruptcy. This means that you typically can’t eliminate your income tax liability by filing for a Chapter 7. But if a tax debt satisfies certain requirements, you may be able to discharge it in bankruptcy. In general, whether you can wipe out an income tax debt in Chapter 7 bankruptcy depends on:

  • when the tax return was due
  • when you actually filed the tax return
  • whether the debt has been assessed by the IRS, and
  • whether you committed tax fraud.

How Are Income Tax Debts Treated in Chapter 7 Bankruptcy?

Most income tax obligations receive special treatment in Chapter 7 bankruptcy because they are considered priority debts. This means that they get paid before most other debts (if there is a distribution made to creditors) and they survive your bankruptcy discharge. If an income tax debt is classified as priority in your bankruptcy case, you will be on the hook for paying it back even after receiving your discharge. (To learn about other priority debts, see  Priority v. Nonpriority Claims in Bankruptcy.)

When Can You Discharge Income Tax Debts in Chapter 7 Bankruptcy?

Discharging an income tax debt is difficult, but not impossible in Chapter 7 bankruptcy. If a tax debt is sufficiently old enough, it can be discharged as a nonpriority unsecured debt in bankruptcy (like your credit card obligations and medical bills).

You may be able to discharge your income tax debt in Chapter 7 bankruptcy if you satisfy all of the following requirements:

  • The tax return for the debt you wish to discharge was due at least three years before your bankruptcy filing date (taking into account any extensions you received).
  • You actually filed a tax return for the debt at least two years prior to your bankruptcy filing date.
  • The tax debt has not yet been assessed by the IRS or was assessed at least 240 days before you filed for bankruptcy (keep in mind that the 240-day limit can be extended if the IRS stopped its collection efforts because you submitted an offer in compromise or filed for bankruptcy previously).
  • You did not file a fraudulent tax return or otherwise engage in willful tax fraud or evasion.

If you have an older tax debt you think you may be able to get rid of in bankruptcy soon, consider delaying filing your case until you satisfy all of the time limit requirements above.

Can You Eliminate Federal Tax Liens in Bankruptcy?

Even if you can discharge an income tax obligation in Chapter 7 bankruptcy, your discharge only wipes out your personal liability for the debt. If the IRS has already placed a tax lien on your property before you filed your case, that lien will not go away. This means that the IRS will be prohibited from garnishing your wages to collect the discharged tax debt. But you will still need to pay off the lien when you sell the property.

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