Taxes & Bankruptcy

Not all tax debts are dischargeable in bankruptcy, but many are. Generally, the Chapter 7 Bankruptcy petitioner must have tax debts that meet seven criteria for discharge and some are related to the "age" of the tax debt. For this reason, the date of your bankruptcy filing may be important if you owe back taxes. Our attorneys will can assist with proper evaluation of your tax debt in order to determine whether it qualifies for discharge, and the appropriate timing for filing.

Advantages of Chapter 7 Bankruptcy for Tax Debts

The automatic stay stops all creditors, including the IRS, from collecting on unpaid debts during bankrputcy. This protection from your creditors goes into effect automatically upon filing of the bankruptcy petition. In addition, you never have to pay debts that are "discharged" in a Chapter 7 Bankruptcy. If your taxes are deemed to be dischargeable, they will be eliminated in a Chapter 7.

7 Criteria for Discharge of Taxes in Chapter 7 Bankruptcy


  • 1. No fraud or willful evasion of taxes. You cannot obtain a discharge if you file a fraudulent tax return or otherwise willfully attempt to evade paying taxes. The IRS typically applies this rule only in cases where a fraud penalty has been assessed.
  • 2. Only income taxes may be discharged in bankruptcy. Other taxes, such as excise taxes or estate and gift taxes are not dischargeable. Trust fund penalties and fraud penalties are never dischargeable.
  • 3. The taxpayer must be an individual. Corporations and other entities liable for income taxes cannot discharge income tax debts in a Chapter 7 bankruptcy.
  • 4. No withheld or collected tax. Your liability for another person’s taxes are cannot be discharged by your bankruptcy. The employer portion of payroll taxes is an example.
  • 5. The three-year rule. The due date for the return, including the due date after filed extensions, must be more than three years prior to the bankruptcy petition. Do not forget that due dates falling on Saturday or Sundays are actually extended to the following Monday.
  • 6. The two-year rule. You must have filed the tax return more than two years prior to the bankruptcy petition. Returns filed by the IRS on your behalf do not qualify. There is one “gotcha” relating to the two-year-rule. The IRS has three years to audit and correct a return after the return has been filed. Thus, it is possible to discharge taxes on a return only to have the IRS assess additional taxes on account of corrections the IRS makes to the return.
  • 7. The 240-day rule. The assessment date for the taxes must be greater than 240 days prior to the date the bankruptcy petition is filed.

What if my taxes are not dischargeable?

You have other options for reducing your tax debt before or after bankruptcy. For example, you may be able to submit an offer in compromise to the IRS. The IRS can negotiate with taxpayers (or their representatives) to compromise tax claims based on either doubtful liability (you really don't owe that much tax) or doubtful collection (you don't have adequate funds to pay the tax you owe).

Tax Liens in Bankruptcy

Recorded tax liens from before bankruptcy will survive after a bankruptcy discharge. Chapter 7 bankrputcy will discharge your personal obligation to pay the debt associated with a tax lien, however any tax liens will continue to attach to any pre-petition property that you retain after bankruptcy. After bankruptcy, the IRS may seize assets that are subject to a recorded tax lien, even if your personal liability has been discharged.

Call for a FREE CONSULTATION: 714-533-6000

We Can Help

If you are facing a financial crisis, understand ALL of your options before considering bankruptcy. CONTACT an Orange County Bankruptcy Attorney at the Anaheim law offices of Nicastro Piscopo today for a FREE consultation.

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Our multi-lingual staff can assist you in English, Spanish and Portugese. Please inquire about interpreter services at our offices in Anaheim.

We are a debt relief agency. We help people file for bankruptcy relief and have been doing so for over 16 years.


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