Filing for bankruptcy is often viewed as a last resort, but for many individuals and businesses, it can provide a genuine opportunity to reset financially. One of the most common questions people ask before filing is whether bankruptcy can wipe out tax debts. The answer is complicated. Some tax obligations may be discharged, while others will follow you even after the bankruptcy case closes.
The General Rule: Taxes Are Harder to Discharge
Bankruptcy laws are designed to balance giving debtors a fresh start with protecting the government’s ability to collect revenue. For this reason, tax debts are treated differently from credit cards, medical bills, or personal loans. Most recent tax debts are considered “priority debts,” which means they cannot be discharged.
That said, older income tax debts may qualify for discharge if they meet specific conditions. This is where timing becomes critical.
Income Taxes vs. Other Taxes
Not all taxes are treated equally in bankruptcy. Only certain federal, state, and local income taxes can be discharged. Payroll taxes, trust fund taxes, and fraud-related tax penalties are never dischargeable. Likewise, sales taxes collected from customers are considered trust taxes and cannot be eliminated through bankruptcy.
The focus, therefore, is on personal or business income taxes that have aged enough to meet the bankruptcy rules.
The Three-Year, Two-Year, and 240-Day Rules
Bankruptcy courts apply a series of timing tests to decide whether an income tax debt qualifies for discharge:
- The tax return must have been due at least three years before the bankruptcy filing date.
- The tax return must have actually been filed at least two years before filing.
- The tax assessment must have been made at least 240 days before filing.
All three tests must be satisfied. If you filed late returns, those may still count toward the two-year rule, but cases involving unfiled returns are generally not dischargeable.
Fraud or Willful Evasion Blocks Discharge
Even if your tax debt meets the timing rules, the bankruptcy court will not discharge it if there is evidence of fraud or willful tax evasion. For example, filing a false return, concealing income, or deliberately avoiding payment will prevent the debt from being wiped out. The law makes a clear distinction between someone who cannot pay and someone who refuses to pay.
Chapter 7 vs. Chapter 13
The type of bankruptcy you file also affects how tax debts are handled.
- Chapter 7 may discharge qualifying income tax debts entirely, allowing you to move forward without them. However, non-dischargeable taxes remain, and the government can continue collection efforts once the case ends.
- Chapter 13 does not immediately eliminate tax debt. Instead, it allows you to create a three- to five-year repayment plan. Priority tax debts must be paid in full through this plan, but interest and penalties may stop accruing. If any older income taxes qualify for discharge, they may be eliminated at the end of the repayment plan.
For many filers, Chapter 13 provides breathing room to pay off nondischargeable taxes in a structured way while protecting them from aggressive collection actions.
Key Point: Tax Liens
Even if the underlying income tax debt is discharged, any tax lien filed by the IRS or a state taxing authority before bankruptcy remains attached to your property. This means the lien must be satisfied if you want to sell or refinance the property.
Contact Flex Legal Group Today To Review Your Options
Bankruptcy can provide meaningful relief, but not every tax obligation will disappear. Income tax debts may be discharged if they meet the strict three-year, two-year, and 240-day rules, and if no fraud or evasion is involved. Payroll taxes, trust fund taxes, and recent returns will remain even after bankruptcy.
At Flex Legal Group, we help individuals and businesses understand how bankruptcy interacts with tax obligations so they know what debts can be eliminated and what must still be addressed. If you are considering bankruptcy and have outstanding tax liabilities, our experienced legal team can guide you through your options and help you make informed decisions. Contact us today to learn more.