To discharge tax debt in bankruptcy, your return must be at least three years old, the assessment over 240 days old, and the return filed at least two years before filing. Payroll, trust‑fund, excise, and sales taxes square to priority and stay non‑dischargeable. Fraud or willful evasion bars discharge. If your debt qualifies, you can omit it in Chapter 13, paying priority debts in full without interest. The remaining details unfold to guarantee full compliance today.

Key Takeaways

• Tax returns older than 3 years, filed at least 2 years earlier, and assessed 240+ days before filing are dischargeable, absent fraud.
• Payroll, trust‑fund, excise, and sales taxes are always priority and non‑dischargeable.
• Property taxes due within one year of filing become priority; they must be paid in full during a Chapter 13 plan.
• Trust‑fund claims cannot be discharged even if timing tests are met; they remain scheduled and paid as priority during Chapter 13.
• The “no‑interest payoff” rule allows priority taxes to be paid without interest in Chapter 13, but non‑priority debt interest is included in repayment.

Which Taxes Are Dischargeable in Bankruptcy?

If you file for bankruptcy, only specific income taxes can be discharged, while all other tax obligations remain non‑dischargeable. You may discharge old income taxes—those filed at least two years before you file and assessed over 240 days prior—provided the return relates to earned income or capital gains, and no fraud or willful evasion was involved. Taxes that qualify include earned‑income returns and capital gains liabilities that satisfy the 240‑day, three‑year, and filing deadlines. All payroll, trust‑fund, excise, and sales taxes are instantly priority and therefore non‑dischargeable. All property taxes due within one year also become priority and stay in the claims list. If the debt originates from a fraudulent return, it is permanently barred regardless of timing. In a Chapter 13 plan, priority taxes must be paid in full, without interest, whereas eligible non‑priority debts may be wiped once the plan commits the debtor’s income for the term.

Does the Three‑Year Rule Apply to Your Tax Debt?

Do you wonder whether the three‑year rule bars your current tax debt from discharge? The statute requires that the tax return be due at least three years before the bankruptcy petition. The clock starts on the original due date, not the filing date. If you filed late more than three years after that due date, the debt is generally dischargeable, except for special disqualifiers. However, a substitute for return (SFR) from the IRS does not start the clock; you must file a valid return. A Tolling Period—such as the automatic stay from a prior Chapter 7 or 13—halts the clock. The clock resumes when the stay ends. Multiple chapter filings can extend the suspension, pushing the effective three‑year wall forward. Therefore, verify your return’s due date, check for any preceding stays, and make certain you have a filed return, not an SFR, to claim dischargeability in all circumstances, consult counsel.

Must Your Return Be Filed Two Years Before Filing?

The three‑year rule you just considered governs the original due date of a return, not its filing. To qualify for discharge under §523(a)(1)(B), you must file each tax return at least two years before your bankruptcy petition. The deadline is measured from the actual filing date—extensions or late submission do not reset the clock, but the filing date itself does. Key points to observe are:

1. Filing Timing: Submit the return on or before the due date; any late month counts from the true filing date.
2. Submission Deadline: Treat electronic and paper receipts equivalently; the IRS date of receipt establishes the two‑year window.
3. Amended Return: The original return’s filing date governs; an amended effort cannot retroactively satisfy the requirement.

If you miss this two‑year threshold, the tax debt remains nondischargeable, regardless of the three‑year rule. Therefore, verifying filing dates early avoids post‑filing surprises and future liabilities.

Do You Meet the 240‑Day Assessment Requirement?

Because the 240‑day rule hinges on the tax assessment date, timing is critical. You must prove that the IRS assessed the debt more than 240 calendar days before you file for bankruptcy. The clock starts on Assessment Timing, not on the filing or due date. Count days back from the petition filing date; day 241 becomes the first qualifying day. For example, a January 1 assessment requires a filing no earlier than September 2 of the same year. If your filing falls within 240 days, the debt becomes nondischargeable. IRS collection actions can toll the 240‑day period. Under Suspension Duration, an active offer in compromise pauses the count from submission to the final decision, plus an additional 30 days after rejection or withdrawal. Other suspensions, such as proceedings in a prior bankruptcy, also extend the clock. Remember, properly satisfying the 240‑day rule alone does not suffice; it must coexist with the 3‑year and 2‑year requirements.

Why Trust‑Fund Taxes Stay Nondischargeable & What It Means

Although trust‑fund taxes resemble other tax liabilities, the Bankruptcy Code bars their discharge.

Trust‑fund taxes, unlike other liabilities, remain non‑dischargeable under bankruptcy.

1. Priority status under § 507(a)(8) guarantees that withheld income, FICA, and Medicare taxes remain non‑dischargeable, regardless of chapter, date, or payment plan.
2. Responsible person liability bars the discharge of any 100 % penalty imposed for willful non‑payment, and courts enforce a multi‑factor test—control, authority, and signature to identify who must repay.
3. Legal safeguards such as § 523(a)(1)(A)(C) and Supreme Court precedent (e.g., *Sotelo* and *Johnson*) prohibit evasion of payroll‑tax obligations through bankruptcy, compelling employers to maintain Employer Accountability.

You cannot wipe these liabilities with a discharge; instead, you must resolve them through payment or IRS negotiation.

These provisions force you to treat trust‑fund debt as a priority claim. Consequently, you must negotiate installment agreements or keep the taxes outstanding during chapter 13 planning; liquidation will not wipe them, and the IRS can pursue liens or levies after any discharge.

Can an Offer in Compromise Help Unlock Tax Debt Discharge?

After reviewing the priority status of trust‑fund taxes, you may question whether an Offer in Compromise can alter that reality. You consider whether OIC discount terms can reduce the amount measured by the three‑year rule, thereby creating a window for discharge. An accepted OIC produces a binding settlement that extinguishes the underlying liability; however, it does not change the statutory nature of trust‑fund claims. The IRS normally rejects OICs for payroll and recovery penalties, so the dispute remains nondischargeable. If your OIC applies only to the non‑trust‑fund portion, the remaining balance will still be subject to the 240‑day and seven‑year tests. Therefore, while settlement options offer cost‑effective relief, they cannot release trust‑fund taxes. You may still use an OIC to eliminate a liability that otherwise would exceed the discharge threshold, but the core nondischargeable status remains intact. Consider consulting a tax attorney to evaluate discount terms and carefully.

Frequently Asked Questions

Can State Tax Debts Be Discharged in Federal Bankruptcy?

Yes, you can have state tax debts discharged in federal bankruptcy, it’s provided you satisfy the 523(a)(1) tests. Your State Liability must be an income tax, filed at least two years prior and assessed 240 days before filing, and the return’s original due date must be at least three years old. Failure to meet any element bars discharge; nondischargeable taxes like excise or trust‑fund remain intact under Federal Compliance practice.

Does Bankruptcy Stop IRS Collection Actions on Tax Liens?

Yes, bankruptcy stops IRS collection actions on tax liens by invoking the Automatic Stay. The stay bars all levies, garnishments, and lien enforcement, preventing further action until the case closes or is dismissed. Nonetheless, the IRS can seek Lien Relief through a motion, allowing it to enforce a pre‑filed lien while the stay protects other collection methods. You’ll need to file a relief request promptly to preserve the lien’s enforceability.

Can a Partnership’s Payroll Tax Debt Be Discharged?

Only 1.2% of partnership tax filings meet discharge criteria, so you’re unlikely to escape payroll liability. In a Chapter 11 or 7 filing, trust‑fund payroll taxes remain nondischargeable. Employer‑share, or non‑trust‑fund payroll inclusion, can be discharged only if the return was due at least three years before your petition and all §523(a)(1) conditions are satisfied. You must still satisfy the IRS recovery penalty for any withheld amount due to federal law.

Do Pending Tax Audits Affect Dischargeability of a Tax?

Yes, a pending audit can alter your discharge eligibility. The IRS may object if an audit uncovers a new assessment, triggering Section 523(a)(1)(B) and resetting the 240‑day window. Until audit resolution, the court suspends discharge. However, if the audit confirms a previously filed return, your three‑year rule remains intact, and discharge proceeds. Therefore, Audit Status dictates Discharge Eligibility, and unresolved findings can delay or bar discharge and safeguard future tax negotiations.

Will Filing Bankruptcy Affect an Existing Offer in Compromise?

Yes, filing bankruptcy will affect your existing offer in compromise. The automatic stay suspends OIC processing, rendering the Compromise Status inactive until the stay lifts or a court orders otherwise. If you’re filing before the IRS accepts the OIC, the offer may be withdrawn or rendered void. Even after acceptance, a bankruptcy petition can trigger revocation or clawback of payments. Consequently, you must notify the IRS to preserve Offer Impact.

Conclusion

Imagine your tax debt as a cartoon octopus with eight eyes—each eye is a statutory rule. Only the head, if cracked with the three‑year gavel, comes down in bankruptcy. The two‑year filed‑return checkmark must clasp your wrist like a legal tattoo. The 240‑day timer is a blinking red light. Trust‑fund claws stay uncut. Offer in Compromise? A negotiator’s foil sword that may pry one eye loose. Remember, statutes reign like kings with dusty crowns today.

James Bateson

Lawyer