Tax Debts and Bankruptcy

I help people resolve their tax debts with the IRS and the states. In this post I will discuss what taxes cannot be discharged in a bankruptcy. While some taxes cannot be discharged in bankruptcy there are still ways to negotiate those tax payments with the IRS and the states.

Trust Fund Taxes like payroll taxes collected for the IRS are not dischargeable in a bankruptcy. Only income taxes are dischargeable in some cases.

Secured tax claims - where a tax lien has been filed are generally not dischargeable in a bankruptcy with some exceptions.

Unsecured/priority trust fund type or those that don't meet one of the three tests below are always non-dischargeable.

Unsecured/non-priority tax claims are sometimes dischargeable.

Which Income Taxes Cannot Be Discharged in Bankruptcy - Three Tests

There are several rules that apply to income taxes when it comes to bankruptcy. Following are some of the rules:

The Three Year Rule Test 

Tax returns last due with the last three years are not dischargeable. The last three years means they were due in the last years prior to the petition date. This is a look back rule that commences when the the return was last due including extensions. So if an extension to October 15th was filed and even though the return was filed before October 15th the last due date was October 15th even if filed earlier.

The Two Year Rule

The actual return must have been filed at least two years prior to the petition date. So even if the return was last due over three years ago but if it was not actually filed in the two years prior to the petition date it is still not dischargeable in a bankruptcy.

Taxpayer Must Self-File a Return. The return cannot be a Substitute For Return (SFR) filed by the IRS. If the debtor signs the SFR, that may constitute a "return".

To be considered a self-filed return it must meet other criteria as well.

  1. It must purport to be a return
  2. It must be executed under penalty of perjury
  3. It must contain sufficient data to allow calculation of tax
  4. It must represent an honest and reasonable attempt to satisfy the requirements of the tax laws.
Filing an inaccurate or incomplete return does not count as a self-filed return.

The 240 Day Rule

The tax in question must have been assessed more than 240 days prior to the bankruptcy (plus any period of time during which an offer in compromise was pending, plus 30 days).
New Assessments:
  • An Amended Return 
  • Exam Changes
Audit Risk: If taxes can still be assessed via audit, then, they will be priority/nondischargeable. A pending tax case is an example. 

Tax Liens
While an underlying tax debt may be dischargeable (meeting the rules) if the Federal Tax Lien remains and the debtor owns or later acquires lienable property the IRS will still be able to execute on its tax lien.

There is more to the issue of taxes dischargeable in bankruptcy but this gives you an idea of what can and cannot be discharged. If you have filed a bankruptcy and still have taxes that could not be discharged in the bankruptcy I can help you get those taxes resolved with the IRS and the states. If you have tax debts that you cannot pay at this time even after going through a bankruptcy now is the time to address those situations with the IRS and the states. Contact me today using my email address below to arrange a consultation via a phone, Zoom, or Skype call.

The CPA Superhero


Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

bAD DEBT Expense

Hear me out please. I am going to address bad debt expense to clear up a common misconception and hopefully I can write this an understandab...