Can Chapter 7 Discharge Tax Debt?
Yes. But only if three very specific timing rules are met. Miss one and the debt survives bankruptcy.
Most people think tax debt cannot be discharged in bankruptcy. That is wrong. Federal income tax debt can be discharged in Chapter 7, but only if three timing rules under 11 U.S.C. §523(a)(1) are all satisfied. Miss any one of them and the tax survives the discharge.
The Three-Year Rule
The tax return must have been due (including extensions) more than three years before the bankruptcy filing date. For a 2021 return due April 15, 2022, you cannot file bankruptcy to discharge that tax until after April 15, 2025.
The Two-Year Rule
The tax return must have been actually filed more than two years before the bankruptcy filing. Late filing is fine — but if you filed the 2021 return on June 1, 2024, you cannot file bankruptcy to discharge it until after June 1, 2026. An IRS Substitute for Return does not count as "filed" for this rule.
The 240-Day Rule
The tax must have been assessed more than 240 days before the bankruptcy filing. Assessment typically happens when the return is processed (TC 150 on the transcript). If the IRS assessed the tax on January 15, 2025, you must wait until after September 12, 2025.
Tolling Complicates Everything
Prior OIC submissions, CDP hearings, and previous bankruptcy filings toll these timing rules. A 90-day OIC that was rejected does not just add 90 days — it adds 90 days plus 30 days to each rule. If a client has a history of multiple collection actions, calculating the actual discharge dates requires careful transcript analysis.
Trust fund taxes (payroll withholding), fraud penalties, and taxes where the return was never filed are never dischargeable. We run the numbers before you file.
Tax attorney Darrin Mish has spent 32 years getting taxpayers out of IRS trouble. Free consultation — no obligation.
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