So, can bankruptcy wipe out tax debt? If you owe the IRS thousands of dollars, you have probably heard this before: tax debt can’t be wiped out in bankruptcy. As Wilkes-Barre bankruptcy attorney Jason P. Provinzano, Esquire explains in Part 1 of his Tax Debt video series, that is simply not always true.
Certain older income tax debt can potentially be discharged in bankruptcy — if it meets very specific requirements. Everything turns on dates. How old is the tax debt? When was the return due? When did you actually file it? And when did the IRS assess the tax?
This guide pulls together all 10 parts of the series in order. Each section answers one question in plain English, with Jason’s video right next to it. You can watch the full series on our Videos page, and learn more about bankruptcy in Pennsylvania on our main bankruptcy page.
Part 1 — Tax debt can’t be wiped out? That is not always true.
Can bankruptcy wipe out tax debt?
Yes — sometimes. Certain older income tax debt can potentially be discharged in bankruptcy if it meets very specific timing requirements. That is the honest answer Jason gives in Part 1, and it is why a flat “no” is wrong.
But “potentially” matters. One tax year may qualify while another does not. The dates for each year — when the return was due, when it was filed, and when the tax was assessed — can make the difference between owing the IRS after bankruptcy and potentially eliminating the debt altogether.
What is the 3-2-240 rule for IRS tax debt?
Generally, for an income tax debt to potentially qualify for a Chapter 7 discharge, Jason looks at three timing requirements. The return generally must have been due more than three years before the bankruptcy. A late-filed return generally must have been filed more than two years before the bankruptcy. And the tax generally must have been assessed by the IRS more than 240 days before the bankruptcy.
Sounds simple, right? Unfortunately, it isn’t. As Jason warns in Part 2, certain events can extend these time periods, and late-filed returns can create additional problems. The rule is a starting point for the analysis — not a guarantee.
Part 2 — The 3-2-240 rule, explained.
Why does the date you file bankruptcy matter so much?
Because filing a few months too early can change the result. Imagine you owe an older income tax debt, but you are just a few months away from satisfying one of the timing requirements. Filing bankruptcy today could potentially leave that tax debt non-dischargeable — meaning it survives bankruptcy. Waiting until the applicable deadline passes could potentially change the result.
That is why Jason does not simply ask, “How much do you owe the IRS?” He needs to know which tax years you owe, when the returns were due, when they were filed, and when the taxes were assessed. With tax debt, bankruptcy planning can be just as important as the bankruptcy filing itself.
Part 3 — Why when you file can make a huge difference.
A tax lien is different from the tax debt itself
Discharging a tax debt and eliminating a federal tax lien are not necessarily the same thing. Let’s say an older income tax debt otherwise qualifies for discharge. If the IRS properly filed a federal tax lien before the bankruptcy, that lien may survive the bankruptcy and remain attached to your property.
Part 4 — A tax lien can survive, even when the debt is discharged.
So there are two separate questions, and Jason asks both in Parts 4 and 5. Number one: can we eliminate your personal obligation to pay the tax? Number two: does the IRS have a lien against your property? They may seem like similar questions. They are not. They are different — and both need an answer before you file.
Part 5 — The lien question, in full.
What if your tax debt is too new to wipe out?
Chapter 13 may still provide a powerful way to deal with it. Certain priority tax debt generally must be paid through the Chapter 13 repayment plan. Remember, Chapter 13 is a restructuring. Instead of dealing directly with IRS collection efforts, you make payments under a court-approved bankruptcy plan.
Chapter 13 plans generally last between three and five years, depending on your household size and income. That can be especially helpful when you owe the IRS and you also have credit cards, personal loans, and other debts at the same time. As Jason puts it in Part 6: bankruptcy isn’t always about eliminating the IRS debt. Sometimes it’s about creating a manageable way to deal with it. Learn more on our Chapter 13 bankruptcy page.
Part 6 — How Chapter 13 can help with newer taxes.
Does bankruptcy stop the IRS from collecting?
In many situations, yes. The bankruptcy automatic stay stops collection activity when the case is filed. That includes IRS enforcement actions such as levies and wage attachments.
But there is an important distinction, and Jason is direct about it in Part 7. Stopping collection does not necessarily mean the tax has been eliminated. The automatic stay gives you protection while the bankruptcy case is pending. Whether the tax ultimately has to be paid depends on the type of tax, its age, your filing history, and the bankruptcy chapter you file.
Part 7 — The automatic stay stops the IRS, too.
What happens to penalties and interest?
Say your original IRS tax bill was $20,000, but after years of penalties and interest, you now owe substantially more. What happens to all of that in bankruptcy? The answer depends on the underlying tax debt and the particular penalty.
In some circumstances, penalties associated with older tax debt can be discharged. And if the underlying income tax qualifies for discharge, the associated interest may also be discharged. But you cannot look at your total IRS balance and automatically determine what will survive bankruptcy. The debt has to be broken down, tax year by tax year.
Part 8 — Penalties can be erased, and interest follows the tax.
Why do we need your IRS account transcript?
If you owe significant back taxes and you are considering bankruptcy, one of the most important documents is your IRS account transcript. Saying “I owe the IRS about $40,000” does not tell us enough.
The transcript shows which tax years make up that balance — and, more importantly, the dates. When were the taxes assessed? When were the returns filed? Depending on the timing, one tax year may potentially qualify for discharge while another may not. That is why the analysis is never just the total balance. It is year by year. The IRS explains its own bankruptcy process in its bankruptcy frequently asked questions.
Part 9 — One document that can be extremely helpful: your IRS transcript.
Chapter 7 or Chapter 13 for tax debt — which fits?
It depends on the analysis above. If your older income tax debt meets the timing requirements, Chapter 7 bankruptcy may potentially discharge it. If your tax debt is too new to discharge, Chapter 13 may still give you a court-approved way to pay priority tax debt over three to five years — while dealing with your other debts in the same case.
Neither answer can be picked from a balance alone. The type of debt, the tax year, and those three dates decide it.
What should you do first? Analyze before you decide
Part 10 puts it all together. Before deciding whether bankruptcy can help, the tax debt has to be analyzed: the type of debt, the tax year, when the return was due, when it was actually filed, when the tax was assessed, and whether the IRS filed a tax lien.
If you are overwhelmed by IRS debt — along with credit cards, loans, and other bills — do not assume you have no options. Have the tax debt analyzed before deciding whether bankruptcy can help.
Part 10 — Analyze your IRS debt before you decide bankruptcy won’t help.
Questions about your tax debt?
Questions about your situation? Call 570-822-5771 for a free consultation. The Law Offices of Jason P. Provinzano, LLC is at 16 W. Northampton Street in Wilkes-Barre, and helps people across Northeastern and Central Pennsylvania.
General information only — not legal advice for a specific situation.
