Can You File Bankruptcy on Back Taxes Owed?

Addressing back taxes through bankruptcy is possible but not guaranteed. Discharging tax debt requires meeting strict conditions, which determine if the liability is eliminated or repaid through a structured plan. This process involves understanding tax and bankruptcy regulations.

Conditions for Discharging Tax Debt

Income tax debt can be discharged in bankruptcy if it meets specific conditions in the bankruptcy code. These conditions relate to the tax debt’s age and the taxpayer’s compliance. If not met, the tax debt remains non-dischargeable.

The “three-year rule” requires the tax return for the debt to have been due at least three years before the bankruptcy petition was filed, including extensions. For example, if a return was due April 15, 2022, and bankruptcy filed April 16, 2025, this condition is met.

The “two-year rule” requires the tax return to have been filed at least two years before the bankruptcy filing date. For instance, if a return was filed October 15, 2022, the bankruptcy must be filed after October 15, 2024. Both the three-year and two-year rules must be met concurrently.

The “240-day rule” specifies that the tax must have been assessed by the tax authority at least 240 days before the bankruptcy petition was filed. Assessment typically occurs after processing the return or following an audit. If assessed less than 240 days prior, or if pending, the tax debt cannot be discharged.

The tax debt must not stem from a fraudulent tax return or an attempt to willfully evade tax payment. If the return was fraudulent or the taxpayer deliberately tried to avoid paying taxes, the associated tax debt will not be dischargeable.

Certain taxes are not dischargeable, even if timing rules are met. These include “trust fund taxes,” which employers withhold from employee wages (e.g., income, Social Security, Medicare). Property taxes, sales taxes, and taxes from fraud or willful evasion are also not eligible for discharge.

Bankruptcy Chapters and Tax Debt

Tax debt treatment varies by bankruptcy chapter, with Chapter 7 and Chapter 13 being most common for individuals. Each offers different mechanisms for addressing tax liabilities. The choice depends on the tax debt’s dischargeability and the debtor’s financial circumstances.

In Chapter 7 bankruptcy, dischargeable tax debt can be eliminated. If the tax debt meets all discharge conditions (e.g., three-year, two-year, and 240-day rules), the debtor’s personal liability for that tax is wiped out.

For tax debts not meeting dischargeability criteria, or for those not qualifying for Chapter 7, Chapter 13 offers a reorganization plan. Under Chapter 13, non-dischargeable tax debts can be included in a three-to-five-year repayment plan. This allows debtors to manage obligations through regular payments.

Filing Chapter 7 or Chapter 13 triggers an automatic stay, halting most collection efforts by creditors, including tax authorities. This provides immediate relief from collection calls, letters, and enforcement actions. The stay protects debtors while their case is pending, preventing further collection steps like levying bank accounts or wages.

Within a Chapter 13 plan, certain tax debts are “priority claims” and must be paid in full. These include non-dischargeable income taxes and trust fund taxes. Other dischargeable tax debts can be treated as general unsecured claims, potentially receiving partial or no payment, depending on the plan and disposable income.

Tax Liens and Bankruptcy

It is important to understand the distinction between discharging personal liability for a tax debt and the survival of a tax lien in bankruptcy. While bankruptcy can eliminate a debtor’s personal obligation, it does not remove a valid tax lien properly filed against the debtor’s property.

A tax lien is a legal claim placed on a taxpayer’s property by a tax authority, such as the Internal Revenue Service (IRS), to secure the payment of a tax debt. Once properly filed, it attaches to all of the taxpayer’s current and future property, including real estate, vehicles, and financial assets. This lien serves as public notice that the government has a claim against the property.

Even if the underlying personal tax debt is discharged, a valid, properly filed tax lien survives bankruptcy. The tax authority can still enforce its claim against the property subject to the lien, even if the debtor is no longer personally obligated. For example, a lien on a house before bankruptcy allows the tax authority to pursue foreclosure, even after bankruptcy.

The implications of a surviving tax lien depend on whether the property is secured or unsecured by the lien. If the property’s value is less than the tax debt, the lien may be partially unsecured. The secured portion of the tax debt, up to the property’s value, will remain enforceable against it.

In some cases, a debtor may “strip down” or “avoid” certain tax liens in bankruptcy. However, this is a complex process with specific conditions. The rule is that a properly perfected tax lien will persist after bankruptcy, affecting the debtor’s ability to sell or transfer encumbered property without addressing the lien.

Preparing to Address Tax Debt in Bankruptcy

Before considering bankruptcy for tax debt, individuals should prepare by gathering information and seeking professional guidance. This phase helps determine bankruptcy’s effectiveness in addressing specific tax liabilities.

The initial step involves gathering all relevant tax records, including past tax returns, assessment notices, and payment records. Also collect documentation related to audits, appeals, or other agency communications. This provides a clear picture of the tax debt’s origin, assessment dates, and payment history.

Understanding each tax obligation’s specific details is important. This includes identifying tax return due dates, assessment dates, and any periods when collection efforts were suspended. These details are important for determining if a tax debt meets dischargeability criteria, like the three-year, two-year, and 240-day rules. Accurate dates are fundamental to assessing discharge eligibility.

It is important to consult with both a qualified tax professional and an experienced bankruptcy attorney. A tax professional can analyze the tax debt from a tax law perspective, verifying its validity, assessment dates, and potential for discharge. They can also help identify errors or resolution opportunities outside of bankruptcy.

Following the tax assessment, an experienced bankruptcy attorney can evaluate the tax professional’s findings within bankruptcy law. They advise on the most appropriate bankruptcy chapter (Chapter 7 or 13) based on tax debt dischargeability and the debtor’s financial situation. These dual consultations ensure full understanding of tax and bankruptcy implications before filing.