Myth Busting: Can Tax Debt Be Discharged in Bankruptcy?

The Myth That Tax Debt Cannot Be Discharged in Bankruptcy Is False

For years in America, many people have believed that IRS tax debt can never go away. However, that is not always true. Under specific circumstances, certain income tax debts can be discharged in bankruptcy. In the right situation, bankruptcy can provide meaningful tax debt relief and help individuals achieve a financial fresh start.

Certain older federal and state income tax debts may qualify for discharge through Chapter 7 bankruptcy. While the process is highly technical and depends on several important factors, bankruptcy and tax debt relief options are available to more people than many realize.

Chad Van Horn, founder of Van Horn Law Group serving Florida and Western Pennsylvania, has created a no-obligation online survey to help individuals determine whether they may qualify to discharge tax debt through bankruptcy.

Take the survey to see if you may qualify for bankruptcy tax debt relief.

Can IRS Tax Debt Be Eliminated in Bankruptcy?

For federal income tax debt to qualify for discharge in bankruptcy, it generally must satisfy a five-part legal test. Bankruptcy attorneys commonly refer to the timing portion of this analysis as the “3-2-240 Rule.”

1. The Three-Year Rule (Tax Return Due Date)

The tax return connected to the debt must have originally been due at least three years before the bankruptcy filing date. If an extension was granted, the extended due date is used instead.

This means recent income tax debt usually cannot be discharged immediately through bankruptcy.

2. The Two-Year Rule (Tax Return Filing Date)

The taxpayer must have actually filed the tax return at least two years before filing bankruptcy.

This requirement is critical because tax debt connected to IRS substitute returns is generally not dischargeable. Filing your own return is often necessary to qualify for tax debt discharge in Chapter 7 bankruptcy.

3. The 240-Day Rule (IRS Assessment Date)

The IRS must have formally assessed the tax debt at least 240 days before the bankruptcy case is filed.

The assessment date may change if there were audits, amended returns, prior bankruptcy filings, or Offers in Compromise that temporarily paused IRS collection activity.

All three timing requirements must be satisfied at the same time for tax debt to potentially qualify for discharge.

Tax Debts That Usually Cannot Be Discharged

Even when the timing rules are satisfied, some tax obligations remain non-dischargeable under bankruptcy law.

Payroll Taxes and Trust Fund Taxes

Bankruptcy generally cannot eliminate payroll tax obligations, trust fund taxes, or certain business-related tax liabilities.

Fraudulent Tax Returns or Tax Evasion

If the IRS believes the taxpayer committed fraud or intentionally attempted to evade taxes, those tax debts are typically permanently non-dischargeable.

Unfiled or Substitute Returns

Taxes tied to unfiled returns or IRS-filed substitute returns may also create major obstacles to discharging tax debt in bankruptcy.

Bankruptcy and Tax Debt Relief May Be Possible

The idea that tax debt can never be eliminated is one of the most common bankruptcy myths. In reality, older income tax debt may qualify for discharge when all bankruptcy timing rules and filing requirements are properly met.

For the right individual, strategically timed Chapter 7 bankruptcy can provide powerful relief from overwhelming IRS debt and state income tax obligations.

If you are struggling with tax debt, take our online survey to determine whether you may qualify for bankruptcy tax debt relief.

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This article originally appeared here and was republished with permission.

The post by Chad Van Horn appears on South Florida Reporter.