Does bankruptcy remove IRS debt?

In Chapter 7, some income-tax years may be discharged while others survive. The tests: the return was last due, with extensions, more than three years before the petition, 11 U.S.C. 507(a)(8)(A)(i); the tax was assessed more than 240 days before the petition, 507(a)(8)(A)(ii); any late return was filed more than two years before the petition, 11 U.S.C. 523(a)(1)(B); and the year involves no fraudulent return or willful attempt to evade the tax, 523(a)(1)(C). These periods require applicable suspension adjustments. The firm also reviews tax still assessable after filing, 507(a)(8)(A)(iii), the definition of a return, and other exceptions. A notice of federal tax lien filed before the petition survives the discharge and still encumbers property owned on the petition date, including exempt property, under 11 U.S.C. 522(c)(2)(B).

Does bankruptcy eliminate tax debt if I never filed the return?

No. 11 U.S.C. 523(a)(1)(B)(i) excepts from discharge any tax for which a return was not filed, and there is no time limit in that subparagraph. Waiting does not cure it. A substitute for return the IRS prepares under 26 U.S.C. 6020(b) is expressly excluded from the definition of return in the flush language at the end of 11 U.S.C. 523(a), while a return prepared under 26 U.S.C. 6020(a) and signed by the taxpayer is included. On an account transcript a substitute for return marks the year as failing until a filed return is located.

Does an offer in compromise change the tax debt clocks in bankruptcy?

It can. 11 U.S.C. 507(a)(8)(A)(ii)(I) excludes from the 240-day period any time an offer in compromise was pending or in effect during that 240-day period, plus 30 days. Clause (II) does the same work for a stay in a prior bankruptcy case, at plus 90 days. The adjusted period is calculated from the assessment and suspension history. Separate provisions address the three-year period.

What happens to a federal tax lien after the tax debt is discharged?

It stays. A discharge is personal. 11 U.S.C. 524(a) voids the judgment determining personal liability and enjoins collection of the debt as a personal liability of the debtor, which leaves an in rem remedy against encumbered property outside the injunction. Long v. Bullard, 117 U.S. 617 (1886), states the rule. 11 U.S.C. 522(c)(2)(B) preserves liability of exempt property for a tax lien whose notice is properly filed. Discharge alone does not avoid that lien. The client who owns a house with equity, and whose older tax year was discharged, still cannot sell that house free of the lien.

Can I file a late return and then discharge that year in the Fourth Circuit?

The answer depends on the facts. Moroney v. United States (In re Moroney), 352 F.3d 902 (4th Cir. 2003), held that income tax forms unjustifiably filed years late, after the IRS had prepared substitute returns and assessed the tax, are not returns for purposes of 11 U.S.C. 523(a)(1)(B)(i). The court declined to adopt a broader per se rule and said other circumstances might show that a debtor, despite the delinquency, had attempted in good faith to comply with the tax laws. In re Ciotti, 638 F.3d 276 (4th Cir. 2011), applies the same standard after BAPCPA to an equivalent report or notice rather than to a late return. Late-return treatment requires review of the facts and current controlling authority before advising on discharge.

Dischargeability of federal income tax

IRS tax debt in bankruptcy.

Some federal income tax years can be discharged in bankruptcy and some cannot. The answer is a dated one, tested year by year under 11 U.S.C. 507(a)(8) and 11 U.S.C. 523(a)(1), and a tax lien filed before the petition survives the discharge.

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How bankruptcy treats tax debt.

11 U.S.C. 507(a)(8)(A) gives priority to specified income-tax claims. The analysis includes tax that was not assessed before filing but remains assessable afterward under clause (iii), subject to its exceptions. Other relevant dates include the date the return was last due including extensions, the date the tax was assessed, and, through the paragraph’s hanging sentence, any period during which the government was barred from collecting. 11 U.S.C. 523(a)(1) then carries those priority periods into discharge and adds three exceptions of its own: subparagraph (A) for priority tax, subparagraph (B) for a return that was never filed or that was filed late and within two years of the petition, and subparagraph (C) for a fraudulent return or a willful attempt to evade or defeat the tax.

Discharge, priority, and secured status are separate questions. A tax can be nondischargeable without having priority, and a valid lien can survive the discharge of personal liability. Chapter 13 treatment depends on each claim’s classification and the confirmed plan. The automatic stay is subject to exceptions, termination, and relief by court order.

11 U.S.C. 507
11 U.S.C. 523
11 U.S.C. 522
11 U.S.C. 524
11 U.S.C. 362
11 U.S.C. 528

The work

How the analysis is done.

Send a high-level summary
Tell me where you live, which tax years are unpaid, whether every return was filed, and whether a notice of federal tax lien has been recorded. Do not send account numbers or documents with the first request.
Pull the IRS account transcript for every year
The account transcript for each year helps establish filing, assessment, payment, and collection events. Filed returns, extension records, and prior proceedings are reviewed alongside it to establish the controlling dates.
Write four dates next to each year
For every year: the date the return was last due including extensions, the date the return was actually filed, the date the tax was assessed, and the dates of any offer in compromise, collection due process request, or prior bankruptcy case. These dates establish the filing and suspension history.
Run the tests year by year
Each year is reviewed separately against the three-year rule in 11 U.S.C. 507(a)(8)(A)(i), the 240-day assessment rule in 507(a)(8)(A)(ii), the two-year rule in 11 U.S.C. 523(a)(1)(B)(ii), the unfiled-return bar in 523(a)(1)(B)(i), and the fraud and evasion exception in 523(a)(1)(C). One year can pass while the year beside it fails.
Choose the chapter against the result, assess the lien
A tax year that clears the discharge tests may be dischargeable in Chapter 7. Chapter 13 may provide a way to pay tax that survives, but priority, secured status, feasibility, and remaining personal liability require separate review. A valid prepetition tax lien can survive discharge against property it encumbers.

The firm establishes the relevant dates from the returns, transcripts, and collection and court records.

Side by side

The three date tests.

Each tax year is scored on its own dates. A year that fails one test fails, whatever the other two say.

Income tax discharge timing tests.
Test	Statute	Date it measures	What makes the year fail
Three-year rule	11 U.S.C. 507(a)(8)(A)(i)	The date the return was last due, including extensions.	The year is priority, and nondischargeable in Chapter 7 under 11 U.S.C. 523(a)(1)(A), if the return was last due after three years before the petition date.
240-day rule	11 U.S.C. 507(a)(8)(A)(ii)	The date the tax was assessed.	The year is priority if the tax was assessed within 240 days before the petition date, and that window is extended by tolling.
Two-year rule	11 U.S.C. 523(a)(1)(B)(ii)	The date a late return was actually filed.	The year is nondischargeable if the return was filed after it was last due and within two years before the petition date. A timely return is outside this test.

Two more tests sit outside the table and have no clock. 11 U.S.C. 523(a)(1)(B)(i) permanently excepts a year for which no return was filed. 11 U.S.C. 523(a)(1)(C) excepts a year for which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat the tax.

Filing dates, suspension periods, and tax liens.

The three-year rule runs from the due date, not the filing date. 11 U.S.C. 507(a)(8)(A)(i) reaches a tax for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition. An extension moves that date. A return extended to an October due date does not reach the three-year mark until three years after that October date, whatever the return says about when it was signed.

The 240-day rule has two internal tolls, and both are narrow. 11 U.S.C. 507(a)(8)(A)(ii) reaches a tax assessed within 240 days before the petition, exclusive of any time during which an offer in compromise with respect to that tax was pending or in effect during that 240-day period, plus 30 days, and any time during which a stay of proceedings against collections was in effect in a prior case under title 11 during that 240-day period, plus 90 days.

The hanging paragraph of 11 U.S.C. 507(a)(8) reaches every period in the paragraph, including the three-year period. It suspends an otherwise applicable time period specified in that paragraph for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under title 11 or during which collection was precluded by the existence of one or more confirmed plans, plus 90 days. A collection due process request and a prior case both matter here, and they matter in a way a pending offer does not.

What counts as a return is defined by statute. The flush language at the end of 11 U.S.C. 523(a) defines return as a return that satisfies the requirements of applicable nonbankruptcy law, including applicable filing requirements, includes a return prepared under 26 U.S.C. 6020(a) and signed by the taxpayer, and excludes a return made under 26 U.S.C. 6020(b). The practical difference is cooperation. A 6020(a) return is prepared with the taxpayer’s consent and signature. A 6020(b) substitute for return is prepared by the Secretary from his own knowledge and available information, without the taxpayer’s signature, and it is not a return for discharge purposes.

The Fourth Circuit rule on a late-filed return is fact-bound. Moroney v. United States (In re Moroney), 352 F.3d 902 (4th Cir. 2003), holds that income tax forms unjustifiably filed years late, where the IRS has already prepared substitute returns and assessed taxes, do not constitute returns for purposes of 11 U.S.C. 523(a)(1)(B)(i). The court rejected the broader per se rule the government requested, writing that circumstances not presented in that case might demonstrate that the debtor, despite his delinquency, had attempted in good faith to comply with the tax laws. State of Maryland v. Ciotti (In re Ciotti), 638 F.3d 276 (4th Cir. 2011), restates that test after BAPCPA on an equivalent report or notice, not on a late return. Late-return treatment requires review of current controlling authority and the filing history before advising on discharge.

A discharge does not clear a filed lien. 11 U.S.C. 524(a) voids a judgment determining the debtor’s personal liability for a discharged debt and enjoins acts to collect that debt as a personal liability of the debtor. 11 U.S.C. 522(c) protects exempt property from prepetition debts except, at (c)(2)(B), a tax lien, notice of which is properly filed. Long v. Bullard, 117 U.S. 617 (1886), is the original statement that a lien on property rides through a discharge. The lien continues to encumber property owned at the petition date unless it is released, avoided, satisfied, or becomes unenforceable under applicable law.

The collection statute stops running during the case. 26 U.S.C. 6503(h) suspends the periods of limitation in 26 U.S.C. 6501 and 6502 while the Secretary is prohibited by reason of the bankruptcy case from making an assessment or from collecting, and adds 60 days after for assessment and six months after for collection. The extension depends on the period during which collection is legally prohibited; it should not be assumed to equal the entire plan term in every case.

11 U.S.C. 507, U.S. Code 2024 edition
11 U.S.C. 523, U.S. Code 2024 edition
26 U.S.C. 6020
26 U.S.C. 6503
11 U.S.C. 108
In re Moroney, 352 F.3d 902 (4th Cir. 2003)
IRS transcript request

Maryland representation.

The U.S. Bankruptcy Court for the District of Maryland sits in Greenbelt and Baltimore. The Maryland page describes that court, its trustees, and its exemption law.

Law Office of Alexander Powell, PLLC files consumer Chapter 7 and Chapter 13 cases in the District of Maryland.

Send a high-level summary through the bankruptcy consultation request.

District of Maryland court locations
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Questions

Common questions about tax debt in bankruptcy.

Does bankruptcy remove IRS debt?
In Chapter 7, some income-tax years may be discharged while others survive. The tests: the return was last due, with extensions, more than three years before the petition, 11 U.S.C. 507(a)(8)(A)(i); the tax was assessed more than 240 days before the petition, 507(a)(8)(A)(ii); any late return was filed more than two years before the petition, 11 U.S.C. 523(a)(1)(B); and the year involves no fraudulent return or willful attempt to evade the tax, 523(a)(1)(C). These periods require applicable suspension adjustments. The firm also reviews tax still assessable after filing, 507(a)(8)(A)(iii), the definition of a return, and other exceptions. A notice of federal tax lien filed before the petition survives the discharge and still encumbers property owned on the petition date, including exempt property, under 11 U.S.C. 522(c)(2)(B).
Does bankruptcy eliminate tax debt if I never filed the return?
No. 11 U.S.C. 523(a)(1)(B)(i) excepts from discharge any tax for which a return was not filed, and there is no time limit in that subparagraph. Waiting does not cure it. A substitute for return the IRS prepares under 26 U.S.C. 6020(b) is expressly excluded from the definition of return in the flush language at the end of 11 U.S.C. 523(a), while a return prepared under 26 U.S.C. 6020(a) and signed by the taxpayer is included. On an account transcript a substitute for return marks the year as failing until a filed return is located.
Does an offer in compromise change the tax debt clocks in bankruptcy?
It can. 11 U.S.C. 507(a)(8)(A)(ii)(I) excludes from the 240-day period any time an offer in compromise was pending or in effect during that 240-day period, plus 30 days. Clause (II) does the same work for a stay in a prior bankruptcy case, at plus 90 days. The adjusted period is calculated from the assessment and suspension history. Separate provisions address the three-year period.
What happens to a federal tax lien after the tax debt is discharged?
It stays. A discharge is personal. 11 U.S.C. 524(a) voids the judgment determining personal liability and enjoins collection of the debt as a personal liability of the debtor, which leaves an in rem remedy against encumbered property outside the injunction. Long v. Bullard, 117 U.S. 617 (1886), states the rule. 11 U.S.C. 522(c)(2)(B) preserves liability of exempt property for a tax lien whose notice is properly filed. Discharge alone does not avoid that lien. The client who owns a house with equity, and whose older tax year was discharged, still cannot sell that house free of the lien.
Can I file a late return and then discharge that year in the Fourth Circuit?
The answer depends on the facts. Moroney v. United States (In re Moroney), 352 F.3d 902 (4th Cir. 2003), held that income tax forms unjustifiably filed years late, after the IRS had prepared substitute returns and assessed the tax, are not returns for purposes of 11 U.S.C. 523(a)(1)(B)(i). The court declined to adopt a broader per se rule and said other circumstances might show that a debtor, despite the delinquency, had attempted in good faith to comply with the tax laws. In re Ciotti, 638 F.3d 276 (4th Cir. 2011), applies the same standard after BAPCPA to an equivalent report or notice rather than to a late return. Late-return treatment requires review of the facts and current controlling authority before advising on discharge.

After the tests are run.

Bankruptcy against an offer in compromise compares the two on cost, timeline, the collection statute, and liens, and Chapter 13 and IRS back taxes explains how a plan pays the years that cannot be discharged. Outside bankruptcy the same balance runs through IRS collections or an offer in compromise.

Send the tax years and whether every return was filed.

Tell me where you live and which years are unpaid. Do not send account numbers with the first request. The first consultation is free. Fees are quoted in writing after it.

Schedule an initial consultation

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Law Office of Alexander Powell, PLLC. 1629 K Street NW, Suite 300, Washington, DC 20006.

How bankruptcy treats tax debt.

How the analysis is done.

Send a high-level summary

Pull the IRS account transcript for every year

Write four dates next to each year

Run the tests year by year

Choose the chapter against the result, assess the lien