Can IRS Debt Be Discharged in Chapter 7 Bankruptcy?
Understanding IRS Tax Debt and Chapter 7 Bankruptcy
Individuals and businesses can eliminate most unsecured debts by filing for Chapter 7 bankruptcy. There are, however, certain conditions that apply to IRS tax debt. Understand the requirements for Chapter 7 discharge if you are struggling with federal tax debt.
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Conditions for Discharging IRS Tax Debt in Chapter 7
There are some tax debts that cannot be discharged. According to the IRS, your tax debt must meet the following conditions:
- The Three-Year Rule – You must have filed your tax return at least three years before filing for bankruptcy.
- The Two-Year Rule – Before filing for bankruptcy, you must have filed your tax return two years prior.
- The 240-Day Rule – You must have filed for bankruptcy at least 240 days before the IRS assessed your tax debt.
Fraud or tax evasion can also prevent the discharge of tax debt.
What IRS Tax Debts Cannot Be Discharged?
Chapter 7 bankruptcy cannot discharge certain IRS tax liabilities, including:
- Unfiled tax returns
- Trust fund taxes (e.g., payroll taxes)
- Tax liens (even after a debt is discharged, the lien remains on assets)
- Recent tax debts that do not meet the 3-2-240 rule
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The Role of the Bankruptcy Trustee
The liquidation process is managed by a Chapter 7 Trustee. The Trustee may request that you turn over your federal tax refund to pay creditors if you receive one. Unpaid tax debts can also be offset against your refund by the IRS.
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Steps to Take Before Filing for Chapter 7
To file for Chapter 7 bankruptcy if you owe IRS tax debt, follow these steps:
- Review your tax records – Make sure your tax returns meet the 3-2-240 requirements.
- Consult a bankruptcy attorney – To determine if your tax debt is dischargeable, seek legal advice.
- Check for tax liens – Discharge of a debt does not remove a tax lien from the IRS.
- Understand the impact on refunds – Unpaid debts may offset tax refunds.
