Bankruptcy can discharge some tax debt, but not all — and the rules are strict about which taxes may have access to and how old they must be

Federal income tax debt can be wiped out in bankruptcy, but only if the debt meets specific conditions. The IRS calls this the three-year, six-year, eight-year rule: the tax return must have been due at least three years ago, you must have filed the return at least two years ago, and the IRS must have assessed the tax at least 240 days before you file for bankruptcy. If all three conditions are met, a Chapter 7 bankruptcy can discharge the debt. If they are not met, the tax debt survives the bankruptcy and you still owe it.

Other types of tax debt — payroll taxes, sales taxes, trust fund taxes — almost never discharge in bankruptcy. These are treated as non-dischargeable debts because they are considered money the business collected on behalf of employees or the government, not money the business earned. State income tax follows similar rules to federal income tax, but each state sets its own requirements, and some are stricter than the federal standard.

Bankruptcy also does not stop the IRS from collecting. Even after discharge, the agency can still place a lien on your property, seize your bank account, or garnish your wages — unless you file for Chapter 13 bankruptcy, which puts you on a repayment plan and stops collection activity while the plan is in place.

Key Takeaways

  • Federal income tax debt can discharge in Chapter 7 bankruptcy only if the return was due more than three years ago, you filed it more than two years ago, and the IRS assessed it more than 240 days before bankruptcy.
  • Payroll taxes, sales taxes, and trust fund taxes do not discharge in bankruptcy under any circumstances.
  • State income tax may discharge under rules similar to federal tax, but requirements vary by state and are sometimes stricter.
  • Filing for bankruptcy does not automatically stop the IRS from collecting through liens, levies, or wage garnishment unless you choose Chapter 13.
  • A bankruptcy attorney can review your specific tax returns and assessment dates to tell you whether discharge is possible in your case.

The three-year, six-year, eight-year rule explained

The rule has three separate time requirements, and all three must be satisfied. The first is the three-year rule: the tax return must have been due at least three years before you file for bankruptcy. If you owe taxes for the 2020 tax year (return due April 15, 2021), you cannot discharge that debt until April 15, 2024 at the earliest. The clock starts from the original due date, not from when you actually filed late.

The second is the two-year rule: you must have actually filed the tax return at least two years before bankruptcy. If you filed your 2020 return on October 1, 2023, you cannot discharge it until October 1, 2025, even if the three-year rule is already satisfied. This rule exists because the IRS needs time to examine the return and assess the tax.

The third is the 240-day rule: the IRS must have assessed the tax (officially recorded it as owed) at least 240 days before you file for bankruptcy. The assessment date is not the same as the due date or the filing date — it is the date the IRS formally added the debt to your account. You can find this date on your IRS transcript or in a notice from the agency. If the IRS assessed the tax on January 1, 2024, you cannot discharge it until September 6, 2024 at the earliest.

All three conditions must be true at the same time. If any one fails, the entire debt is non-dischargeable. A tax attorney or bankruptcy attorney can pull your IRS transcripts and calculate whether your specific tax years meet all three tests.

What types of tax debt never discharge

Payroll taxes — federal income tax withheld from employee paychecks, Social Security tax, and Medicare tax — are treated as trust fund taxes. The employer collected this money from workers and held it in trust for the government. Because it was never the business's own money, bankruptcy courts will not discharge it. The same rule applies even if the business is now closed or bankrupt itself.

Sales taxes collected from customers are also trust fund taxes and do not discharge. Excise taxes, employment taxes, and customs duties follow the same rule. The IRS can pursue the business owner personally for these debts, and bankruptcy does not stop that pursuit.

Tax penalties and interest attached to non-dischargeable tax debt also do not discharge. If you owe payroll tax, the penalties and interest pile up alongside the principal, and all of it survives bankruptcy. Interest on dischargeable tax debt (like old income tax) also survives — only the principal of the income tax itself can be wiped out.

Recent income tax — any return that does not meet the three-year, six-year, eight-year rule — is non-dischargeable. This includes taxes you owe for the current year or any year within the lookback period.

How state income tax is treated differently

State income tax follows the same three-year, six-year, eight-year rule as federal tax, but each state can add its own requirements. Some states use the federal timeline exactly. Others require the return to be older, the filing to be older, or the assessment to be older than the federal standard.

A few states do not allow income tax discharge in bankruptcy at all, regardless of how old the debt is. You need to check your specific state's rules, because a debt that would discharge under federal law might not discharge under state law. If either the federal or state rule prevents discharge, the debt survives.

State tax agencies also pursue collection aggressively. Many states can suspend your driver's license, professional license, or business license for unpaid tax debt. Bankruptcy stops the IRS from collecting, but it may not stop your state revenue department from suspending licenses or placing liens on property.

Chapter 7 versus Chapter 13 bankruptcy for tax debt

Chapter 7 bankruptcy is a liquidation: you surrender non-exempt assets, and a trustee sells them to pay creditors. Dischargeable tax debt is wiped out. Non-dischargeable tax debt survives, and the IRS can continue collecting after the bankruptcy ends — through liens, levies, and wage garnishment.

Chapter 13 bankruptcy is a repayment plan, usually lasting three to five years. During the plan, an automatic stay stops the IRS from collecting. You pay what you can afford into the plan, and at the end, any remaining tax debt that was not paid may be discharged. Chapter 13 does not require you to meet the three-year, six-year, eight-year rule — you can include recent tax debt in the plan. However, you must have a regular income to may have access to for Chapter 13, and the plan must be feasible (the court must believe you can actually make the payments).

For someone with recent tax debt and no way to pay it, Chapter 13 can be the only option. For someone with old tax debt that meets the discharge rules, Chapter 7 may be simpler and faster. A bankruptcy attorney can compare both options for your situation.

What happens to tax liens after bankruptcy

A tax lien is a legal claim the IRS places on your property to secure payment of tax debt. Bankruptcy does not automatically remove a lien, even if the underlying tax debt is discharged. The lien can survive the bankruptcy and attach to any property you own after the bankruptcy ends.

However, you can file a motion to avoid the lien if it impairs your exemptions — meaning the lien prevents you from keeping property the bankruptcy law allows you to keep. This is a separate legal process and requires filing paperwork with the bankruptcy court. Not all liens can be avoided this way, and the rules vary by state.

After bankruptcy, the IRS can still enforce the lien by seizing property or forcing a sale. If you want the lien removed entirely, you may need to negotiate with the IRS or pay the debt. Some people use a payment plan or an offer in compromise (a settlement for less than the full amount owed) to resolve the lien after bankruptcy.

How to learn about your tax debt can be discharged

You will need your IRS transcripts, which show the exact dates the IRS filed your returns and assessed your tax. You can order transcripts free from the IRS website (irs.gov) or by calling 1-800-829-1040. Request the "Account Transcript" for each tax year in question — this shows the assessment date clearly.

Once you have the transcripts, calculate whether each year meets all three conditions: return due date more than three years ago, filing date more than two years ago, and assessment date more than 240 days ago. If all three are true for a given year, that tax debt can discharge in Chapter 7. If any one fails, it cannot.

A bankruptcy attorney can do this calculation for you and also advise whether Chapter 7 or Chapter 13 makes sense for your overall situation. Many bankruptcy attorneys offer free initial consultations. Because tax debt rules are complex and mistakes can be costly, consulting an attorney before filing is worth the cost.

Frequently Asked Questions

Can I discharge tax debt if I never filed a return?

No. The two-year rule requires that you actually filed the return at least two years before bankruptcy. If you never filed, the debt cannot be discharged. The IRS can also file a substitute return on your behalf, which resets the clock — the assessment date becomes the date of the substitute return, not the original due date.

What if I owe both federal and state income tax for the same year?

Each is evaluated separately under its own rules. Federal tax might discharge while state tax does not, or vice versa. You need to check both the federal three-year, six-year, eight-year rule and your state's specific requirements. Some states are stricter than the federal standard.

Does bankruptcy stop the IRS from garnishing my wages?

Filing for bankruptcy triggers an automatic stay that stops most collection activity, including wage garnishment. However, the stay is temporary — it lasts only while the bankruptcy case is open. If the tax debt does not discharge, the IRS can resume garnishment after the bankruptcy ends. Chapter 13 keeps the stay in place for the entire repayment plan, which can last three to five years.

Can I discharge tax debt in Chapter 13 even if it does not meet the three-year rule?

Yes. Chapter 13 does not require the three-year, six-year, eight-year rule. You can include recent tax debt in your repayment plan. At the end of the plan, any tax debt that was not paid through the plan may be discharged, depending on your state's rules and the specific circumstances of your case.

Will bankruptcy remove a tax lien from my house?

Not automatically. A lien can survive bankruptcy and remain attached to your property. You can file a motion to avoid the lien if it impairs your exemptions, but this requires separate legal action and does not always succeed. After bankruptcy, you may need to negotiate with the IRS or pay the debt to remove the lien.