How Bankruptcy Impacts Your IRS Tax Debt

If you are facing a significant amount of debt, bankruptcy might be worth considering. But if a large portion of your debt is tax-related, you may wonder whether filing for bankruptcy will affect this liability. 

Learn how bankruptcy impacts IRS tax debt, then consult an IRS tax debt lawyer for legal guidance. 

Chapter 7 Bankruptcy Can Discharge or Eliminate Tax Debt in Certain Cases

If you are considering filing for Chapter 7 bankruptcy, you may be able to relieve some or all of your tax debt through this process. However, your case must meet specific conditions for your tax debt to be discharged or eliminated. These conditions are known as the “3-2-240 Rule” and are as follows:

• The tax debt must be at least three years old, meaning the original tax return was due at least three years ago. For example, if you are filing for bankruptcy in April 2025, the potential discharge would only apply to taxes due April 2022 or before. 
• The tax return must have been filed at least two years before the bankruptcy petition. This emphasizes the importance of filing annual tax returns, even if you cannot pay tax debt at the time. You can only relieve tax debt from true tax returns.
• The IRS must have assessed the tax debt at least 240 days before filing for bankruptcy, or have not assessed the debt at all. If the IRS approved an offer in compromise and the collection activity was suspended, the IRS can extend this assessment period. 

If your situation meets these criteria, Chapter 7 bankruptcy might relieve your obligation to pay these debts. Talk to an IRS tax debt lawyer to assess whether your case meets these bankruptcy discharge rules. 

Types of Tax Debt That May Not Be Dischargeable Through Bankruptcy

While bankruptcy might provide some tax debt relief, it only applies to certain types of dischargeable tax debt. You may not be able to relieve other types of tax debt or penalties, including:

• Fraud or willful tax evasion: Bankruptcy does not apply if you demonstrated fraudulent activity on tax returns or willfully attempted to evade your taxes. 
• Tax liens and levies: Bankruptcy does not eliminate existing liens on property. While it can stop a tax levy, it does not always permanently relieve the tax debt behind the levy. 
• Non-dischargeable taxes: Bankruptcy generally only applies to federal or state income tax debt, not other types of tax debt, such as payroll taxes.

Other Options for Relieving IRS Tax Debt

Bankruptcy is not your only option for settling or resolving tax debt. With the help of an IRS tax debt lawyer, you may consider other IRS debt settlement programs, such as:

• IRS payment plans: This would allow you to break tax debt into manageable monthly payments rather than owing a lump sum that accrues interest and penalties.
• Offers in compromise: This would settle your tax debt for a lesser amount.
• Penalty abatement: This would relieve penalties applied to the debt if it was your first time owing back taxes or you meet other conditions. 
• Currently Not Collectible (CNC) status: If you are experiencing financial hardship, this could pause your tax debt repayment until your financial situation improves.

Let Levy & Associates, Inc., Help You Understand Your Options 

If you are considering bankruptcy to relieve tax debt, be sure that the conditions above apply to your situation. An experienced IRS tax debt lawyer from Levy & Associates, Inc., can help you explore all of your options for managing tax debt. 

Contact us today at 800-829-5389 or fill out our contact form to request a consultation.