Chapter 13 pays recent income taxes in full through the plan, spread over up to five years, with no new penalties and, unless the IRS has recorded a lien, no interest. Older taxes that meet the three-year, two-year and 240-day rules are treated like credit card debt and mostly discharged. The IRS and the Franchise Tax Board both have to accept the plan's terms.
Priority versus general unsecured
Tax debt comes in two flavors inside a plan. Priority taxes are the recent ones: income taxes for a year whose return was due within three years before filing, taxes assessed within 240 days before filing, and taxes on a return you filed late within two years before filing. Those get paid in full, dollar for dollar, through the plan. Everything older, as long as the returns were filed and there was no fraud, is general unsecured. It gets whatever percentage the unsecured class gets, and the rest is discharged at the end.
The difference is enormous. A client who owes $9,000 for 2024 and $22,000 for 2019 pays the $9,000 through the plan and, in a plan paying unsecured creditors 10%, pays $2,200 on the 2019 year. The IRS writes off the rest. Payroll taxes you withheld from employees and didn't send in are priority no matter how old they are. There's no aging those out.
What stops when you file
Penalties stop accruing on the day of filing for priority taxes paid through the plan. So does interest, unless the IRS or FTB recorded a tax lien before the case. Collection stops entirely: the levy on your bank account, the wage garnishment the IRS set up without a court order, the FTB's demand letters. The automatic stay applies to tax collection the same way it applies to a credit card company, with a narrow carve-out for audits and assessments.
What doesn't stop is the obligation to file and pay current taxes. A plan that pays 2024 in full while you fall behind on 2026 is going to be dismissed. Trustees in the Central District require proof of filed returns every year, and the IRS is quick to move when a debtor in a plan owes for a new year.
The four-year filing requirement
You have to have filed the last four years of returns by the day before the first 341 meeting. Not paid, filed. If you haven't filed since 2022, we start that before the petition, because an unfiled return means the IRS files an estimated claim based on your W-2s and 1099s with no deductions, and the estimate is always higher than the truth.
The trustee can continue the 341 meeting up to 120 days to let you catch up. After that, dismissal. The Chapter 13 overview sets out the other deadlines in the first few months of a case.
Tax liens change the math
Once the IRS records a Notice of Federal Tax Lien with the Los Angeles County Recorder, the tax becomes a secured claim up to the value of what you own, including things you'd normally think of as exempt: the equity in your house, your car, your furniture, the balance in your checking account. Secured tax claims get paid in full with interest through the plan. The FTB records liens too, and they attach the same way.
The lien only secures up to the value of your property. If the IRS lien is for $60,000 and everything you own is worth $14,000, the claim is $14,000 secured (paid with interest) and $46,000 unsecured or priority depending on the year. We value the property carefully, because every dollar of value is a dollar paid with interest instead of at the unsecured percentage.
Refunds during the plan
The refund you're expecting for the year you file is usually claimed by the trustee, at least in part, because it represents income that was over-withheld while the plan was running. Central District trustees typically want refunds above a modest amount turned over each year of the plan. The practical fix is to adjust your withholding so you're not lending the government money you'll have to hand to the trustee anyway. Better to see it in your paycheck.
The IRS can also offset a refund against a prior tax year it's owed, even during the case, and that offset counts as a payment on its claim.
When Chapter 7 handles taxes better
If every year you owe is old enough to be dischargeable, there's no lien, and you otherwise qualify, Chapter 7 discharges the taxes in four months instead of five years. We check the dates on the IRS account transcript before recommending either chapter. Sometimes the answer is to wait a few months for a year to age past the three-year mark and then file the shorter case. The chapter comparison covers that call in more detail, and we'll pull the transcripts with you on a free video consultation.
the transcript is the whole conversation, and people almost never have it. Not the letter, not the balance from the website, the account transcript for each year, which shows the return filing date, the assessment date and every extension. Get it from the IRS online account before we talk. I've had a client who thought the 2020 year was dischargeable, and it was, until the transcript showed an amended return filed eighteen months ago that reset the clock. We built the plan around the real dates and it confirmed without an IRS objection.
Questions people ask about this
Does Chapter 13 stop an IRS wage garnishment?
Yes, the day the case is filed. The IRS receives electronic notice and releases the levy, usually within a few days. If your employer has already withheld for the pay period, that money can sometimes be recovered, depending on timing and amounts.
Can the FTB be included in a Chapter 13 plan?
Yes. The Franchise Tax Board is treated the same way as the IRS: priority for recent years, general unsecured for older years that meet the rules, secured if a lien was recorded. The FTB files its own claim and reviews the plan.
What if I owe taxes for a year I never filed?
The year has to be filed before it can be classified. An unfiled year is never dischargeable. Once filed, it's priority if the return was late-filed within the two years before the petition, and the amount comes from your return rather than the IRS's estimate.
Will I still owe interest on the taxes in the plan?
On priority taxes without a lien, no. Interest stops at filing. On taxes secured by a recorded lien, interest continues through the plan at the statutory rate. On the unsecured portion, no interest and most of the balance is discharged.
Can I set up an IRS payment plan instead of filing bankruptcy?
Often, and we'll say so if it's the better route. An installment agreement keeps interest and penalties running, which over five years can add a third to the balance. Chapter 13 stops both. If the tax debt is your only problem, the installment agreement might still be simpler and cheaper.
Talk it through with the attorney
Download your IRS account transcripts before the call, and book a free video consultation. Naomi will go year by year and tell you which taxes get paid in full, which get treated like a credit card, and whether Chapter 13 or Chapter 7 handles them better.