Income tax debt to the IRS or the California Franchise Tax Board can be discharged in Chapter 7 if the return was due more than three years before filing, was actually filed more than two years before, and the tax was assessed more than 240 days before. Payroll taxes, recent taxes and taxes tied to fraud survive. A recorded tax lien survives too.
The three rules, and what they measure
Each rule counts backward from your bankruptcy filing date.
| Rule | What must be true | Example for 2021 taxes, filed on time |
|---|---|---|
| Three-year rule | The return's due date, including extensions, was more than three years before the bankruptcy filing | Due April 18, 2022; dischargeable after April 18, 2025 |
| Two-year rule | You actually filed the return more than two years before the bankruptcy filing | Filed April 2022; satisfied April 2024 |
| 240-day rule | The IRS or FTB assessed the tax more than 240 days before the bankruptcy filing | Assessed May 2022; satisfied January 2023 |
All three have to be met. For a return filed on time with no audit, the three-year rule is the only one that bites. The other two exist for late returns and for taxes assessed after an audit or an amended return.
Extensions and late returns reset the clock
If you filed for an extension in 2022, the due date moved to October 17, and the three years runs from October, not April. If you filed the 2021 return late in 2024, the two-year rule keeps it non-dischargeable until 2026 regardless of the three-year rule. A return the IRS prepared for you because you never filed (a substitute for return) is generally not a "return" for this purpose at all, and the tax under it stays with you.
The clocks also pause. An offer in compromise stops the 240-day clock while it's pending plus 30 days. A prior bankruptcy tolls the periods for the time the automatic stay was in effect plus 90 days. So does a collection due process hearing. A client who thinks the 2019 taxes are safely old sometimes learns that an offer in compromise in 2023 moved the date by seven months.
A worked example
A photographer in Silver Lake owes the IRS $31,000 for tax years 2019, 2020, 2022 and 2024. She filed every return on time and was never audited. She's thinking of filing Chapter 7 in October 2026.
The 2019 and 2020 returns were due in 2020 and 2021. Both are more than three years old, filed more than two years ago, assessed more than 240 days ago. Dischargeable. The 2022 return was due April 18, 2023; three years runs to April 2026, so it's dischargeable too if she files in October. The 2024 return was due April 2025 and isn't three years old. That $6,000 survives.
Roughly $25,000 goes; $6,000 stays. If she'd filed the 2020 return late, in mid-2025, the two-year rule would keep that year alive as well. We check the IRS account transcripts for every year before giving a client a number like that.
Liens survive. Priority and penalties have their own rules.
If the IRS or FTB recorded a Notice of Federal Tax Lien or a state lien with the Los Angeles County Recorder before the filing, the lien stays attached to whatever you owned on that date, including a house and, technically, the furniture. The discharge kills your personal liability; it doesn't release the lien. For a renter with no real property, that usually means little in practice. For a homeowner, it means the tax gets paid out of the equity at sale or refinance, and Chapter 13 may be the better tool.
Taxes that fail the timing rules are priority debts: not discharged, and paid ahead of credit cards if the trustee distributes anything. Penalties on a dischargeable tax are dischargeable. Penalties on a non-dischargeable tax are usually dischargeable anyway if the event that triggered them is more than three years old. Interest follows the tax.
Taxes that never qualify
Payroll taxes you withheld from employees and didn't remit, the trust fund recovery penalty assessed against you personally for a business's withholding, sales tax, and any tax connected to a fraudulent return or a willful attempt to evade. The last category is broader than it sounds: hiding income, paying personal expenses from a business account to dodge assessment, or a pattern of not filing while spending freely can all be argued as willful evasion. The IRS raises it in a small number of consumer cases. When it does, it files an adversary complaint and the judge decides.
A tax that survives can still be dealt with. Chapter 13 pays priority taxes through the plan over up to five years, with no further penalties and, usually, no interest. For someone with $40,000 of recent taxes and steady income, that's often the better answer than a Chapter 7 that leaves the tax standing.
What we need from you
IRS account transcripts for every year with a balance, which we can pull with a signed authorization. FTB account statements. Copies of the returns, with the filing dates. Any offer in compromise, installment agreement or collection notice. With those in hand, the analysis is a spreadsheet, and we'll show you which years come off in a Chapter 7 and which don't. If the dischargeable amount is large and the filing date is a few months short of a deadline, waiting is almost always worth it. The tax analysis is part of the free consultation, not an add-on.
The 2019 tax year is the one I keep having to talk people out of counting. The pandemic pushed the due date, an extension pushed it again, and a lot of those returns were filed late in 2021 or 2022. People remember the year on the tax, not the date they finally sent it in. I pull the transcript every time now, because the difference between 'filed April 2020' and 'filed November 2022' has been the difference between a discharged $14,000 and a surviving one, more than once.
Questions people ask about this
Can I discharge IRS debt in Chapter 7?
Income tax, yes, if the return was due more than three years ago, was filed more than two years ago, and the tax was assessed more than 240 days ago, with no fraud. The same rules apply to California FTB income tax.
What if I never filed the return?
Then the two-year rule can't be met and the tax is not dischargeable. If the IRS prepared a substitute return, that usually doesn't count as your return either. File the missing returns first, wait two years, and the analysis changes.
Does a tax lien go away in Chapter 7?
No. Your personal liability is discharged, but a lien recorded before the filing stays on the property you owned at that time. For a homeowner that means the tax is paid from the equity eventually. Chapter 13 can often handle a lien more effectively.
Are tax penalties dischargeable?
Generally yes, if the tax they relate to is dischargeable or if the event that caused the penalty is more than three years old. Interest follows the tax: dischargeable interest on dischargeable tax, surviving interest on surviving tax.
Will the IRS keep my refund after I file?
The IRS can offset a refund against a surviving tax debt. A refund for a pre-filing year is also an asset of the estate unless exempted. Timing the filing around the refund avoids most of the problem.
Does an installment agreement with the IRS affect the timing?
An installment agreement doesn't toll the clocks. An offer in compromise does, for the time it's pending plus 30 days. A prior bankruptcy tolls them for the length of the stay plus 90 days.
Talk it through with the attorney
Send us your IRS transcripts, or sign an authorization and we'll pull them, and Naomi will tell you on a free video call which tax years a Chapter 7 would wipe out.