Chapter 13 splits your tax debt in two. Recent income taxes are priority claims that have to be paid in full through the plan, interest-free in most cases. Older income taxes can be treated as general unsecured debt and discharged along with your credit cards.
The dividing line is mostly about age, and it's more mechanical than people expect.
Which taxes fall on which side
For income taxes, the general rule involves three timing tests: the return was due more than three years before filing, the return was actually filed more than two years before filing, and the tax was assessed more than 240 days before filing. Clear all three and the tax may be dischargeable. Fail one and it's priority debt.
Trust fund taxes are different. Payroll withholding you failed to remit, and the sales tax a business collected, are never discharged. Neither is a tax on a return you never filed at all.
| Type | Treatment in Chapter 13 |
|---|---|
| Income tax, all three timing tests met | General unsecured, dischargeable |
| Income tax, recent | Priority, paid in full through the plan |
| Trust fund and payroll taxes | Priority, never dischargeable |
| Recorded tax lien | Secured up to the value of your property |
| Penalties on old taxes | Often dischargeable even where the tax isn't |
The advantage nobody sells hard enough
Priority taxes get paid in full, which sounds like no benefit at all until you compare it to the alternative. Collections stop. Levies stop. Wage garnishment stops. And in most Chapter 13 cases, priority taxes are paid without post-petition interest continuing to accrue, so a $22,000 balance stays $22,000 instead of growing while you chip at it.
Compare that to an IRS installment agreement, where interest and failure-to-pay penalties keep running the whole time. Over five years the difference is often thousands of dollars.
You must file the returns first
Unfiled returns will stop your case. Both the IRS and the Franchise Tax Board file estimated claims that are usually far higher than what you actually owe, and the only fix is filing the real return.
Tax liens change everything
Once the IRS records a notice of federal tax lien, the debt becomes secured against your property, and secured tax debt has to be paid up to the value of what it attaches to even if the underlying tax would otherwise be dischargeable. This is a strong argument for not waiting. The lien is a much worse position than the naked debt.
“I had a client who ignored FTB letters for two years because they came in envelopes she recognized. The balance went from about eleven thousand to nineteen. Opening the mail is free.”
Naomi Reyes-AshfordCalifornia specifics
The Franchise Tax Board follows similar timing rules to the IRS but is its own creditor with its own claim, and it's aggressive about bank levies. The EDD shows up in cases where a business classified workers as contractors and lost that argument. Both should be listed and both will file claims.
Questions we get asked
Will the IRS keep my refunds during the case?
Often the trustee will, and the plan may require you to turn over refunds above a threshold. Adjust your withholding so you're not overpaying in the first place.
Can I discharge a tax I'm currently on an installment agreement for?
The agreement doesn't change the analysis. What matters is the age of the tax and the filing history.
What about penalties and interest?
Penalties on dischargeable taxes are generally discharged. Penalties on priority taxes are usually treated as general unsecured claims, which is a meaningful savings.
Does an audit stop my bankruptcy?
Not necessarily, but an unresolved audit makes the claim amount uncertain, and that complicates plan confirmation. Tell us if one is open.
What to do next
Request your IRS account transcripts for every year you owe, and the equivalent from the FTB. The assessment dates on those transcripts decide which taxes are dischargeable, and we can read them with you on a consultation call.