Old income taxes can be discharged in Chapter 7. Most people believe the opposite, and that belief costs them years of payments on debt a filing would have erased.
The answer turns on three timing rules, all of which have to be satisfied for the same tax year, plus the separate question of whether the IRS or the Franchise Tax Board recorded a lien before you filed.
The three rules
- Three years. The return must have been due, including extensions, more than three years before your filing date.
- Two years. You must have actually filed the return more than two years before your bankruptcy filing date.
- 240 days. The tax must have been assessed more than 240 days before you file.
A 2019 return you filed on time in April 2020 typically clears the first two comfortably. A 2019 return you did not get around to filing until 2024 does not, no matter how old the tax year sounds.
A substitute return is not your return
If the IRS filed a substitute return for you because you never filed, the two-year clock generally never starts, and courts have been unforgiving here. Filing the real return late starts the clock, which is why the first advice in a tax case is often to file the missing returns and then wait.
What never discharges
- Payroll trust fund taxes, including the responsible person penalty
- Sales tax you collected and did not remit
- Taxes from a fraudulent return or a willful attempt to evade
- Any tax year where the return was never filed at all
- Recent taxes still inside the three-year or 240-day windows
Tolling, liens, and the Franchise Tax Board
The periods stretch for anything that paused IRS collection. A prior bankruptcy, a pending offer in compromise, or a collection due process appeal each add time, usually the length of the pause plus a cushion. I have seen a tax that looked eligible on a calendar turn out to be two months short because of an offer filed in 2021, which is why I pull IRS account transcripts before giving anyone an answer. Not a client's notes, not a notice from three years ago. The transcript is the only document that settles it.
Liens are the other half. If a Notice of Federal Tax Lien was recorded before you filed, discharge kills your personal liability but the lien stays attached to property you owned at that time, so on a home with equity it follows the property and gets paid at sale. On a filer with no assets, a surviving lien is usually a paper problem rather than a practical one. California's Franchise Tax Board follows broadly similar timing rules for state income tax, collects aggressively (including bank levies without a court judgment), and gets stopped by the same automatic stay on the day you file. State and federal tax for one year can have different assessment dates, so each is analyzed separately.
Questions we get asked
I owe $38,000 to the IRS from 2018 and 2022. What happens?
Likely a split result. The 2018 liability may well discharge if the return was filed on time, while the 2022 liability almost certainly does not because it is too recent.
Should I set up an installment agreement or file?
Run the dischargeability analysis first. Paying an installment plan for two years on a tax that could have been wiped out is the most expensive avoidable mistake in this area.
Does filing stop an IRS wage levy?
Yes. The automatic stay stops levies, garnishments and bank seizures on the day of filing, including for taxes that will not ultimately be discharged.
What about penalties and interest?
Penalties on a dischargeable tax generally discharge with it. Interest follows the underlying tax, so if the tax survives, the interest survives too.
What to do next
Request your IRS account transcripts for every year you owe (they are free through your online IRS account) and file any return still missing. Nothing else in a tax case can be answered until those two things are done.