Can Bankruptcy Wipe Out IRS Tax Debt? The 3-Year, 2-Year and 240-Day Rules Explained
Some income taxes can be discharged in bankruptcy. Learn the 3-year, 2-year and 240-day rules, the late-return trap in NJ, tax liens, and Chapter 7 vs. 13.
DRAFT: UNDER ATTORNEY REVIEW. This guide is a working draft posted temporarily so that Thomas F. DiLullo & Associates, P.C. can review it. It has not been approved, may contain errors, and must not be relied on as legal or tax advice. For help with your situation, schedule a confidential case evaluation or call (201) 488-0070.
Pending review by Thomas F. DiLullo, Esq., CPA, LL.M. · Draft dated October 2026
Key takeaways
Yes, some income tax debt can be discharged in bankruptcy, but only taxes that meet strict timing rules. Each tax year, and sometimes each assessment within a year, is tested separately.
The core tests: the return was due more than 3 years before you file bankruptcy, it was actually filed more than 2 years before, the tax was assessed more than 240 days before, and there was no fraud or willful evasion.
Payroll trust fund taxes and the Trust Fund Recovery Penalty are never dischargeable.
A discharge wipes out your personal liability. A tax lien already filed stays attached to property you owned when you filed, including your home equity and retirement accounts.
In New Jersey, a return you filed after the IRS assessed the tax on its own may not count as a "return" at all (In re Giacchi, 3d Cir. 2017). That can make the tax permanently non-dischargeable.
Which taxes can be discharged?
Federal (and state) income taxes can be discharged in Chapter 7 or Chapter 13 when all of these are true:
3-year rule — Requirement: The return was last due, including extensions, more than 3 years before the bankruptcy petition; Bankruptcy Code: 11 U.S.C. §507(a)(8)(A)(i)
2-year rule — Requirement: You actually filed the return more than 2 years before the petition; Bankruptcy Code: §523(a)(1)(B)
240-day rule — Requirement: The tax was assessed more than 240 days before the petition; Bankruptcy Code: §507(a)(8)(A)(ii)
No fraud or evasion — Requirement: The return wasn't fraudulent, and you didn't willfully try to evade the tax; Bankruptcy Code: §523(a)(1)(C)
Example. Say you filed your 2021 return on time in April 2022, without an extension, and the IRS assessed the tax shown on it in May 2022. For a bankruptcy filed in October 2026:
3-year rule: the return was due April 18, 2022, more than 3 years earlier. ✓
2-year rule: filed April 2022, more than 2 years earlier. ✓
240-day rule: assessed May 2022. ✓
That 2021 tax may be dischargeable. Your 2023 tax, though, was due April 15, 2024, so it fails the 3-year rule until after April 15, 2027. One day can decide whether a tax year is discharged.
Each assessment has its own 240-day clock. If an audit added more 2021 tax that was assessed in, say, July 2026, that extra amount isn't dischargeable in an October 2026 bankruptcy, even though the original 2021 tax is.
Taxes that survive bankruptcy
Payroll trust fund taxes and the Trust Fund Recovery Penalty. These include income tax and FICA withheld from employees, and collected sales taxes. See our TFRP guide.
Recent income taxes that fail the 3-year or 240-day rules. They are "priority" taxes.
Taxes for years with no return filed, or returns filed within 2 years of the petition.
Taxes tied to fraudulent returns or willful evasion.
Penalties often fare better than the tax. A tax penalty is generally dischargeable if the underlying tax is dischargeable. It is also dischargeable if the event that triggered it, such as the late filing or late payment, happened more than 3 years before the petition, even when the tax itself survives (§523(a)(7)). Interest generally follows the tax.
The late-return trap: why New Jersey taxpayers need to be careful
If you didn't file and the IRS prepared a substitute for return (SFR) and assessed the tax, the SFR itself is not a return for bankruptcy purposes. Many people then file their own return to "start the 2-year clock." In New Jersey, that may not work:
The U.S. Court of Appeals for the Third Circuit (covering New Jersey, Pennsylvania and Delaware) held in In re Giacchi (2017) that a return filed after the IRS had already assessed the tax wasn't an honest and reasonable attempt to comply with the tax law. Because it served no tax purpose, it wasn't a "return," and the tax wasn't dischargeable.
Some other circuits go further and treat any late-filed return as a non-return: the "one-day-late" rule of the First, Fifth and Tenth Circuits.
The practical lesson: if you haven't filed, file before the IRS assesses the tax through an SFR. If the IRS has already assessed, get advice before assuming bankruptcy will help with those years. Other tools, such as an offer in compromise, may work better.
What happens to IRS tax liens in bankruptcy
A discharge eliminates your personal obligation to pay. A Notice of Federal Tax Lien filed before the bankruptcy keeps securing the debt against property you owned on the petition date, including property that is otherwise exempt, such as home equity and retirement accounts.
In practice, the IRS may be paid from that property later: when the house is sold or refinanced, or when retirement funds are distributed. Property you acquire after filing is free of the pre-petition lien.
That's why the value of your assets on the petition date matters as much as the dischargeability rules. See our federal tax lien guide.
Chapter 7 vs. Chapter 13 for tax debt
How it works — Chapter 7: Liquidation. Non-exempt assets are sold, and qualifying debts are discharged in a few months; Chapter 13: A 3- to 5-year repayment plan
Dischargeable (older) income taxes — Chapter 7: Discharged; Chapter 13: Paid a share like other general unsecured debts; the remainder is discharged
Priority (recent) taxes — Chapter 7: Not discharged; you still owe them after the case; Chapter 13: Must be paid in full through the plan, generally without further penalty accruals
Taxes secured by a filed lien — Chapter 7: The lien survives on pre-petition property; Chapter 13: Paid through the plan up to the value of the collateral, with interest
Requirements — Chapter 7: Pass the means test; Chapter 13: Regular income; file the last 4 years of tax returns before the meeting of creditors (§1308); stay current on new taxes
Chapter 13 is often the better fit when recent priority taxes are large. It lets you pay them over time under court protection, with collection stopped. Chapter 11 can serve a similar role for businesses and higher-debt individuals.
The automatic stay (11 U.S.C. §362) stops levies and most IRS collection as soon as you file. The IRS can still audit, issue notices of deficiency, and assess tax during the case.
Timing traps: what pauses the bankruptcy clocks
The bankruptcy look-back periods are suspended, which pushes back the date a tax becomes dischargeable, during:
a pending offer in compromise, plus 30 days (for the 240-day rule);
a prior bankruptcy case, plus 90 days;
a Collection Due Process hearing and appeal, plus 90 days.
Meanwhile, the IRS's 10-year collection period is suspended during a bankruptcy, plus six months (IRC §6503(h)).
So filing an offer or requesting a hearing can delay the date a tax becomes dischargeable, and a bankruptcy filed a few months too early can make things worse. Plan the sequence before you act.
Bankruptcy vs. an offer in compromise or "currently not collectible" status
Bankruptcy isn't the only way out, and it isn't always the best one:
An offer in compromise can settle taxes that bankruptcy can't touch, including recent and payroll-related personal liabilities, without a bankruptcy on your record. The IRS won't consider an offer while you're in an open bankruptcy case.
If your income and assets are low, currently not collectible status may let the collection statute run out. See our guide to currently not collectible status.
In offer and CNC negotiations, showing what the IRS would get if you filed bankruptcy is a powerful argument. See saving the family home through "hypothetical bankruptcy".
How to check your own dates
Order your IRS account transcripts for every year you owe (from IRS.gov or through a representative). Look for:
Transaction code 150: when the return was filed and the original tax assessed.
Codes 290 and 300: later additional assessments, each with its own 240-day clock.
Codes 480 and 520: offers in compromise and bankruptcies, which can toll the clocks.
"Substitute for return" indicators: a sign of the late-return problem described above.
How we help
As attorneys and CPAs, we map every tax year and every assessment against the dischargeability rules. We check for SFRs and tolling events, value the property a lien would reach, and compare bankruptcy with an offer, a payment plan or CNC status. We work alongside your bankruptcy counsel, so the petition is filed when the tax years qualify, not a day too early.
Frequently asked questions
Can I discharge IRS debt in Chapter 7? Yes, for income taxes that meet the 3-year, 2-year and 240-day rules and involve no fraud. Recent income taxes, payroll trust fund taxes and the TFRP aren't discharged.
Does bankruptcy remove an IRS tax lien? No, not for a lien filed before the bankruptcy. It stays attached to property you owned on the filing date, even if the tax is discharged. It doesn't attach to property you acquire later.
I never filed my returns. Can I file them now and discharge the taxes later? Possibly, if you file before the IRS assesses the tax through a substitute for return, and then wait more than 2 years. If the IRS already assessed the tax, a later return may not count in New Jersey under Giacchi.
Are New Jersey and New York income taxes dischargeable too? The same Bankruptcy Code timing rules generally apply to state income taxes. State sales and withholding taxes are trust fund taxes and generally aren't dischargeable.
Will filing bankruptcy stop a wage garnishment by the IRS? Yes. The automatic stay halts most IRS levies as soon as the petition is filed. Whether the debt is ultimately discharged depends on the rules above.
Sources
11 U.S.C. §§362, 507(a)(8) (including the tolling paragraph), 523(a)(1), 523(a)(7), 523(a) (definition of "return"), 1308, 1322(a)(2), 1328(a)
IRC §6503(h)
In re Giacchi, 856 F.3d 244 (3d Cir. 2017); Beard v. Commissioner, 82 T.C. 766 (1984)
Internal Revenue Manual 5.9, Bankruptcy and Other Insolvencies
Wondering whether bankruptcy would clear your tax debt? Get the year-by-year analysis before you file. Schedule a confidential case evaluation or call (201) 488-0070.
This guide is general information, not legal advice for your situation. Reading it doesn't create an attorney-client relationship.
DRAFT: UNDER ATTORNEY REVIEW. This guide is a working draft posted temporarily so that Thomas F. DiLullo & Associates, P.C. can review it. It has not been approved, may contain errors, and must not be relied on as legal or tax advice. For help with your situation, schedule a confidential case evaluation or call (201) 488-0070.
