Does Bankruptcy Clear IRS Debt?

by Kent Anderson, Esq.

July 19, 2010

Does Bankruptcy Clear IRS Debt?

Bankruptcy can clear some types of tax debt.  It will not clear a federal tax lien that has attached to your assets.  However, when no tax lien has been filed, income tax debt can be discharged and cleared from your record if some very specific requirements are met in either a Chapter 7  or a Chapter 13 proceeding.  Not only can bankruptcy clear IRS income tax debt, it can get rid of state and local income tax debt as well.

Timing is an important issue in clearing a tax debt and there are some other basic steps that must be followed.  To discharge income tax debt, the following rules apply:

  1. Your tax returns must have been due three years or more before the  petition was filed;
  2. Your tax returns have to have been filed more than two years before the petition;
  3. The tax you owe must have been assessed against you by the government for at least 240 days before the case is filed;
  4. Your tax returns must have been truthful and not fraudulent; and,
  5. You must not have been intentionally attempting to evade or defeat the tax when you failed to pay.

There are some technical rules that can complicate a discharge of tax, but in most cases the tax will be discharged if the above requirements are met.

If a notice of federal tax lien has been filed by the IRS, the tax debt covered by the lien becomes attached to any assets you own at the time it is filed.  What is worse is that it attaches to anything new you get so long as the lien is in effect.  This applies as long as you owe the tax.  Until the collection time limit expires or the tax debt is cleared the lien remain in place.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.

Last modified: October 22, 2012