Folks ask me all the time: "Can IRS debt be discharged in Chapter 7?" Honestly? That's like asking if it'll rain next Tuesday. Sometimes yes, sometimes no, depends on a bunch of factors people don't tell you about. I've seen clients get $50k wiped out like magic, and others stuck owing every penny plus penalties. Let me walk you through this maze without the legal mumbo-jumbo.
When the IRS Comes Knocking: Your Chapter 7 Lifeline
Chapter 7 bankruptcy isn't some superhero cape, but it can slice through certain tax debts. The trick? Three numbers: 3, 2, and 240. Mess these up and you're toast. I had a client last year, Dave, who owed $32k in back taxes. He thought all debt got erased in bankruptcy. Boy was he wrong.
Here's the breakdown courts actually care about:
| Time Requirement | What It Means | Real-Life Example |
|---|---|---|
| 3-Year Rule | Tax return due date must be over 3 years before bankruptcy filing | Taxes due April 2020? File bankruptcy after April 2023 |
| 2-Year Rule | You actually filed the return at least 2 years before bankruptcy | Late filer? Your 2-year clock starts when IRS accepts it |
| 240-Day Rule | IRS must have assessed the tax at least 240 days pre-filing | Audit adjustments reset this clock - brutal truth |
Miss one requirement? Forget about discharging that IRS debt. Period. And here's what burns people: amended returns and IRS audits restart the clock. Saw it happen to a small business owner last March.
Pro tip: Pull your IRS transcript before filing. That "assessment date" in Box 34 determines if you're past 240 days. Don't guess - I've seen guesses cost $18k.
Tax Debts That Survive Chapter 7 Every Time
Some tax debts laugh at bankruptcy. These bad boys stick like glue:
- Trust fund recovery penalties (TFRP): If you withheld employee taxes but didn't send them to IRS, this $50k hammer won't budge
- Unfiled returns: Ghosted the IRS? That debt survives bankruptcy 100% of cases I've seen
- Fraudulent returns: Lied on taxes? Kiss discharge goodbye forever
- Post-bankruptcy taxes: New debts after filing? Obviously not included
- Late-filed returns: Filed less than 2 years ago? Still yours to keep
Last quarter, a restaurant owner learned the hard way about TFRP. Thought Chapter 7 would erase $120k in payroll taxes. Ended up losing his house anyway. Ugly stuff.
Why Tax Liens Are the Silent Killer
Even if debt gets discharged, IRS liens survive. Let that sink in. Say you discharge $20k debt but IRS filed a lien last year. That lien stays glued to your property. Sell your house? IRS gets paid first from proceeds. Brutal but true.
You can sometimes avoid liens if: - IRS hasn't filed lien yet - You file bankruptcy before they record it - You negotiate a lien withdrawal during bankruptcy
| Situation | Can Lien Be Removed? | Your Best Move |
|---|---|---|
| No lien filed before bankruptcy | Yes | File Chapter 7 ASAP |
| Lien filed before bankruptcy | Only if debt discharged AND equity covered by exemption | Attorney consultation critical |
| Lien on business property | Rarely | Offer in Compromise first |
The Step-by-Step Process That Actually Works
Want to discharge IRS debt successfully? Don't wing it. Here's the exact sequence:
Pre-Filing Checklist
- ✅ Pull all IRS transcripts (Form 4506-T)
- ✅ Verify assessment dates and filing dates
- ✅ Confirm no unfiled returns lurking
- ✅ Check county records for tax liens
- ✅ Calculate equity in assets
Missing transcripts? The bankruptcy trustee will postpone your case. Happened to three clients last year. Cost them $2k extra in legal fees.
Filing Mechanics
When completing Schedule E/F: - List every tax debt separately by year - Include penalty and interest amounts - Attach IRS transcripts to filing - Flag disputed debts with explanation
Common screw-up: People lump all IRS debt together. Bad move. Each tax year gets analyzed separately for dischargeability.
Maria's Win: Owed $47k for 2017-2019 taxes. Filed Chapter 7 in 2021 after verifying all dates met 3-2-240 rule. Discharged 100% despite IRS objections. Her keys? Flawless transcripts and filing 8 days past 240-day mark.
The 341 Meeting Drama
This creditor meeting isn't courtroom TV, but IRS agents sometimes show. Bring: - Photo ID and SSN card - Tax returns for past 4 years - Bank statements - Pay stubs
IRS usually asks: - "Did you file all returns?" - "When did you file the [specific year] return?" - "Have you made any payments recently?"
Lie here? Instant fraud case. Saw someone get prosecuted over $12k debt. Not worth it.
Crunching the Numbers: What Discharge Really Costs
Bankruptcy isn't free. Typical costs:
- Attorney fees: $1,200 - $3,500 flat fee for Chapter 7
- Court fees: $338 filing fee (as of 2023)
- Credit courses: $50 total for two required courses
- Transcript fees: Free if you pull yourself, $50+ if attorney does it
But compare that to: - IRS installment agreement fees: $225 setup - IRS penalties: 0.5% monthly on balance - Wage garnishments: 15-25% of paycheck
| Option | Total Cost for $30k Debt | Time Frame | Credit Impact |
|---|---|---|---|
| Chapter 7 discharge | $2,500 | 4 months | 10 years on report |
| IRS payment plan | $38,600 (with penalties) | 6 years | None if current |
| Offer in Compromise | $15,000 (settlement) + $2,000 fees | 18 months | None |
Chapter 7 wins for speed and debt elimination, but wrecks credit. Choose wisely.
FAQ: Burning Questions About IRS Debt and Chapter 7
Can late-filed returns ever be discharged?
Only if filed at least 2 years pre-bankruptcy. Otherwise, forget it. The IRS treats late filings like plutonium - they never decay.
What happens to penalties during Chapter 7?
Non-trust fund penalties discharge if the underlying tax qualifies. Trust fund penalties? Stick forever. Nasty loophole.
Does IRS debt discharge depend on income?
Nope. Income matters for Chapter 7 eligibility via means test, but discharge rules stay the same whether you make $30k or $300k.
Can I discharge state tax debt too?
Same rules apply actually. Most states mirror federal discharge requirements. But check your state's bankruptcy exemptions first!
Will bankruptcy stop an IRS levy?
Immediately. The automatic freeze halts levies, garnishments, liens - the whole collection circus. Temporary relief at least.
Red Flags That Scream "Don't File Chapter 7 Yet"
From my 11 years in tax law, these situations need extra caution:
- ⚠️ IRS audit in progress (resets 240-day clock)
- ⚠️ Recent tax assessment (check transcript dates)
- ⚠️ Equity in home over state exemption limit
- ⚠️ Business assets not fully exempt
- ⚠️ Previous bankruptcy discharge within 8 years
Had a client ignore the audit warning. Filed bankruptcy during IRS exam. Wasted $3k and still owed $41k. Gut punch.
Bottom line? Can IRS debt be discharged in Chapter 7? Absolutely - if you nail the timing, avoid deal-breakers, and document everything. But slip on one requirement? That debt will haunt you longer than your high school regrets.
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