Always order an account record or tax transcript from the IRS for a client filing a bankruptcy. You may want to obtain transcripts for the last 15 years to make sure all needed returns have been filed. The client may not be sure of the amount of liability or the years owed. This information will help you to determine what taxes are owed and whether they are dischargeable. Without accurate information on the assessment dates and tax return filing dates, you may file a bankruptcy before a tax becomes dischargeable and saddle the debtor with tax debt that could have been discharged. Also, a tax transcript or account record will enable you to verify that your client has filed all required tax returns.

At least 7 days before the first date set for the creditors meeting, the debtor must provide the trustee with a copy of the federal income tax return (or tax transcript) for the most recent year ending before the commencement of the case, if a return was required for that year.1 A copy of this return must be given to any creditors who request one at least 14 days before the first date set for the creditors meeting.2 The bankruptcy court may dismiss the petition of a debtor who fails to file a required return or transcript.3 If an interested party has filed a motion to dismiss of these grounds, the debtor must show that the failure to file was due to circumstances beyond the debtor’s control.

Because most low-income taxpayers use professional tax preparation services, a copy of a lost return can usually be obtained from the tax preparer. Attorneys who work for Low-Income Taxpayer Clinics also have immediate electronic access to IRS tax transcripts provided the client signs a Form 2848 authorizing the low-income tax clinic attorney to represent the client in tax matters for the relevant years. If these options are not available, you should immediately file an IRS Form 4506-T to obtain the client transcripts for the tax year in question. 

• 111 U.S.C § 521(e)(2)(A).
• 211 U.S.C. § 521(e)(2)(A)(ii); Fed. R. Bankr. P. 4002(b)(4).
• 311 U.S.C. § 521(e)(2)(B).

Chapter 13 debtors must file all required tax returns for tax periods ending within 4 years of the debtor’s bankruptcy filing. These must be filed before the first meeting of the creditors. A debtor may request that a trustee hold the creditors meeting open for an additional 120 days to enable the debtor to file the required returns. The failure to file the required returns will prevent confirmation of a Chapter 13 bankruptcy plan and will result in the dismissal of the Chapter 13 case or conversion to case under Chapter 7.

For all bankruptcies, a debtor must file any tax return that becomes due after the commencement of the bankruptcy case or obtain an extension for filing the return before the due date. If the debtor fails to timely file required returns or extensions, a taxing authority may request that the court dismiss the bankruptcy or convert it to another chapter of the Bankruptcy Code. If the debtor does not file the required return or obtain an extension within 90 days after the taxing authority’s request, the court must dismiss or convert the case. You should advise bankruptcy clients of their duties to file tax returns and ensure that they comply.

Certain income tax debts may be discharged in a Chapter 7 or a Chapter 13 bankruptcy. In a bankruptcy, you should always evaluate whether any of the income tax debt can be discharged. Many attorneys mistakenly assume that federal tax debt cannot be discharged. The rules for determining whether an income tax is dischargeable are very complex.1  The analysis should be done for each tax year.

If most of the client’s debt is federal tax, an Offer in Compromise may provide the client with better relief from his tax debt than a bankruptcy.2  In some cases (e.g., if the taxpayer filed the tax return after the IRS assessed the tax by a Substitute for Return), an Offer in Compromise may be the only option.

• 1See Nat’l Consumer L. Ctr., Consumer Bankruptcy Law and Practice § 15.4.3.1.1 (12th ed. 2019); Effectively Representing your Client Before the New IRS ch. 21 (ABA 8th ed. 2021); Morgan D. King, Discharging Taxes in Consumer Bankruptcy Cases (2012).
• 2For a complete discussion of Offers in Compromise, see Section 7.3.

Income taxes are dischargeable only if six separate tests are each met.

The Timely-Filed Return Test. 11 U.S.C. § 523(a) prohibits discharge of tax debt in the absence of a return. The First, Fifth, and Tenth Circuits have ruled that a tax, where the return is late, is not dischargeable. This has become known as the “one-day-late” rule. This means that a taxes on a return filed even one day late are not dischargeable. In a 2010 Chief Counsel notice, the IRS declared that a late filed tax return would not bar bankruptcy discharge of the related tax unless the return was filed after an assessment pursuant to § 6020(b) Substitute for Return.1  Nevertheless, the Fifth Circuit has continued to hold that a late-filed return (with the possible exception of a return filed pursuant to I.R.C. § 6020(a)) can never be a “return” for bankruptcy discharge purposes.2

The 3-year tax return due date test. To satisfy this test, the tax return must have been due at least 3 years before the bankruptcy filing.3  For example, if a 2022 tax return was due on April 15, 2023, the bankruptcy petition must be filed after April 15, 2026 for the 2022 income tax to be dischargeable.4  The 3-year lookback period may be suspended by bankruptcy and collection due process appeals.5  Offers in Compromise don’t suspend the 3-year period.6

The 2-year tax return filing date test. To satisfy this test, the tax return must have been filed at least 2 years before the bankruptcy filing. This test will exclude debtors with unfiled returns and certain late-filed returns. For example, if a 2022 tax return was not filed until April 15, 2024, the bankruptcy could not be filed until after April 15, 2026, if the debtor seeks to discharge the 2022 income taxes. Note that the “filing date” in the IRS records may be weeks or even months after the debtor mailed the return to the IRS. The only way to know the IRS filing date is to obtain the tax transcript or account record from the IRS.

A Substitute for Return will not qualify as a tax return for the purposes of this test.7  The IRS also maintains that a tax can’t be discharged if the taxpayer filed the tax return after the IRS assessed a tax deficiency following the taxpayer’s failure to respond to the 90-day deficiency letters based on the IRS’s preparation of a Substitute for Return.8

The assessment date test. For a tax debt to satisfy this test, the IRS must have assessed the tax against the tax debtor at least 240 days before the bankruptcy petition was filed. You can only determine the assessment date by reviewing the IRS tax transcript or account record.9  Generally, assessment is made within 3 years of the tax return’s due date. You don’t want to file a bankruptcy petition before 240 days (with extensions) has run from the assessment. The 240-day period may be extended if the taxpayer filed a prior bankruptcy in which case, the length of the bankruptcy plus 6 months must be added to the time periods.10  Offers in Compromise, collection due process appeals, and Taxpayer Assistance Orders may also toll or increase the time requirements.11

The fraud or willful evasion test. A fraudulent return or a willful attempt to evade or defeat tax will prevent discharge of the tax debt.12  The IRS bears the burden of proof on fraud or evasion.13

The timely notification test. To discharge a tax, the debtor must notify the IRS of the bankruptcy in time for the IRS to file a timely proof of claim.14

• 1Internal Revenue Serv., Chief Counsel Notice, No. CC 2010-016 (Sept. 2, 2010), For a more extensive discussion of a Substitute for Return, see Section 6.2.
• 2See, e.g., In re McCoy, 666 F.3d 924 (5th Cir. 2012) (interpreting post-2005 language of 11 U.S.C. § 523(a)(1)(B)(i)); In re Fahey, 779 F.3d 1 (1st Cir. 2015); In re Mallo, 774 F.3d 1313 (10th Cir. 2014).
• 3For an example of the interplay between the look back periods, see Severo v. Comm’r, 129 T.C. 160 (2007), aff’d, 586 F.3d 1213 (9th Cir. 2009).
• 4See Loving v. United States (In re Loving), No. 11-01439-MAM-7, 2011 WL 3800042 (Bankr. S.D. Ala. Aug. 29, 2011) (taxes not dischargeable because debtor filed on April 8, 3 years after she filed her tax return, but less than 3 years after due date of the return).
• 511 U.S.C. § 507(a)(8).
• 6Chief Counsel Advice 2004-04-049 (Jan. 5, 2004).
• 7Rev. Rul. 2005-59, I.R.B. 2005-37; I.R.M. 4.12.1.8.2. For a more extensive discussion of a Substitute for Return, see Section 6.2.
• 8Internal Revenue Serv., Chief Counsel Notice, No. CC 2010-016 (Sept. 2, 2010), (citing 11 U.S.C. § 523(a)(1)(B)(i)). But see In re Colsen, 446 F.3d 836 (8th Cir. 2006) (under pre-2005 law, return filed after assessment pursuant to “substitute for return” may qualify as a tax return for bankruptcy discharge purposes).
• 9See Effectively Representing Your Client Before the IRS § 17.2 (ABA 8th ed. 2021) (giving information on how to ascertain assessment date).
• 10Severo v. Comm’r, 129 T.C. 160 (2007), aff’d, 586 F.3d 1213 (9th Cir. 2009).
• 11I.R.C. § 507 (a)(8)(A)(ii); I.R.M. 5.9.13.19.3(2) (concept of tolling); see also In re Emerson, 224 B.R. 577 (Bankr. W.D. La. 1998) (appeal of rejected offer in compromise does not toll the 240-day period in I.R.C. § 507).
• 12See, e.g., In re Bruner, 55 F.3d 195 (5th Cir. 1995).
• 13Grogan v. Garner, 498 U.S. 279 (1991).
• 14United States v. Hairopoulos, 118 F.3d 1240 (8th Cir. 1997).

A Chapter 13 bankruptcy may secure a more favorable repayment plan for taxes than an installment agreement. The maximum repayment period for a Chapter 13 bankruptcy is 5 years. 

If the taxpayer has less than 5 years to repay federal tax liability, Chapter 13 can extend the payment period, resulting in lower monthly payments.

The Chapter 13 plan must provide for priority and secured tax debts. Older taxes may be “non-priority” and therefore dischargeable. In some cases, you can also prevent a tax debt from becoming “secured” by filing the bankruptcy before the IRS files its lien.

Before 2005, some tax liability that was non-dischargeable in a Chapter 7 bankruptcy because it failed to satisfy one or more of the six tests discussed in the previous section could be discharged in a Chapter 13 filing as long as the liability was listed. This was true even if the liability was not entirely paid in the 5-year payment period. This was commonly known as a “super” discharge. For the most part, the 2005 bankruptcy legislation eliminated the Chapter 13 “super” discharge. Although the scope of dischargeable debts in Chapter 13 has been narrowed, Chapter 13 can still be used to discharge priority taxes paid with money from loans and credit cards, tax penalties, and post-petition interest on certain taxes.