Rules for Chapter 7 Bankruptcy and IRS Tax Debt Discharges

Rules for Chapter 7 Bankruptcy and IRS Tax Debt Discharges

Dealing with IRS tax debt can be an overwhelming experience for clients, and as a CPA, tax professional, or enrolled agent, understanding the relationship between Chapter 7 bankruptcy and IRS debt is crucial in providing the best guidance possible. This comprehensive guide will delve into the intricacies of Chapter 7 bankruptcy and IRS debt, shedding light on the rules, requirements, and potential outcomes that your clients may face.

From eligibility criteria to the specific types of tax debts that can be discharged under Chapter 7, we’ll provide a detailed analysis and practical tips to help you confidently navigate this complex area of tax resolution. By the end of this article and video, you’ll be well-equipped to advise your clients on the most effective strategies for addressing their IRS tax debt through Chapter 7 bankruptcy.



After Checking Out this Video, Click Here to Watch an IRS Solutions Demo on Analyzing Dischargeable Tax Debt in Bankruptcy


The Rules For Dischargeable Debt In Bankruptcy

I was recently working with an accountant trying to help him with his client to put together an installment agreement for the client who owed 25,000 dollars. We had everything going really good, but as we were talking, we found out that his client owed another 100,000 dollars in small debts, credit card debts, and other unsecured assets. He was just never going to get out of the hole. So, we brought up the idea that he should probably be looking into bankruptcy.

We were just talking about this and he did not realize that taxes might be dischargeable in bankruptcy. So, I gave him a few ideas of what would help him and it’s really not that much that the client has to do.

In order to qualify for taxes to be dischargeable in bankruptcy, it has to meet 3 or 4 rules.

  • The first one is the 3-year rule. The taxes must have been due at least 3 years ago in order to become dischargeable. Meaning that a 2018 return would have been due on April 15, 2019. 3 years from that would be April 15, 2022. If there was an extension filed, it would be October 15, 2022 to meet the 3-year rule. Pretty simple so far.
  • The next rule is the 2-year rule. This one is a little trickier. The return must have been filed at least 2 years ago in order for it to become dischargeable. The question is, what is considered a return and what is considered filed? The courts have realized that a late re-filed return may not be a “return” and if it was ever a Substitute for Return where the IRS prepared the return for you, it may also not be dischargeable. So, there is some little things that we are going to have to look into there. But, for the most part, we can figure that part out.
  • The next thing is the 240-day rule. This means that the taxes must have been assessed at least 240 days ago. If there was an audit that happened 3 months ago, you would have to wait another 5 months (240 days), about 8 months in order for that tax to become dischargeable.

So, after we look at all of these things and numbers, we compare all 3 dates and try to figure out which is the last date in order for the client to make a tax dischargeable. It’s really quite amazing and it works quite often as a great tool in your toolbox.


Guide to Boost Revenue by Offering IRS Transcript Monitoring

How IRS Action Monitoring Can Help You Grow Your Tax Practice

Sign up for the Newsletter:

Keep Reading for More Insights...