Bankruptcy can discharge certain IRS tax debts, but federal tax liens often survive the process. In most cases, your personal obligation to pay qualifying tax debts may be eliminated through Chapter 7 or Chapter 13 bankruptcy. However, if the IRS filed a Notice of Federal Tax Lien before your bankruptcy, that lien typically remains attached to your property even after discharge.
As a bankruptcy and IRS solutions firm serving clients throughout New York, John D’Amato, PLLC has helped many individuals and businesses resolve complex cases involving federal tax debt and bankruptcy law. We understand how these rules apply in real cases and what options may be available to you.
How Federal Tax Liens Work
A federal tax lien gives the IRS a legal claim against your property when you owe unpaid taxes. This claim attaches to all your assets, including real estate, vehicles, and financial accounts. It also covers any property you acquire while the lien is in effect.
The lien itself arises automatically when you fail to pay taxes after the IRS sends a demand for payment. When this happens, the IRS may file the Notice of Federal Tax Lien, a public filing that alerts creditors to the government’s claim on your property.
Here’s what that means in practical terms. If you own a home in New York and the IRS files a lien against you, the government’s interest attaches to that property. If you later sell the home, the IRS may be entitled to proceeds from the sale. The lien can also make it difficult to obtain credit or refinance a mortgage.
The Difference Between Discharge and Lien Survival
Many people confuse two distinct concepts in bankruptcy: discharging the debt and releasing the lien.
Discharging a debt means you’re no longer personally obligated to pay it. The U.S. Courts explain that a discharge releases you from personal liability and prohibits creditors from taking collection action against you.
However, as the bankruptcy court notes, a valid lien that hasn’t been avoided during the bankruptcy case will remain after discharge. This creates a situation where you may no longer owe the tax debt personally, but the IRS lien stays attached to property you owned when the lien was filed.
For example, if you owed the IRS $50,000 and the agency filed a lien before you filed for bankruptcy, a discharge might eliminate your tax personal debt but not the lien attaching to your property. If you own a home worth $300,000, the lien could still attach to that property. When you sell that house, the IRS may collect from the proceeds.
Which Tax Debts Can Be Discharged
Not all tax debts qualify for bankruptcy discharge. Federal law sets specific requirements, commonly called the “3-2-240 rules,” that determine whether income tax debt can be eliminated.
- The three-year rule. The tax debt must relate to a return that was due at least three years before you file bankruptcy. If you filed for an extension, the clock starts from the extended due date. For instance, if your 2020 tax return was due April 15, 2021, the three-year period wouldn’t expire until April 15, 2024.
- The two-year rule. You must have actually filed the tax return at least two years before your bankruptcy petition. This rule emphasizes the importance of filing returns, even if you can’t pay the taxes owed. Returns filed by the IRS on your behalf without your consent typically don’t satisfy this requirement.
- The 240-day rule. The IRS must have assessed the tax at least 240 days before you file for bankruptcy. Assessment usually occurs around the time you file your return, but audits or amended returns can reset this clock.
You must meet all three requirements for a particular tax year’s debt to qualify for discharge. Missing even one means that tax debt survives your bankruptcy.
Taxes That Cannot Be Discharged
Certain tax debts are never dischargeable, regardless of how old they are. According to the IRS bankruptcy information, these include:
- Trust fund taxes, such as payroll taxes you collected from employees but didn’t remit to the IRS
- Tax debts related to fraudulent returns
- Taxes you willfully attempted to evade
- Tax debts for returns you never filed.
At John D’Amato, PLLC, we’ve seen cases where tax payers assumed their tax debts would be discharged, only to discover that fraud allegations or missing returns prevented relief. Attorney John D’Amato can review your specific situation to determine which debts may qualify for discharge.
Chapter 7 Versus Chapter 13 for Tax Debts
The type of bankruptcy you file affects how tax debts and liens are handled.
- Chapter 7 bankruptcy. Often called liquidation bankruptcy, Chapter 7 can discharge qualifying income tax debts that meet the 3-2-240 rules. The process typically takes three to four months for the discharge to be entered. However, any IRS lien filed before bankruptcy remains attached to your property.
- Chapter 13 bankruptcy. This option involves a three-to-five-year repayment plan. Qualifying tax debts may be treated as general unsecured claims and discharged at the end of your plan. Tax debts that don’t meet the discharge requirements are treated as priority debts that must be paid in full through your plan.
Chapter 13 offers some advantages for dealing with tax liens. You may be able to pay off the lien amount through your plan while discharging any remaining personal liability for the underlying debt.
What Happens After Bankruptcy Discharge
If your bankruptcy case results in a discharge of tax debts, any existing IRS lien remains attached to the property you owned at the time of the bankruptcy filing. However, the lien doesn’t attach to property you acquire after your bankruptcy discharge. The IRS Internal Revenue Manual confirms that in bankruptcy cases, the discharge can prevent the IRS lien from attaching to your after-acquired property.
If you’re planning to sell property that has a lien attached, you’ll need to negotiate with the IRS or apply for a discharge of that specific property from the lien. In some cases, the IRS may agree to discharge the property if the proceeds won’t be sufficient to cover the lien amount or if other conditions are met.
Options for Dealing With Tax Liens
Even when tax debts are discharged, you still need to address any existing liens. Several options may be available depending on your circumstances.
- Lien release. The IRS will release (remove) a lien within 30 days after you’ve paid the debt in full or when the IRS collection period has expired. The IRS collection period is generally 10 years from the date of assessment, which means that 10 years after your tax debt is assessed, the IRS lien typically disappears.
- Lien discharge. A discharge lifts the lien from specific property. This is often used when selling real estate, where proceeds can be used to pay the IRS claim. The IRS has specific procedures outlined in Publication 783 for applying for a certificate of discharge.
- Lien subordination. This doesn’t remove the lien but lets other creditors move above the IRS in priority. It can make it easier to refinance a mortgage or obtain new financing.
- Lien withdrawal. In some cases, the IRS will withdraw the public notice of the lien while you remain liable for the debt. This can help if you’re in a direct debit installment agreement and meet certain requirements.
Supporting Data
According to the U.S. Courts, bankruptcy filings rose 13.1 percent during the 12-month period ending March 31, 2025, with total filings reaching 529,080 cases. Non-business filings, which include most individual bankruptcy cases, rose 13 percent to 505,771.
The IRS Data Book for fiscal year 2024 shows that the agency’s collection function brought in nearly $77.6 billion, a 13.6 percent increase from the prior year. More than $16 billion was collected through installment agreements, indicating that many taxpayers are working with the IRS to resolve their debts outside of bankruptcy.
Frequently Asked Questions
Will filing for bankruptcy automatically remove my IRS tax lien?
No. While bankruptcy may discharge your personal obligation to pay certain tax debts, any lien the IRS filed before your bankruptcy typically remains attached to property you owned at that time. You’ll need to address the lien separately through payment, discharge application, or other methods.
How long do I have to wait after a tax return is due before I can discharge that tax debt?
You must wait at least three years from the return’s due date, including any extensions. You also need to have filed the return at least two years before your bankruptcy, and the tax must have been assessed at least 240 days before filing. All three timing requirements must be met.
Can I discharge payroll taxes I owe as a business owner?
No. Trust fund taxes, which include payroll taxes you withheld from employees, are never dischargeable in bankruptcy. These are treated as money you held in trust for the government and must be repaid regardless of your bankruptcy filing.
What if the IRS filed a substitute return for a year I didn’t file?
Tax debts from IRS substitute returns filed without your consent are generally not dischargeable. To potentially qualify for discharge, you should file before filing for bankruptcy your own return for that tax year, though some courts have ruled this may not be sufficient if the substitute return was already filed.
Key Points to Remember
- Bankruptcy can discharge certain income tax debts that meet the 3-2-240 timing rules, but federal tax liens typically survive the discharge and remain attached to pre-bankruptcy property.
- Trust fund taxes, fraudulent tax debts, and taxes from unfiled returns cannot be discharged in any bankruptcy chapter.
- Chapter 13 may offer advantages for addressing tax liens through a structured repayment plan while potentially discharging remaining personal liability.
- The IRS offers options to manage the lien even after bankruptcy discharge, such as lien release, subordination, lien discharge, withdrawal.
- Each case requires careful analysis of when returns were due, when they were filed, and when taxes were assessed.
Contact John D’Amato for Help With Your Bankruptcy and IRS Case
Dealing with IRS tax liens and bankruptcy together requires careful planning and a clear understanding of both areas of law. If you’re facing federal tax debt and considering bankruptcy, it’s important to understand how these processes interact before taking action.
John D’Amato is a top-rated bankruptcy and IRS solutions attorney in New York. Visit Attorney John D’Amato’s profile to learn more about his experience and results.
Call (716) 703-9099 to schedule a free consultation.