The popular belief that taxes are never dischargeable in bankruptcy is wrong. So is the equally common belief that filing bankruptcy will sweep away every outstanding obligation to the IRS or the Franchise Tax Board. The truth lies in a careful reading of the Bankruptcy Code, particularly §523(a)(1), and in a sequence of dates that most taxpayers have never tracked.
For more than four decades we have advised clients on whether bankruptcy is the right response to a tax problem—and, just as often, on why it is not. The analysis is technical, but the stakes are practical: an ill-timed petition can destroy a discharge that would have been available six months later, and a well-timed one can resolve a problem that no installment agreement could ever fully address.
The dischargeability framework
At its core, the question of dischargeability turns on three statutory timing rules and a handful of disqualifying conduct provisions. Income taxes may be discharged in a Chapter 7 case only if the return for the year was due more than three years before the bankruptcy filing, the return itself was filed more than two years before the petition, and the tax was assessed more than 240 days before the petition. Even when each of those is satisfied, a discharge is unavailable if the return was fraudulent or the taxpayer willfully attempted to evade the tax.
Trust-fund payroll taxes are never dischargeable. Sales taxes generally are not. Penalties tied to non-dischargeable taxes follow the same rule; penalties on dischargeable taxes that arose more than three years before the petition usually fall away. The Code is unusually precise here, and its precision rewards careful work.
Federal taxes and California taxes
The Franchise Tax Board generally follows the federal dischargeability framework, but its assessment and collection timelines do not always match the IRS. We routinely confront cases where the federal liability is dischargeable on a given date and the matching state liability is not, and the petition strategy has to account for both. The CDTFA and EDD obligations bring their own rules. None of this can be analyzed accurately without account transcripts in hand.
When bankruptcy is the right answer
Bankruptcy is rarely a first option, but for the right client it is the only option that produces a true fresh start. We see this most often in three patterns: an individual whose older income tax liabilities have ripened past the §523 timing bars and whose other debts have grown to the point that an offer in compromise will no longer be accepted; a small business owner whose closed company left behind both income and trust-fund tax problems, where Chapter 7 can address the former and a separate Chapter 13 plan can structure the latter; and a real estate investor whose collapse has produced both deficiency exposure and cancellation-of-indebtedness income.
When bankruptcy is the wrong answer
Just as often, our analysis concludes that bankruptcy will not produce the outcome the client is seeking. Trust-fund recovery penalty exposure on a corporate officer is not discharged by a personal Chapter 7. A recently filed return, no matter how large the underlying liability, remains non-dischargeable for at least two years. A disputed assessment that has not yet been finalized cannot run the 240-day clock. In each case, the right counsel is not bankruptcy but careful collection alternatives—an installment agreement, an offer in compromise, or in some cases a properly negotiated currently-not-collectible status.
Because we practice in both bankruptcy and tax, we are able to give clients an integrated answer rather than two partial ones. That integration matters: a recommendation drawn from only one side of the analysis frequently misses the other side's deciding fact.
How we work the case
Every dischargeability engagement begins the same way. We pull federal and state account transcripts, build a chronology of every return, every assessment, every collection notice, and every prior collection action. We map each liability against the §523 timing rules. We then meet with the client to walk through the analysis in plain language and present the realistic options—whether bankruptcy, collection resolution, or some combination of both.
A retired contractor carried roughly $380,000 in older federal and California income tax liabilities, all from years that had finally aged past the §523 timing bars. After confirming each year was clean on the timing rules and that no return had been late-filed within two years, we coordinated a Chapter 7 petition that produced a full discharge of the income tax portion. The remaining trust-fund and recently assessed amounts were addressed through a separate installment agreement.
If you are weighing bankruptcy as a response to a tax liability—or wondering whether to wait—we can review the timing and the alternatives in a single confidential meeting. The math is unforgiving, but it is always knowable.