Bankruptcy can discharge income taxes if the debt meets code requirements.  The general rule is that taxes must be three years old, have been filed more than 2 years prior to filing bankruptcy, and have been assessed by the tax authority more than 240 days prior to filing the bankruptcy.

The three year rule for determining dischargeable income taxes is tied directly to the due date of the return, which means the bankruptcy filing date must take into consideration any extensions filed by the debtor.  Similarly, the 240 day assessment may be suspended or reset if there are any appeals, offer and compromise, or previous bankruptcies that toll or otherwise impede the ability for the taxing authority to assess and collect the debt.

If a tax debt is discharged, any existing tax lien(s) still remain.  Tax liens attach to all real and personal property, despite their possible exempt status.  If a debtor’s assets are minimal in nature, a request can be made for an administrative discharge, which is a request to the IRS for a voluntarily release of the tax lien.

Interest on income tax debt continues to incur up to the filing of the bankruptcy, and will continue to incur through the bankruptcy if the tax is non-dischargeable.  The general rule is that the interest is dischargeable to the same extent that the underlying income tax debt is dischargeable.  The same can hold true for tax penalties.  However, some taxing authorities treat interest and penalties differently and have the premise that if income taxes are dischargeable in nature, as are interest and penalties.

Though income tax may be discharged in a Chapter 7 bankruptcy, the broadest tax discharge is accomplished through filing and completing a Chapter 13 plan, which would discharge even taxes that fail the 2 year rule for late filed returns.