Popular search terms:
Published: July 22, 2020   |   Last Updated: August 12, 2022

Collection – Bankruptcy

View our interactive tax map to see where you are in the tax process. It could help you navigate your way through the IRS.

Show on Roadmap
Taxpayer Roadmap with folded image in front

Station Overview

Bankruptcy

Proceedings begin when you file a petition in bankruptcy court; that filing creates the bankruptcy estate which consists of all your assets as of the filing date. When you file a bankruptcy petition, your assets in the bankruptcy estate, under the jurisdiction of the bankruptcy court, aren’t subject to levy. However, creditors may file a “proof of claim” with the bankruptcy court to protect their rights. You should review Publication 908, Bankruptcy Tax Guide, prior to filing. Not all debts are dischargeable. Many tax debts are exempted from the bankruptcy discharge and you will still owe the debt after your bankruptcy is complete.

This station may include additional topics that have not yet been covered here. Please check back frequently for updates.

What does this mean to me?

If you have a tax debt and you and/or your spouse filed a bankruptcy petition, you may receive various letters from the IRS concerning your bankruptcy and how it relates to your tax debt.  Please read letters very carefully and respond accordingly. If you have any questions, please contact the person listed on the notice sent to you immediately.

How did I get here?

You have unpaid debt which you cannot pay and have filed for bankruptcy or have been discharged after filing for bankruptcy.

What are my next steps?

The first thing to do is to check the return address to be sure it’s from the Internal Revenue Service (IRS) and not another agency.

If it’s from the IRS, the notice will have instructions on how to respond. If you want more details about your tax account, you can order a transcript.

If you owe past due federal taxes that you cannot pay, bankruptcy may be an option. If your bankruptcy has been dismissed or if you have a tax balance after you have been discharged, consider other payment options. The IRS is unable to consider a payment plan or offer in compromise while there is an open bankruptcy.

If you have filed a bankruptcy petition, or you are a debtor’s attorney or a U.S. Trustee with questions about an open bankruptcy, you may contact the IRS’s Centralized Insolvency Operations Unit, Monday through Friday, 7 a.m. to 10 p.m. Eastern time, at 1-800-973-0424.

You should review Publication 908 prior to filing. Not all debts are dischargeable. Many tax debts are exempted from the bankruptcy discharge and you will still owe the tax balance after your discharge is complete.

Effect of Bankruptcy on Taxes

1
1.

Chapter 7

Who Can File

  • Individuals
  • Business
  • Corporations
  • Partnerships

Purpose

Liquidation – Trustee takes control of debtor’s assets and tries to sell them to pay creditors.

Length

Usually 90 to 120 days

Prepetition Taxes

Dismissal: IRS may keep payments, and time in bankruptcy extends time to collect remaining tax liabilities.

Discharge: Will generally eliminate (discharge) personal liability for tax debts older than three years.  But taxes due within three years of the bankruptcy are excepted from discharge, as are unassessed but still assessable income taxes, taxes for which no return was filed, and taxes for which a return was filed late within two years of the bankruptcy.  Trust fund taxes and taxes that the debtor attempted to evade are also excepted from the discharge. Businesses don’t receive a discharge since they’re liquidated.

Post-Petition Taxes

  • Debtor must timely file income tax returns.
  • No discharge of post-petition tax liabilities.
  • IRS may offset refunds from postpetition periods against postpetition tax debts (and may offset refunds from prepetition periods against prepetition tax debts).  Also, chapter 7 trustees may request prepetition refunds owed to the debtor, as well as the prepetition portion of the refund for the period in which the petition was filed.

 

2
2.

Chapter 13

Who Can File

  • Individuals (Including Sole Proprietors)

Purpose

Adjustment of Debts – Trustee distributes debtor payments to creditors pursuant to a court-authorized plan.

Length

3 – 5 years

Prepetition Taxes

Debtor must file returns for the last four tax periods.

Dismissal: IRS may keep payments, and time in bankruptcy extends time to collect remaining tax liabilities.

Discharge: Tax debts incurred within three years of the petition date are subject to discharge, but must nevertheless be paid in full under the plan if a claim is filed. Unassessed but still assessable income taxes, tax debts for which a return was not filed, and taxes for which a return was filed late within two years of the bankruptcy, are excepted from discharge.  Trust fund taxes are also excepted from discharge, as well as tax debts that the debtor willfully attempted to evade.

Post-Petition Taxes

  • Debtor must timely file income tax returns.
  • No discharge of post-petition tax liabilities.
  • IRS may offset refunds from postpetition periods against postpetition tax debts (and may offset refunds from prepetition periods against prepetition tax debts).
3
3.

Chapter 11

Who Can File

  • Individuals
  • Corporations (Including Limited Liability Companies (LLC))
  • Partnerships

Purpose

Reorganization – allows debtor to pay reduced amount to creditors and stay in business. May also be a liquidation.

Length

Usually 5 years when the debtor is an individual. Plans in business cases can be longer.

Prepetition Taxes

Dismissal: IRS may keep payments, and time in bankruptcy extends time to collect remaining tax liabilities.

Discharge: For reorganizing businesses, the discharge applies to all debts incurred prior to confirmation of the plan, except to the extent they must be paid under the plan.  Taxes that the debtor willfully attempted to evade are also excepted from discharge.  For individuals, unassessed but still assessable income taxes, taxes for which no return was filed, or for which a return was filed late within two years of the petition date, are also excepted from discharge.

Post-Petition Taxes

  • Debtor must timely file income tax returns and pay income tax due after the petition date.
  • The discharge applies to debts arising before confirmation of the plan, but postpetition taxes must be timely paid or the case can be dismissed or converted to chapter 7.
  • IRS may offset refunds from postpetition periods against postpetition tax debts (and may offset refunds from prepetition periods against prepetition tax debts).
4
4.

Chapter 12

Who Can File

  • Family Farming or Fishing Operations

Purpose

Adjustment of Debts – Trustee makes payments to creditors considering seasonal income.

Length

3 – 5 years

Prepetition Taxes

Dismissal: IRS may keep payments, and time in bankruptcy extends time to collect remaining tax liabilities.

Discharge: Tax debts incurred within three years of the petition date are excepted from discharge and must also be paid in full under the plan. Unassessed but still assessable income taxes, tax debts for which a return was not filed, and tax debts for which a return was filed late within two years of the bankruptcy, are excepted from discharge.  Trust fund taxes are also excepted from discharge, as well as tax debts that the debtor willfully attempted to evade

Post-Petition Taxes

  • Debtor must timely file income tax returns.
  • No discharge of post-petition tax liabilities.
  • IRS may offset refunds from postpetition periods against postpetition tax debts (and may offset refunds from prepetition periods against prepetition tax debts).

Where can I get additional help?

Understanding your notice or letter

Get Help topics

If you still need help

The Taxpayer Advocate Service is an independent organization within the IRS that helps taxpayers and protects taxpayers’ rights. We can offer you help if your tax problem is causing a financial difficulty, you’ve tried and been unable to resolve your issue with the IRS, or you believe an IRS system, process, or procedure just isn’t working as it should. If you qualify for our assistance, which is always free, we will do everything possible to help you.

Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

Low Income Taxpayer Clinics (LITCs) are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. For more information or to find an LITC near you, see the LITC page on the TAS website or Publication 4134, Low Income Taxpayer Clinic List.

Related Notices and Letters

  • Letter 1714, Request for Missing Tax Returns
  • Letter 4066, Final Notice – Notice of Intent to Levy and Notice of Your Right to a Hearing
  • Letter 4067, Final Notice of Intent to Levy – No CDP Rights
  • Letter 4068, Post-discharge Letter Seeking Payment
  • Letter 4521, Non-Debtor Spouse – Bankruptcy Joint Liabilities
  • Letter 6285, Stay Lifted
  • Notice 1421, How Bankruptcy Affects Your Rights to File a Petition in Tax Court in Response to a Notice of Deficiency
icon

Where am I in the tax system?

Collection – Bankruptcy (Insolvency)

en English
X