Bankruptcy and IRS Debt in Texas: Yes, Taxes Can Be Discharged

Most people believe taxes cannot be discharged in bankruptcy. Most people are wrong, and the misunderstanding costs Texans real money every year. Federal income taxes are dischargeable in bankruptcy when the timing rules are satisfied, full stop. I have watched bankruptcy erase six-figure IRS debts that no offer in compromise would have touched.

The catch is that the rules are mechanical timing tests, measured to the day, and getting them wrong by a week can make the entire debt survive.

The Three Clocks

For income taxes, three timing rules do most of the work. The three-year rule: the return for the year in question must have been due, including extensions, more than three years before the bankruptcy filing. The two-year rule: you must have actually filed the return more than two years before filing bankruptcy, which means substitute-for-return years where you never filed can be a serious problem. The 240-day rule: the tax must have been assessed more than 240 days before the bankruptcy, which matters when a recent audit created the balance.

Each of these clocks can be paused by events like prior bankruptcies, offers in compromise, and collection due process hearings. A debt that looks dischargeable on the calendar can fail because a tolling event quietly added months to a deadline. This analysis is exactly the kind of thing that has to be calculated, not eyeballed.

What Discharge Does Not Fix

Straight talk on the limits. Trust fund taxes, including the payroll taxes withheld from employees and the trust fund recovery penalty, do not discharge. Fraud years do not discharge. Recent years that fail the timing tests do not discharge. And a federal tax lien filed before the bankruptcy survives against property you owned on the filing date, so a discharged debt can still cling to your house until the lien is dealt with.

None of those limits make bankruptcy useless. They make it a precision tool: discharge the years that qualify, then resolve the slimmer remainder with the ordinary IRS toolbox.

Bankruptcy Versus an Offer in Compromise

For a Texas taxpayer with old income tax years, decent income, and few assets at risk, Chapter 7 can outperform an offer in compromise on every axis: faster, cheaper, no five-year probation, and no IRS discretion involved, because discharge is a right when the rules are met, not a request. Texas exemptions, including the unlimited homestead, mean many Texans go through Chapter 7 without losing a single asset.

Sometimes the answer is the reverse: the timing fails, or trust fund taxes dominate, and an offer wins. The point is to run both analyses side by side before choosing.

I analyze the bankruptcy discharge dates in tax cases as a matter of routine, and the day a stubborn debt becomes dischargeable is a date worth knowing even if you never use it, because the IRS knows it too, and it changes every negotiation. Let's find your dates.