Bankruptcy and Federal Tax Debt: IRC 523, IRC 507, and Discharge Practitioner Guide

Bankruptcy and federal tax debt occupy an intersection that few practitioners are trained to navigate precisely. The tax rules governing discharge under 11 U.S.C. 523(a)(1) are mechanical, but the mechanics matter: a single unsatisfied prong, a pending offer in compromise, or a Substitute for Return filing can convert a dischargeable liability into a surviving, post-petition personal obligation. This guide is written for enrolled agents, CPAs, and tax attorneys who need a precise, citation-anchored reference for discharge eligibility analysis, CSED tolling, priority claim strategy, and the interaction of bankruptcy with other IRS resolution tools.

All procedures, statutory citations, bankruptcy code provisions, and regulatory guidance referenced in this guide must be verified against the current text of the Bankruptcy Code (Title 11 U.S.C.), the Internal Revenue Code, and applicable circuit court authority before being relied on in any specific client matter. Tax law and bankruptcy law are both subject to legislative change; any detail here may be superseded. This guide is for informational purposes only and does not constitute legal or tax advice. Bankruptcy strategy is case-specific and requires coordination with a licensed bankruptcy attorney.

Section 1: Can Federal Income Tax Debt Be Discharged in Bankruptcy?

Federal income tax debt is potentially dischargeable in a Chapter 7 bankruptcy case, but it is not dischargeable by default. The taxpayer bears the burden of proving that the specific debt satisfies every condition required for discharge under 11 U.S.C. 523(a)(1)(B). The general rule is that tax debt survives bankruptcy; discharge is the exception, and the exception is narrow.

This guide addresses whether the tax debt itself can be discharged under 11 U.S.C. 523. That is a separate question from the income tax treatment of other (non-tax) debt discharged in the same bankruptcy. When a debtor's non-tax debt is cancelled in bankruptcy, cancellation of debt income can arise, though the bankruptcy exclusion under IRC 108(a)(1)(A) generally removes it from taxable income. For that analysis, see our IRC 108 cancellation of debt income and Form 982 guide.

For a federal income tax debt to be dischargeable in Chapter 7, all three conditions of 11 U.S.C. 523(a)(1)(B) must be met for the same tax year:

• (a) Three-year rule: The tax for that year was due (including any extensions) more than three years before the bankruptcy petition date.
• (b) Two-year filing rule: The taxpayer filed the return for that year more than two years before the bankruptcy petition date.
• (c) 240-day assessment rule: The IRS assessed the tax more than 240 days before the bankruptcy petition date (subject to tolling for any OIC pending period plus 30 days).

Even if all three conditions are satisfied, two additional absolute bars to discharge apply regardless of how old the debt is or how many prongs are met:

• Fraud bar (11 U.S.C. 523(a)(1)(C)): Taxes for which the taxpayer filed a fraudulent return are never dischargeable.
• Willful evasion bar (11 U.S.C. 523(a)(1)(C)): Taxes the taxpayer willfully attempted to evade or defeat are never dischargeable.
• Trust fund non-dischargeability (11 U.S.C. 523(a)(1)(A)): The Trust Fund Recovery Penalty assessed under IRC 6672 is categorically non-dischargeable. These amounts represent employees' withheld wages held in trust and are treated as a distinct, permanent non-dischargeable obligation.

Section 2: The Three-Prong Test in Detail

The three prongs under 11 U.S.C. 523(a)(1)(B) must be satisfied independently for the same tax year's debt. Satisfying two out of three is not sufficient for discharge.

Prong 1: The Three-Year Rule (Due Date)

The tax for the year in question must have been due (including any extensions) more than three years before the date the bankruptcy petition was filed. For a calendar-year individual taxpayer, the standard due date is April 15 of the following year. With an automatic extension, the due date extends to October 15.

Example: A taxpayer files a Chapter 7 petition on July 1, 2026. The three-year lookback window reaches to July 1, 2023. For the 2022 tax year (return due April 15, 2023, or October 15, 2023 with extension), the due date would need to have fallen before July 1, 2023. If the taxpayer obtained a filing extension to October 15, 2023, the due date is after July 1, 2023, and Prong 1 is not satisfied for the 2022 tax year. The 2021 tax year (due April 15, 2022, or October 15, 2022 with extension) would generally satisfy Prong 1 for a July 1, 2026 petition.

The three-year period is measured from the later of the original due date or the extended due date, not from the date the return was actually filed.

Prong 2: The Two-Year Filing Rule (Taxpayer Return)

The taxpayer must have filed the return for the tax year more than two years before the bankruptcy petition date. This means the taxpayer personally filed a return, not that a return was filed on the taxpayer's behalf by the IRS.

Critical SFR issue: If the IRS prepared and filed a Substitute for Return (SFR) under IRC 6020(b) because the taxpayer failed to file, that SFR generally does not constitute a taxpayer-filed return for purposes of Prong 2. The majority view in the courts is that an SFR does not satisfy the two-year filing rule, meaning the underlying tax debt may be permanently non-dischargeable for that tax year. See our Substitute for Return (SFR) practitioner guide for a detailed discussion of the SFR process and consequences.

However, some circuits have recognized that a late-filed return submitted by the taxpayer after the IRS has already prepared an SFR may satisfy Prong 2 if it is a genuine tax return (the "Beard test" factors). Courts are split on this question; the applicable rule depends on the circuit in which the bankruptcy is filed. Hedge to applicable circuit court authority and bankruptcy counsel.

Confirm the return filing date from the IRS Account Transcript, using TC 150 for the original return processed date. Confirm that the TC 150 reflects a taxpayer-filed return and not an SFR filed by the IRS. An SFR will typically be noted in the transcript narrative.

Prong 3: The 240-Day Assessment Rule

The IRS must have assessed the tax more than 240 days before the bankruptcy petition date. The assessment date is the date the IRS officially recorded the tax on its books, reflected as TC 300 or TC 296 (for deficiency assessments) or TC 150 (for original self-assessed returns) on the Account Transcript.

Tolling of the 240-day period: The 240-day period is tolled (paused) for any period during which an offer in compromise was pending, plus 30 additional days after the OIC was resolved (accepted, rejected, returned, or withdrawn). This tolling is provided by 11 U.S.C. 523(a)(1)(B)(ii). Practitioners must identify any OIC submissions for the relevant tax year from the Account Transcript (look for TC 971 with Action Code 043, TC 480, and TC 481 or TC 482), calculate the OIC pendency period, add 30 days, and extend the 240-day period accordingly before determining whether Prong 3 is satisfied.

CDP hearings do NOT toll the 240-day period. A Collection Due Process hearing under IRC 6330 tolls the CSED (10-year collection statute) but it does not toll the 240-day period for bankruptcy discharge purposes. These are two separate statutes with separate tolling rules. Do not conflate them. See the IRS Collection Due Process (CDP) hearing practitioner guide for CDP tolling and CSED interaction analysis.

Section 3: What Is Never Dischargeable

Certain categories of federal tax debt are permanently non-dischargeable in bankruptcy, regardless of how old the debt is, whether returns were filed, and whether the three-prong test would otherwise be satisfied. These absolute bars exist because Congress determined that the public interest in collecting these particular obligations outweighs the debtor's fresh-start interest.

Trust Fund Taxes and the TFRP (11 U.S.C. 523(a)(1)(A))

The Trust Fund Recovery Penalty assessed under IRC 6672 is categorically non-dischargeable in bankruptcy. The TFRP is a personal liability assessed against responsible persons (typically officers, owners, or employees with authority over financial decisions) who willfully failed to collect, account for, or remit employee payroll taxes.

The TFRP represents the "trust fund" portion of employment taxes: the federal income tax, Social Security employee share, and Medicare employee share that employers are required to withhold from employees' wages and remit to the IRS. These funds are considered held in trust for the United States government. Because they were never the employer's money to begin with, Congress treats the obligation as a trust fund debt that cannot be extinguished through bankruptcy.

This is one of the most common practitioner traps. A client who operated a business with unpaid payroll taxes and who also has non-trust-fund tax debt (such as personal income tax) may be able to discharge the income tax portion (if it meets the three-prong test) while the TFRP remains as a surviving personal liability after bankruptcy. Practitioners must separate these two categories on the transcript and advise the client that the TFRP will not go away.

Fraudulent Returns (11 U.S.C. 523(a)(1)(C))

Taxes for which the taxpayer filed a fraudulent tax return are never dischargeable in bankruptcy. The fraud bar applies to the specific tax year for which the fraudulent return was filed. The IRS does not need to have criminally prosecuted the taxpayer for fraud; a civil finding of fraud in a Tax Court proceeding or a bankruptcy adversary proceeding is sufficient.

If a fraudulent return was filed for one tax year but not others, only the fraudulent year is barred by 11 U.S.C. 523(a)(1)(C) on that basis. The other years remain subject to the ordinary three-prong analysis.

Willful Evasion (11 U.S.C. 523(a)(1)(C))

Taxes the taxpayer willfully attempted to evade or defeat are never dischargeable. Willful evasion is broader than filing a fraudulent return; it covers any deliberate conduct intended to avoid tax obligations, including hiding income, concealing assets, or structuring transactions to prevent IRS detection. A prior criminal conviction for tax evasion is not required; a bankruptcy court finding that the taxpayer acted willfully is sufficient to bar discharge.

If the client has a history of criminal tax investigation, a prior civil fraud penalty (75 percent penalty under IRC 6663), or a Tax Court finding of fraud, these are red flags that must be disclosed and analyzed before any discharge opinion is formed.

Penalties Associated with Non-Dischargeable Tax

Penalties that relate to non-dischargeable tax obligations are themselves non-dischargeable. If the underlying tax debt survives bankruptcy (because it is too recent, because fraud applies, or because it is a trust fund penalty), the penalties and interest associated with that debt also survive. Practitioners should not assume that the tax can be identified as dischargeable and the related penalties then stripped away.

Section 4: Priority Claims Under 11 U.S.C. 507(a)(8) and IRC 507

Federal tax claims that do not meet the three-prong discharge test are classified as priority unsecured claims in the bankruptcy estate under 11 U.S.C. 507(a)(8). Priority status means the claim is treated differently from ordinary (non-priority) unsecured claims: priority claims must be paid before ordinary unsecured creditors receive anything.

Under 11 U.S.C. 507(a)(8), priority status attaches (among other circumstances) to income taxes assessed within three years of the petition date, income taxes for which the return was due within three years of the petition date, and excise taxes and employment taxes within specified lookback windows. Hedge the precise scope of 507(a)(8) priority to the current text of the statute and bankruptcy counsel, as the priority categories are detailed and their application is fact-specific.

Chapter 7: Priority Claims Survive Discharge

In a Chapter 7 liquidation, priority tax claims are not discharged. When the Chapter 7 case closes, the IRS retains its right to collect the full priority claim balance from the debtor as a personal obligation. The debtor receives a discharge of general unsecured debts but remains personally responsible for the full priority tax claim.

If the bankruptcy estate has assets, the Chapter 7 trustee may pay the IRS's priority claim in whole or in part from estate assets before making any distribution to general unsecured creditors. Any remaining balance after estate distribution survives as a personal obligation of the debtor.

Chapter 13: Mandatory Full Payment of Priority Claims

In a Chapter 13 reorganization plan, all priority claims under 11 U.S.C. 507(a)(8) must be paid in full through the plan. This is a mandatory requirement: a Chapter 13 plan cannot be confirmed by the court unless it provides for full payment of all priority unsecured tax claims. The plan can spread those payments over the plan period (typically three to five years, subject to court approval).

Interest on priority claims in Chapter 13: Interest continues to accrue on tax debts during the Chapter 13 plan period. The treatment of interest on priority tax claims, including the applicable rate, is governed by 11 U.S.C. 511 and has been the subject of substantial litigation. Hedge the interest calculation and treatment to the current text of 11 U.S.C. 511 and bankruptcy counsel.

Section 5: CSED Tolling During Bankruptcy

This is the most important counter-intuitive point in bankruptcy and tax debt planning. Clients who file bankruptcy to stop IRS collection end up giving the IRS additional time to collect on any tax debts that are not discharged.

Under 11 U.S.C. 6503(h), the IRS 10-year collection statute under IRC 6502 (the CSED) is tolled for the entire period the automatic stay is in effect, plus an additional six months after the stay is lifted or the case is closed. This is separate from, and in addition to, any other CSED tolling events the client may have accumulated (OIC pendency, CDP hearings, etc.). For the full IRC 6503(h) bankruptcy tolling rules, including the six-month post-discharge extension practitioners most commonly miscalculate, see our IRC 6503: SOL Tolling and CSED Suspension guide.

Effect on the Collection Timeline

Consider a taxpayer with a 2018 income tax assessment (CSED running from, say, October 2019, with a projected expiration of October 2029) who files a Chapter 7 bankruptcy case in January 2026 and receives a discharge in May 2026 (a four-month case). The 2018 tax debt meets the three-prong test and is discharged. However, suppose the taxpayer also owes a 2023 income tax assessment that is a priority claim and survives discharge. The CSED on the 2023 assessment is tolled from January 2026 through May 2026 (four months) plus six additional months, for a total CSED extension of ten months. The IRS has ten months longer to collect the non-discharged 2023 debt after the bankruptcy closes.

For longer bankruptcies (a Chapter 13 plan running three to five years), the CSED extension is substantial. A five-year Chapter 13 plan tolls the CSED by five years plus six months. The IRS essentially receives back the full plan period as additional collection time after the plan concludes, on every non-discharged assessment.

Automatic Stay vs. CSED Tolling: Two Different Concepts

The automatic stay stops active IRS collection during the bankruptcy case. The CSED toll extends the period the IRS has to collect after the case concludes. These are two separate mechanisms with separate effects. The automatic stay pauses collection activity; the CSED toll extends the IRS's collection authority. A client who enters bankruptcy to "run out the clock" on a CSED is likely to find that the clock was paused, not run down, during the bankruptcy.

For full CSED computation guidance, including all tolling events and how to identify them from the Account Transcript, see the IRS Collection Statute Expiration Date (CSED) practitioner guide.

Section 6: Chapter 7 vs. Chapter 13 for Managing Tax Debt

The two primary bankruptcy chapters available to individuals with tax debt each serve a different purpose. Choosing the right chapter requires a careful analysis of which tax debts are dischargeable, which survive, what assets are at risk, and how the CSED toll affects the client's position on non-discharged liabilities.

Chapter 7: Liquidation

Chapter 7 is a liquidation proceeding. Non-exempt assets are sold by the trustee to pay creditors, and the debtor receives a discharge of eligible debts. For tax purposes:

• Eligible tax debts are discharged if all three prongs of 11 U.S.C. 523(a)(1)(B) are satisfied and no fraud or willful evasion bar applies.
• Non-eligible tax debts survive discharge as personal liabilities of the debtor. Priority claims under 11 U.S.C. 507(a)(8) survive; the IRS can resume collection after the case closes.
• Trust fund penalties and fraud debts are unaffected by the Chapter 7 discharge and survive in full.
• Certain tax penalties survive discharge if the underlying tax is non-dischargeable; penalties related to dischargeable tax years may themselves be dischargeable as "other" debt under a separate analysis.
• Timeline: A typical no-asset Chapter 7 case closes in approximately three to six months, making it the fastest bankruptcy chapter. The short duration limits the CSED toll but also provides no structured mechanism for paying non-dischargeable tax debts.

Chapter 13: Reorganization

Chapter 13 is a reorganization proceeding. The debtor proposes a three-to-five-year repayment plan, confirmed by the court, under which creditors are paid from the debtor's disposable income. For tax purposes:

• All priority tax claims must be paid in full through the plan (11 U.S.C. 1322(a)(2)). This is mandatory; the plan cannot be confirmed without providing for full priority tax claim payment.
• Non-priority (general unsecured) tax claims may receive only a pro-rata distribution along with other general unsecured creditors; the balance may be discharged at plan completion under the Chapter 13 discharge (which is broader than the Chapter 7 discharge in limited respects).
• The automatic stay protects the debtor from IRS collection for the full plan period, typically three to five years.
• Chapter 13 allows the debtor to cure pre-petition tax liabilities through the plan, avoiding immediate IRS levy or lien enforcement.
• Non-exempt assets are generally retained by the debtor (unlike Chapter 7 liquidation), but the plan must pay unsecured creditors at least as much as they would receive in a Chapter 7 liquidation.
• CSED toll caution: A three-to-five-year Chapter 13 plan tolls the CSED by three to five years plus six months. For clients with non-dischargeable tax debts on which the CSED was approaching expiration, this can be a significant strategic cost of choosing Chapter 13.

Chapter 11 for Business Entities

Chapter 11 allows a business (or in some cases an individual with high debt) to reorganize tax and other debts through a court-confirmed plan of reorganization. The analysis of tax debt under Chapter 11 is broadly analogous to Chapter 13 in concept (priority claims paid in full through the plan) but the procedural complexity and cost are substantially greater. Hedge all Chapter 11 tax debt strategy to bankruptcy counsel.

Timing Strategy: Delaying the Petition

Some practitioners and debtors delay a bankruptcy filing to allow more tax debt to satisfy the three-prong test, particularly the three-year and 240-day prongs. Waiting an additional year before filing may convert a non-dischargeable tax debt (too recent under the three-year rule) into a dischargeable one.

This strategy requires a careful CSED analysis. If the client is already accumulating CSED tolling from other sources (an existing OIC or CDP hearing) during the waiting period, the CSED extension from those events must be added to the post-bankruptcy toll. The CSED impact of the delay itself also needs to be projected. In some cases, waiting to file maximizes discharge eligibility while minimizing CSED damage; in others, it is counterproductive. Analyze before advising.

Section 7: The Automatic Stay and IRS Collection

Filing a bankruptcy petition immediately and automatically triggers the automatic stay under 11 U.S.C. 362. The stay takes effect the moment the petition is filed, without any court order or additional action. The IRS is bound by the stay as a creditor.

What the Automatic Stay Stops

Upon bankruptcy filing, the following IRS collection activities must stop immediately:

• Bank levies and wage garnishments under IRC 6331
• Property seizures
• Enforcement of a federal tax lien against property of the estate
• Collection calls, letters, and dunning notices directed at the debtor or estate property
• Offset of tax refunds against pre-petition tax debts (in most circumstances; hedge to applicable bankruptcy law)

Any IRS collection action taken in violation of the automatic stay is void or voidable and may expose the government to sanctions in appropriate circumstances. The IRS has established internal procedures for immediately stopping collection upon notification of a bankruptcy filing.

What the Automatic Stay Does NOT Stop

The automatic stay has important exceptions. Under 11 U.S.C. 362(b), certain government actions are not stayed:

• Tax Court proceedings for pre-petition years: The IRS may continue (or the Tax Court may proceed with) a pending Tax Court case for years prior to the bankruptcy. The debtor's right to continue the Tax Court case is also generally preserved.
• Tax audits and new assessments: The IRS may audit and assess taxes for pre-petition years that had not yet been assessed as of the petition date. A new assessment creates a new priority claim in the bankruptcy.
• Post-petition tax obligations: Taxes that arise after the bankruptcy is filed (the debtor's ongoing tax obligations) are not subject to the stay. Post-petition taxes are treated as administrative expenses with priority and must be paid before the case closes.
• Other government unit exceptions: The full scope of 11 U.S.C. 362(b) government creditor exceptions is broader than summarized here; hedge to the statute and bankruptcy counsel for any specific IRS action that may fall within an exception.

Section 8: Interaction with Other IRS Resolution Tools

Practitioners who work in IRS collection resolution will encounter clients who have used, are using, or are considering IRS resolution tools in parallel with or prior to a bankruptcy filing. The interaction between those tools and the bankruptcy discharge rules is a critical planning point that is often overlooked.

Offer in Compromise and the 240-Day Period

Filing an OIC tolls the 240-day period under 11 U.S.C. 523(a)(1)(B)(ii) by the full OIC pendency period plus 30 days. This means that filing an OIC for a tax year that a client wants to discharge in a future bankruptcy will extend the time before the 240-day prong is satisfied.

Example: Suppose a 2020 income tax assessment was made on June 1, 2021. Without any tolling, the 240-day period would run from June 1, 2021, expiring approximately January 27, 2022. If the client then filed an OIC covering the 2020 liability on February 1, 2022, and the OIC was rejected on August 1, 2022 (a six-month pendency), the 240-day period is tolled for six months plus 30 days. The 240-day computation restarts from the post-tolling point, and a bankruptcy filed before the adjusted 240-day date would not satisfy Prong 3 for the 2020 tax year.

When OIC history exists, practitioners must pull the complete OIC submission and resolution dates from the Account Transcript and calculate the exact adjusted 240-day date before advising on discharge eligibility.

Installment Agreements and Bankruptcy

A standard installment agreement under IRC 6159 does not toll the CSED and does not affect the three-prong discharge test. However, when a bankruptcy petition is filed, the standard installment agreement is typically terminated because the automatic stay prevents the IRS from enforcing its normal collection rights, including the IA levy protection conditions. The debtor cannot generally continue making IA payments through the bankruptcy without specific arrangements.

Practitioners should discuss with bankruptcy counsel how to handle existing IAs before the petition is filed, and whether any arrears from a defaulted IA create new assessment issues that affect the discharge analysis.

Currently Not Collectible Status

Currently Not Collectible (CNC) status suspends active IRS collection but does not toll the CSED. The collection clock keeps running during CNC status, which can make CNC a strategically superior alternative to bankruptcy for clients whose primary goal is to outlast the CSED on non-dischargeable tax debts. See the Currently Not Collectible (CNC) practitioner guide for hardship standards and the CNC-versus-bankruptcy decision framework.

The automatic stay during bankruptcy also stops active IRS collection, but unlike CNC, the bankruptcy tolls the CSED. If a client's tax debts are all non-dischargeable (too recent, fraud, TFRP), and the CSED is approaching, CNC may be preferable to bankruptcy specifically because CNC preserves the CSED clock.

Collection Due Process Hearings: CDP Tolls CSED, Not the 240-Day Period

A CDP hearing under IRC 6330 tolls the CSED for the duration of the hearing process. However, it does not toll the 240-day bankruptcy assessment period. A client who has a CDP hearing pending on a tax assessment that the practitioner wants to discharge in bankruptcy gains no 240-day period extension from the CDP hearing, even though the CSED is tolled.

This is a distinction that catches practitioners who confuse the two tolling regimes. The CSED tolling and the 240-day bankruptcy tolling are governed by separate statutory provisions with different triggering events. Only an OIC tolls the 240-day period. See the IRS Collection Due Process (CDP) hearing practitioner guide for a detailed analysis of CDP tolling and the CSED interaction.

State and Local Tax Debt in Bankruptcy

State income taxes can also potentially be discharged in bankruptcy if they satisfy analogous rules to the federal three-prong test. However, state exemptions, state tax authority claim procedures, and how each state's tax authority participates in the bankruptcy process vary significantly from state to state. The analysis of state tax debt discharge eligibility is highly state-specific. Hedge all state tax debt discharge analysis to applicable state law and bankruptcy counsel with experience in the relevant jurisdiction.

Section 9: Practitioner Checklist

Use this checklist before advising any client on the dischargeability of federal tax debt in bankruptcy. Run every item; a partial analysis is not sufficient for a discharge eligibility opinion.

Step 1: Pull IRS Account Transcripts for All Open Tax Years

• Request Account Transcripts (not Return Transcripts) for every year with an open balance.
• Identify TC 150 date (return processed date) and confirm the return is taxpayer-filed, not an SFR.
• Identify all assessment dates: TC 150, TC 300, TC 296, TC 290. Note that one tax year may have multiple assessments with separate dates.
• Identify the original return due date (April 15 or the extended due date if a timely extension was filed) for each year.

Step 2: Run All Three Prongs for Each Tax Year

• Prong 1 (Three-year rule): Is the return due date (including any extension) more than three years before the planned petition date?
• Prong 2 (Two-year filing rule): Was the return filed by the taxpayer (TC 150, not SFR) more than two years before the planned petition date? If an SFR was filed by the IRS, flag for bankruptcy counsel; discharge for that year may be unavailable.
• Prong 3 (240-day rule): Was the assessment more than 240 days before the planned petition date? Add the tolling period from any OIC pendency plus 30 days and recalculate.

Step 3: Check the Absolute Bars

• Does the client have any TFRP assessments under IRC 6672? If yes, these are non-dischargeable; do not include them in any discharge analysis.
• Is there any history of civil fraud penalties (IRC 6663), a fraudulent return finding, or a criminal tax conviction? If yes, those years are barred from discharge under 11 U.S.C. 523(a)(1)(C).
• Is there any indication of willful evasion? Flag for bankruptcy counsel before any discharge opinion.

Step 4: Calculate the CSED Impact

• For each assessment that will survive discharge (because it fails any prong or hits an absolute bar), compute the current CSED including all prior tolling events.
• Project the post-bankruptcy CSED by adding the anticipated case duration plus six months (11 U.S.C. 6503(h)).
• Assess whether alternatives to bankruptcy (CNC, PPIA, or an OIC for the dischargeable years separately) better protect the client's CSED position on the surviving liabilities.

Step 5: Coordinate with Bankruptcy Counsel

• As a tax professional (enrolled agent, CPA, or tax attorney not specializing in bankruptcy), your role is to perform the tax-side discharge eligibility analysis and provide the transcript documentation.
• The decision to file bankruptcy, the choice of chapter, plan design, and the adversary proceeding strategy are the domain of a licensed bankruptcy attorney. Provide your analysis; do not make the legal strategy decision unilaterally.
• Share the transcript analysis, the three-prong computation for each tax year, the CSED projection, and the list of non-dischargeable items with bankruptcy counsel before the petition is filed.
• For state tax debts, coordinate with both bankruptcy counsel and a tax professional familiar with the applicable state's tax authority procedures.

Frequently Asked Questions

Common questions from enrolled agents, CPAs, and tax attorneys working on tax debt and bankruptcy matters.

Related Practitioner Guides

The following guides cover IRS resolution tools and collection procedures that intersect with bankruptcy strategy and tax debt planning.

• IRS Collection Statute Expiration Date (CSED): Practitioner Reference Guide -- covers the 10-year collection statute under IRC 6502, CSED computation from assessment date, all tolling events (OIC, CDP, bankruptcy, TAS, Form 900), transcript codes TC 520 and TC 550, and PPIA strategy.
• IRS Collection Due Process (CDP) Hearing Practitioner Guide -- covers CDP hearing rights under IRC 6330, equivalent hearing procedures, Notice of Determination timelines, and Tax Court petition rights, including the critical distinction that CDP tolls the CSED but does NOT toll the bankruptcy 240-day period.
• IRS Substitute for Return (SFR): IRC 6020(b) Practitioner Guide -- covers the SFR process, consequences of an IRS-prepared SFR, the displacement workflow, and the critical impact an SFR has on bankruptcy discharge eligibility under the two-year filing rule.
• Currently Not Collectible (CNC) Status: IRM 5.16.1 Practitioner Workflow Guide -- covers hardship standards, ACS vs. Revenue Officer paths, re-activation triggers, and the strategic comparison of CNC vs. bankruptcy for clients with non-dischargeable tax debt and a CSED approaching expiration.
• IRC 6663: Civil Fraud Penalty, 75% -- civil fraud findings create non-dischargeable tax debts under IRC 523(a)(1)(C).
• IRC 6672: Trust Fund Recovery Penalty -- Responsible Person and Willfulness -- the TFRP is a trust fund tax obligation that survives Chapter 7 discharge under IRC 523(a)(1)(A); practitioners advising insolvent or bankrupt responsible persons must model the TFRP balance as a non-dischargeable personal liability separate from the entity's tax debt.
• IRC 6901: Transferee and Fiduciary Liability -- IRC 6901 transferee liability survives bankruptcy of the underlying taxpayer (the transferor); the IRS can assess the transferee even after the transferor has received a discharge; in the transferee's own bankruptcy, the IRC 6901 liability may itself be dischargeable under 11 U.S.C. 523 depending on the character of the underlying tax and the circumstances of the transfer.
• IRC 6050P and Form 1099-C discharge of indebtedness reporting -- a bankruptcy discharge is one of the eight identifiable events that can trigger a creditor's Form 1099-C under IRC 6050P; practitioners should confirm whether a 1099-C issued for a debt discharged in bankruptcy is properly excluded from income under IRC 108(a)(1)(A) and reconciled on Form 982, since a creditor's reporting does not by itself create taxable COD income for the debtor.

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