Many people are surprised to learn that bankruptcy can sometimes wipe out federal income taxes — but not always. One of the most common points of confusion involves tax liens and dischargeability.
Clients often ask:
“If the IRS tax lien survives bankruptcy anyway, why can’t the tax itself be discharged?”
The answer lies in understanding that tax debts and tax liens are treated differently under bankruptcy law.
Tax Debt vs. Tax Lien: Two Separate Legal Issues
A tax debt is your personal obligation to pay the IRS.
A federal tax lien is the IRS’s legal claim against your property.
Bankruptcy analyzes these issues separately:
- Is the tax debt dischargeable?
- If the debt is discharged, does the lien still survive?
The answer to one question does not control the other.
When Federal Income Taxes Can Be Discharged
Federal income taxes may be discharged in bankruptcy only if all of the following timing rules are met:
- The 3-Year Rule
The tax return was due (including extensions) more than 3 years before the bankruptcy filing. - The 2-Year Rule
The tax return was actually filed more than 2 years before the bankruptcy filing. - The 240-Day Rule
The tax was assessed more than 240 days before the bankruptcy filing. - No fraud or willful tax evasion
When these rules are satisfied, bankruptcy can eliminate your personal obligation to pay the tax.
When Federal Taxes CANNOT Be Discharged
If any of those rules are not met, the tax is not dischargeable — even if:
- The IRS already filed a tax lien
- The tax is secured by property
- The debtor files Chapter 7 or Chapter 13
In those cases:
- The tax debt survives
- The tax lien survives
- The IRS can continue to collect after bankruptcy
This includes:
- Wage garnishments
- Bank levies
- Seizure of future income
Why the “Lien Survives Anyway” Argument Doesn’t Work
This is an aspect of tax liens and bankruptcy where many people — and even some attorneys — get tripped up.
It’s true that a federal tax lien usually survives bankruptcy, but that does not mean the tax is automatically dischargeable.
Congress intentionally gave the IRS two layers of protection:
- Priority status for recent taxes
- Lien survival for secured claims
These protections work together, not as substitutes.
Think of it this way:
- Discharge rules determine whether you still owe the IRS personally
- Lien rules determine how the IRS gets paid if the debt is discharged
If the tax is not dischargeable, bankruptcy does nothing to stop IRS collection.
What Happens When Taxes Are Discharged but a Lien Exists?
If the tax meets the discharge rules, bankruptcy eliminates your personal liability — but:
- The tax lien remains attached to property you owned at filing
- The IRS cannot pursue you personally
- The IRS can only collect from the value of that property
Importantly:
- The lien does not attach to future income
- The IRS cannot garnish wages after discharge
- The IRS cannot levy new bank accounts
Strategic Takeaway: Timing Matters More Than Almost Anything
These tax lien and bankruptcy nuances are where experienced tax-bankruptcy planning makes a real difference.
Filing bankruptcy too early can:
- Preserve IRS priority
- Leave the tax fully collectible
Waiting or using Chapter 13 strategically can:
- Convert nondischargeable taxes into dischargeable ones
- Control IRS enforcement
- Protect income and assets
At Thinking Outside the Box Law, Inc., we often say bankruptcy and tax law is a mix of math, timing, and strategy — and the tax lien and bankruptcy conversation is a perfect example.
Bottom Line
Federal income taxes that do not meet the 3-year, 2-year, and 240-day rules are not discharged in bankruptcy — even though a federal tax lien would survive discharge anyway.
If you’re dealing with IRS debt, the when can be just as important as the how.
Need Help With Tax Debt and Bankruptcy?
At Thinking Outside the Box Law, Inc., we focus on the intersection of tax law and bankruptcy — helping clients find legal solutions others miss.
📞 Contact us to schedule a consultation and explore whether bankruptcy, timing, or strategy can reduce or eliminate your IRS debt.