State income-tax debt in bankruptcy

How does bankruptcy actually treat state income tax debt?

The Bankruptcy Code is federal, and it does not sort tax debt by which government is owed. Section 523(a)(1) excepts from discharge any tax "of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed." Section 507(a)(8) covers taxes owed to a "governmental unit," which includes a state department of revenue. So the question is never whether a tax is state or federal. It is how old the liability is, whether you filed the return, whether you filed it on time, and whether the taxing authority alleges fraud or evasion. Taxes that clear all four hurdles are treated as general unsecured debt and can be discharged alongside credit cards and medical bills. Taxes that fail any one of them survive the case and remain collectible afterward.

• Age and priority status under 11 U.S.C. § 507(a)(8)
• Whether a required return was filed at all
• Whether a late return was filed more than two years before the petition
• Whether the return was fraudulent or the tax willfully evaded

What changes the answer for your particular tax years?

Four facts do most of the work, and they are evaluated tax year by tax year. It is common for someone to have five years of state tax debt where two years are dischargeable and three are not. First, priority: section 523(a)(1)(A) makes any tax with 507(a)(8) priority status nondischargeable. Second, filing: under section 523(a)(1)(B)(i), a tax for which a required return "was not filed or given" is excepted from discharge, with no time limit that cures it. Third, timing of a late return: section 523(a)(1)(B)(ii) excepts a tax where the return was filed late and "after two years before the date of the filing of the petition." Fourth, conduct: section 523(a)(1)(C) excepts a tax where the debtor "made a fraudulent return or willfully attempted in any manner to evade or defeat such tax." The date of the taxable year involved does not matter for the fraud exception.

What does federal law say about priority tax claims?

Priority is the pivot point, because a priority tax is both nondischargeable and entitled to full payment. Section 507(a) ranks claims in order, and the eighth category covers unsecured tax claims of governmental units. The section also includes a suspension rule: an applicable time period "shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days," plus any time a stay was in effect in a prior case or collection was precluded by a confirmed plan, plus 90 days. That matters if you previously appealed a state assessment or filed a prior bankruptcy. Periods you assumed had run may have paused, moving an old tax year back into priority status.

• Priority tax claims are unsecured but paid ahead of general unsecured creditors
• Prior collection appeals and prior bankruptcy cases can suspend the running of these periods
• Section 507(a)(8) applies identically to state, local, and federal taxing authorities

Where do state and local rules change the outcome?

The discharge tests are federal, but almost every input to them comes from state law. When a state return was "last due," whether an extension applied, when an assessment became final, and how long the department has to collect are all questions of your state's revenue code. Section 505 lets the bankruptcy court determine "the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax," but not where the amount "was contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction" before the case began. So a state tax appeal you already lost generally cannot be reopened in bankruptcy. Section 346 also addresses state and local income taxation of the bankruptcy estate directly, providing that where the Internal Revenue Code creates a separate taxable estate, "a separate taxable estate is also created for purposes of any State and local law imposing a tax on or measured by income." We do not publish verified figures for every state's assessment or lien periods here. Check your state page.

• State law sets return due dates, extensions, and assessment finality
• State law governs how a revenue department records and enforces a tax lien
• A tax already adjudicated in a state tribunal is generally outside 11 U.S.C. § 505 review

What does this look like in a real Chapter 7 or Chapter 13 case?

In Chapter 7, a dischargeable state tax year is simply wiped of personal liability along with your other unsecured debt. A nondischargeable year is not, and the state can resume collection once the case closes. One protection does apply: the legislative history to section 522 explains that "dischargeable tax claims may not be collected out of exempt property," while "nondischargeable taxes, however, will continue to be collectable out of exempt property." In Chapter 13, section 1322(a)(2) requires that a plan "provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment." That turns a priority state tax into a fixed line item in your monthly plan payment, paid over the plan term while the automatic stay holds collection off. Older, non-priority tax years are treated as general unsecured claims.

What documents and information will you need?

Start with returns, because unfiled returns are what most often sink a tax discharge. Chapter 13 has a hard requirement: under section 1308(a), no later than the day before the first scheduled creditors' meeting, a debtor "shall file with appropriate tax authorities all tax returns for all taxable periods ending during the 4-year period ending on the date of the filing of the petition." If they are not filed, the trustee may hold the meeting open, but not beyond 120 days after that meeting for a past-due return. Local rules add their own document duties. In the Southern District of Illinois, the debtor must give the trustee copies of the most recently filed federal and state returns no later than seven days before the 341 meeting, and failure to do so "will result in the dismissal of the case" on the trustee's motion. Idaho's local rule notes that while the Code addresses federal returns, providing state returns to the trustee is also important, and failure may be grounds for dismissal.

• State income tax returns for at least the last four tax years
• State notices of assessment, deficiency, and any lien filings
• Records of any installment or deferred payment agreement with the revenue department
• Any prior bankruptcy case numbers and prior collection appeals, which can suspend priority periods
• Your most recently filed federal and state returns for the trustee

What should you ask a bankruptcy lawyer about state tax debt?

Bring the actual notices, not a summary. The analysis is year-by-year and turns on dates that are easy to misremember. A useful conversation covers which specific tax years clear all four tests in section 523(a)(1), whether any recorded state tax lien attaches to property you own, and whether the priority periods were suspended by an earlier appeal or filing. Ask specifically about deferred payment agreements: section 523(a)(1)(D) covers tax payments due under an agreement for deferred payment of taxes entered into with a state or local tax authority before the petition, relating to a prepetition liability. If you set up a payment plan with your state, that arrangement can affect dischargeability. Ask which chapter better fits your mix of dischargeable and priority years, since a large priority balance drives the Chapter 13 plan payment.

• Which tax years are dischargeable, listed individually with the reasoning
• Whether a state tax lien is recorded and what property it reaches
• Whether prior appeals or filings suspended any priority period
• How a prepetition state payment agreement affects the analysis
• What a Chapter 13 plan payment would look like given the priority balance

Frequently asked questions

Can state income taxes be discharged in Chapter 7?

Some can. A state income tax year is dischargeable only if it lacks priority status under 11 U.S.C. § 507(a)(8), a required return was filed, any late return was filed more than two years before the petition, and there was no fraudulent return or willful evasion (11 U.S.C. § 523(a)(1)). Older years commonly meet these tests; recent years commonly do not.

Does a state tax lien go away when the tax debt is discharged?

Generally not. A discharge cancels your personal obligation to pay, but it does not by itself remove a lien already attached to property. That is why a recorded state tax lien can outlast a discharge of the same tax year. Whether the lien can be addressed depends on state lien law and the value and status of the property involved.

What happens if I never filed some state returns?

Taxes for a year with no filed return are excepted from discharge under 11 U.S.C. § 523(a)(1)(B)(i), and no amount of time cures that. In Chapter 13, § 1308(a) requires all returns for taxable periods ending in the four years before the petition to be filed with the appropriate tax authorities by the day before the first scheduled creditors' meeting.

How does Chapter 13 handle back state taxes?

Priority state tax claims are paid in full through the plan. Under 11 U.S.C. § 1322(a)(2), a plan must provide for full payment in deferred cash payments of all claims entitled to priority under § 507, unless that claim holder agrees to different treatment. Older non-priority tax years are treated as general unsecured claims and share whatever the plan pays that class.

Can the bankruptcy court decide I owe less state tax than the state says?

Sometimes. Under 11 U.S.C. § 505(a)(1), the court may determine the amount or legality of any tax, penalty, or addition to tax, whether or not previously assessed or paid. But § 505(a)(2)(A) blocks that where the amount was already contested and adjudicated by a competent judicial or administrative tribunal before the bankruptcy case began.

Do the filing fees change if I have tax debt?

No. The fees are the same regardless of what kinds of debt you list. A Chapter 7 case carries a $245 filing fee (28 U.S.C. § 1930(a)(1)(A), (f)(1)) plus a $78 administrative fee and a $15 trustee surcharge. A Chapter 13 case carries a $235 filing fee (28 U.S.C. § 1930(a)(1)(B)) plus a $78 administrative fee.

Does my state's law matter, or is this all federal?

Both. The discharge tests are federal and identical nationwide, but the dates they depend on come from state law: when a return was last due, when an assessment became final, and how a revenue department records and enforces liens. 11 U.S.C. § 346 also addresses how state and local income tax applies to the bankruptcy estate itself.

Sources

• 11 U.S.C. § 523 — Exceptions to discharge · official source
• 11 U.S.C. § 507 — Priorities · official source
• 11 U.S.C. § 505 — Determination of tax liability · official source
• 11 U.S.C. § 1322 — Contents of plan · official source
• 11 U.S.C. § 1308 — Filing of prepetition tax returns · official source
• 11 U.S.C. § 346 — Special provisions related to the treatment of State and local taxes
• 11 U.S.C. § 522 — Exemptions · official source
• S.D. Ill. LBR 1007-3 — Bankruptcy Code § 521 Tax Returns and Requests
• Bankr. D. Idaho LBR 1007-3 — Tax Returns
• Bankr. D. Utah LBR 6070-1 — Tax Returns and Tax Refunds
• 28 U.S.C. § 1930(a)(1)(A), (f)(1)
• 28 U.S.C. § 1930(a)(1)(B)
• Bankruptcy Court Miscellaneous Fee Schedule, Item 8
• Bankruptcy Court Miscellaneous Fee Schedule, Item 9

Related

• Which debts get discharged
• Chapter 13
• Chapter 7
• The automatic stay
• Build your personalised roadmap
• Find your local bankruptcy court