The broad rule in bankruptcy is that tax debts are not dischargeable in Chapter 7, Chapter 11, or Chapter 13 bankruptcy proceedings and that these debts have the eighth priority for payment of claims. There are, however, a number of exceptions to this broad rule under which certain income tax debts may be dischargeable by an individual taxpayer in a Chapter 7 bankruptcy proceeding. If the obligation is discharged, then creditors may not attempt to collect the debt.
I. The Three-Year Rule
If the due date for the tax return, including any extensions, is greater than three years from the date of the filing of the bankruptcy petition, then the debt is dischargeable (11 U.S.C. §507(a)(8)(A)(ii)). Under the "three-year rule," the due date for the tax return, including any extensions, is the starting point and the date of the filing of the bankruptcy petition is the end point. The three year period is extended if the taxpayer has filed a prior bankruptcy petition, filed a case in Tax Court, or extended the statutory period for assessment. Under such circumstances, the three year period is extended as long as the proceeding is pending under bankruptcy or nonbankruptcy law, plus an additional 90 days.