Tax Debt and Bankruptcy in New York

Q: Does bankruptcy discharge New York State taxes?

Yes, the same rules that apply to federal income tax discharge generally apply to New York State income taxes. If the state tax meets the 3-year, 2-year, and 240-day rules and was not fraudulent, it may be dischargeable.

Q: What happens to tax liens in bankruptcy?

A tax lien that was recorded before your bankruptcy filing survives the discharge. However, the personal liability is eliminated. The lien remains only on property you owned at the time of filing. Chapter 13 can sometimes address tax liens through the repayment plan.

Certain income tax debts - both federal IRS and New York State - can be discharged in bankruptcy if they meet specific age and filing requirements. Here are the rules.

Yes, certain income tax debts can be discharged in bankruptcy if they meet all of the following criteria: the tax return was due more than 3 years ago, the return was filed more than 2 years ago, the tax was assessed more than 240 days ago, the return was not fraudulent, and you did not willfully evade the tax.

The Five Rules for Tax Discharge

To discharge income tax debt in bankruptcy (Chapter 7 or Chapter 13), ALL five of these conditions must be met:

3-Year Rule: The tax return was due (including extensions) at least 3 years before you file bankruptcy.
2-Year Rule: The tax return was actually filed at least 2 years before your bankruptcy filing date.
240-Day Rule: The tax was assessed at least 240 days before filing. (Tolled by prior bankruptcy, offers in compromise, or certain other events.)
No Fraud: You did not file a fraudulent return or willfully attempt to evade the tax.
Not a Substitute Return: If the IRS filed a substitute return for you (SFR), that does not count as "filed" - you must file your own return to start the 2-year clock.

Taxes That Cannot Be Discharged

Payroll taxes (trust fund taxes) - Never dischargeable. Employers who withheld but did not remit owe these regardless of bankruptcy.
Tax penalties from non-dischargeable taxes - Penalties tied to non-dischargeable tax debt survive bankruptcy.
Taxes for which no return was filed - If you never filed the return, the tax cannot be discharged.
Sales tax collected but not remitted - Trust fund obligations that cannot be discharged.
Recent taxes - Any taxes that do not meet the 3-year/2-year/240-day rules.

Chapter 7 vs. Chapter 13 for Tax Debt

Chapter 7

Qualifying tax debts that meet all five rules are eliminated in the discharge (3-4 months). Non-qualifying taxes survive and must be paid after the case. Tax liens recorded before filing survive the discharge but attach only to property owned at the time of filing.

Chapter 13

Non-dischargeable priority tax debts must be paid in full through the 3-5 year repayment plan, but interest stops accruing after the filing date. This can save significant money on large tax debts. Dischargeable taxes are treated as general unsecured debt and may receive only a fraction of their face value.

Advantage: Chapter 13 lets you pay priority taxes over 3-5 years at 0% interest (in most cases), compared to the IRS's typical installment agreement rates of 7-8%.

New York State Tax Considerations

The same five rules apply to New York State income tax debts. Additional considerations:

New York State tax warrants (the state equivalent of a federal tax lien) survive discharge just like IRS liens
New York can garnish up to 10% of gross wages for state tax debts - the automatic stay halts this
The New York Department of Taxation and Finance may offset state refunds for prior tax debts
NYC residents should also consider city income tax obligations (same rules apply)

Tax Liens and Bankruptcy

A tax lien that was recorded before bankruptcy presents special challenges:

The personal liability for the underlying tax may be discharged (if the tax qualifies)
But the lien itself survives the discharge and attaches to property you owned at the time of filing
In Chapter 13, you can sometimes pay off the secured portion of the lien through your plan and strip the unsecured remainder
If you sell the property, the lien must be satisfied from the proceeds

This is one of the most complex areas of bankruptcy law. Consult an attorney experienced in both bankruptcy and tax before filing.

Frequently Asked Questions

Can bankruptcy discharge tax debt?

Yes, income taxes can be discharged if the return was due 3+ years ago, filed 2+ years ago, assessed 240+ days ago, was not fraudulent, and was not a substitute return. Both IRS and New York State taxes qualify under these rules. See bankruptcytaxes.org for details.

What is the 3-year rule for tax discharge?

The tax return must have been due (including extensions) at least 3 years before you file bankruptcy. For example, a 2022 return due April 15, 2023 could be discharged in a case filed after April 15, 2026.

Does bankruptcy discharge New York State taxes?

Yes, the same five rules apply to New York State income taxes. If the state tax meets all the criteria, it may be dischargeable in either Chapter 7 or Chapter 13.

What happens to tax liens in bankruptcy?

Tax liens recorded before filing survive the discharge. The personal liability may be eliminated, but the lien remains on property owned at the time of filing. Chapter 13 can address tax liens through the repayment plan.