Bankruptcy as an Option to Eliminate Debt. What are the rules?


My client is exploring bankruptcy as an option to eliminate her tax debt. She owes approximately $30,000, which includes penalties and taxes due. All of her returns are on file with the IRS, except that one return is an SFR (incidentally, the SFR is on file in the same year she owes). I’ve recommended she file a return to replace the SFR.


Hi Marg, Happy to help if I can. What’s your question?


Generally speaking, anything in particular I should know to advise her whether bankruptcy is an option and of course whether to contact an attorney?


Sure, bankruptcy can eliminate tax debts, but there are certain rules that must be followed. Generally, the bankruptcy code requires a certain amount of time to pass before your client becomes eligible to discharge their tax debts.

The rules include requirements that (1) the taxpayer must have filed a tax return (this could be problematic for your client since she has an SFR on file), (2) the taxpayer must have filed the return that has the tax liability more than two years before you file the bankruptcy, and (3) the tax must be from a return that was due to be filed with the IRS more than three years before you file the bankruptcy.

It can be helpful to look at the taxpayer’s transcripts to determine whether there were any tolling events (OIC, etc.) that might affect the timing of the items above.

I found this blog post that might be helpful to read through:

Also, note that you should certainly file a new return to replace the SFR. Whether the new return in place of the SFR constitutes a ‘return’ for purposes of Rule (1) above is not something I know. I suspect a bankruptcy attorney could tell you.


The 5th District Court ahs ruled that a return filed subsequent to an SFR is a valid Filing. This does not set precedent outside the 5th District. However, it may hold sway with the RO or agent you are dealing with.



Hey @MargieInSF et al,

We are hosting a webinar on CPA Academy today, about this topic. I’m sure you already found the best solution for that client you were originally asking about, but you might still find this session valuable…

Larry is the expert presenter that we’ve selected, and he knows this topic inside and out :wink: