If you owe recent income taxes, Chapter 13 will not make them disappear. What it will do is put them on a schedule you can live with, freeze the IRS in place while you pay, and wipe out a lot of what sits around those taxes when you finish.
The rule that drives all of this is short. Under 11 U.S.C. § 1322(a)(2), a Chapter 13 plan must provide for full payment, in deferred cash payments, of all claims entitled to priority, unless the holder of a particular claim agrees to a different treatment. The IRS rarely agrees to less. So the question becomes: which of your taxes are priority claims, and how much is that claim?
Which taxes are priority claims
Priority tax claims are listed in 11 U.S.C. § 507(a)(8). For individuals, the main categories are:
- Recent income taxes under § 507(a)(8)(A). A year is priority if the return was last due (including extensions) within three years before you filed, if the tax was assessed within 240 days before you filed, or if it was not yet assessed but still assessable when the case began.
- Trust fund taxes under § 507(a)(8)(C): taxes you were required to collect or withhold, in whatever capacity you are liable. This includes the trust fund recovery penalty assessed against a responsible person. Age does not matter for these.
- Certain employment and excise taxes under § 507(a)(8)(D) and (E), with their own three-year windows.
- Penalties under § 507(a)(8)(G), but only a penalty related to a priority tax and "in compensation for actual pecuniary loss." Most IRS penalties are punitive rather than compensatory, so they usually land in the general unsecured pile instead.
Anything that does not fit those boxes and is not secured by a lien is a general unsecured claim. The difference is explained in priority vs. general unsecured tax claims. Run your years through the discharge calculator to get a first read on which side of the line each year falls.
How big is the priority claim?
The priority claim is the tax plus interest accrued up to the filing date. Interest that had not yet accrued when you filed is unmatured interest, and § 502(b)(2) disallows it as part of the claim. That is a real benefit when an IRS balance has been compounding for years.
Compare that with Chapter 11, where § 1129(a)(9)(C) requires payments with a total value, as of the plan's effective date, equal to the claim. That "value" language is why Chapter 11 plans pay interest on tax claims. Section 1322(a)(2) speaks of full payment of the claim, not its present value. Where interest is required on a tax claim, 11 U.S.C. § 511 sets the rate at the one applicable under nonbankruptcy law, fixed as of the month the plan is confirmed.
Secured tax claims are different. If the IRS recorded a lien, the claim is secured up to the value of your interest in the property, and § 1325(a)(5) generally requires the plan to pay that secured amount with enough interest to give the IRS its present value. See secured tax claims in Chapter 13.
The plan math
Your plan payment has to be large enough to pay, at a minimum, the trustee's commission, your attorney fees approved through the plan, secured claims you are paying through the plan, and every dollar of priority claims, all within the plan length.
A simple example: $30,000 in priority income taxes over a 60-month plan works out to $500 a month for the IRS alone, before the trustee's percentage and anything else the plan must pay. Over a 36-month plan, the same claim is about $833 a month. If the numbers do not fit inside five years, the plan is not feasible and will not be confirmed.
Plan length is not purely your choice. Under § 1322(d) and § 1325(b)(4), if your household income is at or above your state's median, the commitment period is five years. Below the median, the plan is three years unless the court approves a longer period for cause, never longer than five. Below-median filers with big priority tax debt routinely ask for five years for exactly that reason.
The IRS proof of claim drives the number
The IRS files a proof of claim breaking your debt into secured, priority, and general unsecured parts. A governmental unit's claim is timely if filed within 180 days after the order for relief (11 U.S.C. § 502(b)(9)). For a return you file under § 1308 during the case, the IRS gets 60 days after that return is filed.
Do not assume the IRS got the categories right. Estimated claims for unfiled years, years put in the wrong bucket, and penalties labeled priority are common. Reading the claim line by line is a job in itself; see reading and objecting to an IRS proof of claim. A wrong priority figure can sink an otherwise good plan, or cost you thousands you did not owe.
The IRS's own manual tells its personnel to object to a plan that does not provide for full payment of priority taxes (IRM 5.17.11, Chapter 13 Bankruptcy (Individuals with Regular Income) and Chapter 12 Bankruptcy (Family Farmers or Fishermen with Regular Income)). Expect them to read your plan.
Taxes that come due during the plan
Your tax life does not stop for five years. You must keep filing returns and paying current taxes. Under § 1305(a)(1), the IRS may file a claim for taxes that become payable while the case is pending, which can be added to the plan, but a growing post-petition balance is one of the fastest ways to get a case dismissed. Adjust your withholding or estimated payments before you file, not after.
What is left when you finish
When you complete the plan, the discharge under § 1328(a) covers debts provided for by the plan except those listed in § 1328(a)(2). For taxes, that list includes trust fund taxes under § 507(a)(8)(C), taxes on unfiled or late-filed returns under § 523(a)(1)(B), and fraud or evasion taxes under § 523(a)(1)(C).
In practice, ordinary priority income taxes have been paid in full by then, and general unsecured taxes that received a partial payment are discharged for the balance. The exceptions are the ones to plan around. If part of your trust fund liability is still unpaid at the end, it survives. If a year is nondischargeable because of a late return, interest and penalties on that year can follow you out of the case. More on penalties in tax penalties in bankruptcy.
For the timing rules that decide which years are priority in the first place, see the 3-year, 2-year, 240-day rule.
Get the numbers right before you file
A Chapter 13 plan with tax debt is a math problem with a federal agency checking your work. Call Darrin T. Mish, tax attorney, at (813) 229-7100 to go over your transcripts and the plan numbers before the IRS does. Every case turns on its own transcripts and dates; this page is general information, not legal advice for your situation. The IRS reads every plan; make sure someone on your side read it first.