Most people decide whether to file bankruptcy by looking at what they owe the IRS today. That is a reasonable start. It is not the whole picture.
The Bankruptcy Code also reaches tax the IRS has not assessed yet. If the IRS still has the legal right to assess it when you file, that tax is treated much like the debt you already know about.
The statute
Section 507(a)(8)(A) gives priority to income taxes for a taxable year ending on or before the petition date that fall into one of three categories. The third, § 507(a)(8)(A)(iii), covers a tax "not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case." It then excludes taxes of a kind specified in § 523(a)(1)(B) or (C), meaning unfiled or late-filed returns within the 2-year window, and fraud or evasion.
Section 523(a)(1)(A) then makes any tax of the kind and for the periods in § 507(a)(8) nondischargeable, "whether or not a claim for such tax was filed or allowed." So unassessed but assessable income tax is generally priority, and generally not discharged.
What "assessable" means in real life
A tax is assessable if the IRS is still inside its time limit to assess it. The main limits are in IRC § 6501:
- Three years after the return was filed, under § 6501(a)
- Six years if you left out more than 25 percent of the gross income stated on the return, under § 6501(e)
- Any time if no return was filed, or the return was fraudulent, under § 6501(c)
- As long as you agreed, if you signed an extension under § 6501(c)(4), which is the "by agreement" in the bankruptcy statute
Where you most often see this:
- A year is under audit and no assessment has been made
- You received a notice of deficiency (the 90-day letter) and the IRS cannot assess yet because of IRC § 6213(a)
- You are in Tax Court on a deficiency and the decision is not final
- You signed a Form 872 extending the assessment period
- You recently filed a return and the IRS has not processed it
Why the exclusions matter less than they look
The carve-out for § 523(a)(1)(B) and (C) taxes sounds like good news. It is not much help. Those taxes are kept out of the priority category, but they are still nondischargeable on their own under § 523(a)(1)(B) and (C). An unfiled year, a return filed late within two years of the petition, and a fraud year all survive discharge anyway. See IRS substitutes for return and fraud and willful evasion.
The difference shows up in a Chapter 13 plan. Priority claims must be paid in full under § 1322(a)(2) unless the IRS agrees otherwise. A nonpriority tax that is still nondischargeable is treated differently in the plan, which affects your monthly payment. That is one reason the category matters. For more, see priority vs general unsecured tax claims.
The trap: an old year with an open audit
Here is how people get caught. Your return for a year was due more than three years ago. You filed on time. The original tax was assessed long ago. Everything about that year looks dischargeable.
But you signed an extension during an audit, and the IRS has not finished. The additional tax the IRS is going to propose is unassessed but assessable when you file. It is a priority claim, not discharged, no matter how old the year is. The original balance may still be discharged. The audit piece is not.
Same idea if you got a notice of deficiency shortly before filing. Until the deficiency is assessed, it sits in this category. After it is assessed, the 240-day rule takes over for that piece. Either way, it is not dischargeable on day one. See amended returns and audit assessments.
The IRS can assess during your case
You might think the automatic stay protects you from new assessments. It does not. Section 362(b)(9) allows a governmental unit to audit, issue a notice of deficiency, demand tax returns, and make an assessment and send notice and demand for payment while the case is pending.
There is a limit built into that same paragraph: a tax lien that would otherwise attach to estate property because of that assessment does not take effect unless the tax is a debt that will not be discharged and the property, or its proceeds, goes back to you. Collection is a separate matter, and the stay still blocks levies.
How the IRS claims it
Governmental units have a longer deadline for filing a proof of claim. Under § 502(b)(9)(A), a government claim is timely if filed before 180 days after the order for relief. The IRS will often file an estimated claim for unassessed periods, sometimes based on what it thinks you would owe for unfiled years. Those estimates can be far off. You can object. See reading and objecting to an IRS proof of claim.
If the dispute is about the amount, the bankruptcy court can decide it under § 505 rather than leaving it to an audit or Tax Court.
Chapter 7 vs Chapter 13 for unassessed tax
In Chapter 7, unassessed priority tax is not discharged, and in a no-asset case it usually is not paid either. It simply survives, and the IRS assesses and collects after the case closes.
In Chapter 13, the IRS's priority claim for unassessed tax must be provided for and paid in full through the plan under § 1322(a)(2). That can be a real advantage. You pay the priority tax over the life of the plan, under court protection, rather than facing collection after a Chapter 7.
Questions to answer before filing
- Is any year under audit, or has the IRS asked for records?
- Have you signed an extension of the assessment period?
- Have you received a notice of deficiency, and is the 90-day period still running?
- Did you leave out significant income on any return in the last six years?
- Do you have unfiled years? See the general guide on unfiled tax returns.
If any of those apply, call (813) 229-7100 and talk with Darrin T. Mish, a tax attorney, about what the IRS can still assess and how that fits a Chapter 7 or Chapter 13. Every case turns on its own transcripts and dates; this page is general information, not legal advice for your situation. The tax you have not been billed for yet still counts.