Most debts in a bankruptcy case are sorted by what they are. A credit card is a credit card, a medical bill is a medical bill, and the law treats each the same way whether it was incurred last spring or six years ago. Tax debt is the exception. With a tax debt, the question is almost never what — it is when. The same unpaid income tax, in the same amount, owed to the same agency, is wiped out by a chapter 7 discharge or survives it untouched depending on dates that nobody involved thinks to mention until a lawyer asks.
There are three of those dates, they run from three different events, and a petition filed a few weeks too early can convert a tax debt that would have disappeared into one that follows the filer for a decade. Here is how the timing actually works, what no clock will ever save, and what Wisconsin’s own collection machinery does on top of the federal rules.
Priority and discharge are the same question
Start with the provision that connects the two halves of the Bankruptcy Code that matter here, because almost every mistake in this area comes from reading one without the other.
Section 523 (a) (1) (A) of the Bankruptcy Code excepts from discharge any debt for a tax “of the kind and for the periods specified in section 507 (a) (3) or 507 (a) (8) of this title, whether or not a claim for such tax was filed or allowed.” Section 507 (a) (8) is the priority provision — the list of tax claims a governmental unit gets paid ahead of ordinary creditors.
So the two questions collapse into one. If a tax claim qualifies for eighth-level priority under § 507 (a) (8), it is also nondischargeable, and the fact that the taxing authority never bothered to file a proof of claim changes nothing. If it falls outside § 507 (a) (8), and outside the two other exceptions discussed below, it is an ordinary unsecured debt that goes away with the rest of the dischargeable debt.
Which means the whole analysis is the text of § 507 (a) (8), and the text of § 507 (a) (8) is a set of clocks.
Clock one: three years from the day the return was due
Under § 507 (a) (8) (A) (i), an income tax claim has priority — and so survives discharge — where the return “if required, is last due, including extensions, after three years before the date of the filing of the petition.”
Read it from the other direction, which is the useful direction: once the return’s due date is more than three years behind you, that clock has run, and the tax is no longer nondischargeable on this ground.
Two words in that sentence do most of the damage.
The first is due. The clock runs from the date the return was due, not the date the tax was incurred and not the date anyone paid attention to it. A 2022 income tax year generated a return due in April 2023, and it is April 2023 that counts.
The second is including extensions. An extension to file moves the due date, and moving the due date moves the three-year line with it. A filer who extended to October instead of filing in April has, by that single administrative act, pushed the date on which the debt becomes dischargeable six months into the future. People forget extensions they requested years ago. The transcript does not.
Clock two: 240 days from assessment
Clearing the three-year line is necessary but not sufficient, because § 507 (a) (8) (A) (ii) supplies a second and independent basis for priority: a tax “assessed within 240 days before the date of the filing of the petition.”
Assessment is a separate event from filing, and it can happen long after the return was due — following an audit, an amended return, or a notice of deficiency that went unanswered. A tax from a decade-old year that was assessed four months ago is a priority claim, and nondischargeable, notwithstanding that the three-year clock ran out years ago.
The 240 days are counted “exclusive of” two periods. Under clause (I), any time during which an offer in compromise was pending or in effect during that 240-day period, plus thirty days, does not count. Under clause (II), any time during which a stay of proceedings against collections was in effect in a prior bankruptcy case during that period, plus ninety days, does not count either. An offer in compromise is often the right thing to do; it is worth knowing that it also pushes this date outward while it is pending.
Clock three: two years from the day the return was actually filed
The third clock lives in a different section, and it is the one that catches people who eventually did the right thing but did it late.
Section 523 (a) (1) (B) excepts from discharge any tax debt with respect to which a return, or equivalent report or notice, if required, “(i) was not filed or given; or (ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition.”
Two consequences, and they are not symmetrical.
A return never filed is never dischargeable. Not after three years, not after ten. Clause (i) has no clock at all. The tax for an unfiled year sits outside the discharge permanently, and the only way to change that is to file the return and start clock three.
A return filed late is nondischargeable for two years after it is filed. A filer who finally files a 2018 return in 2026 has a tax that is well past the three-year line and squarely inside the two-year one. Filing that return is still the right move — it is the only thing that will ever make the debt dischargeable — but the petition has to wait.
There is a definitional point buried at the end of § 523 (a), and it matters more than its placement suggests. For purposes of that subsection, “the term ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements),” and the term “includes a return prepared pursuant to section 6020 (a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020 (b) of the Internal Revenue Code of 1986, or a similar State or local law.”
Section 6020 (a) is a return the Secretary prepares with the taxpayer’s cooperation and signature. Section 6020 (b) is the substitute return the Service prepares for a nonfiler, without cooperation. The first counts as a return and starts the clock. The second does not. A filer who assumes that the agency’s own substitute filing solved the problem has not started any clock at all, and will discover the fact after the discharge arrives.
The clocks stop running, and nobody sends a notice when they do
The paragraph following the subparagraphs of § 507 (a) (8) is a single sentence, and it undoes a great deal of back-of-the-envelope arithmetic: “An otherwise applicable time period specified in this paragraph shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under this title or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days.”
In plain terms: a collection due process appeal suspends the clocks while it is pending and for ninety days afterward, and a prior bankruptcy case suspends them for as long as its stay or its confirmed plan held collection off, plus ninety days. A prior filing that was dismissed, or completed, is not a neutral event in this calculation. It is tolling, and the only way to count it accurately is to know the dates.
There is a parallel provision on the collection side. Under 26 U.S.C. § 6502 (a) (1), an assessed federal tax may be collected by levy or court proceeding within ten years after assessment. Under 26 U.S.C. § 6503 (h), the running of that period is suspended during a title 11 case for the period the Secretary is prohibited from collecting, plus sixty days for assessment and six months for collection. A bankruptcy that does not discharge a tax therefore hands the Service additional time to collect it — a result worth weighing before filing a case whose timing does not work.
Two categories no clock will save
Beyond the dates, two kinds of tax debt are nondischargeable regardless of age.
Fraud or willful evasion. Section 523 (a) (1) (C) excepts a tax “with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” No clock, no amount threshold, no forgiveness by the passage of time.
Taxes you collected or withheld for someone else. Section 507 (a) (8) (C) gives priority to “a tax required to be collected or withheld and for which the debtor is liable in whatever capacity.” This is the sales tax a business collected from customers and the income tax it withheld from employees’ paychecks — trust-fund money, in the usual phrase, which was never the business’s to spend. Those claims are nondischargeable in a chapter 7, and § 1328 (a) (2) names § 507 (a) (8) (C) specifically among the debts that survive even a completed chapter 13 plan. For a small-business owner, this is frequently the single most important fact about their case.
One further trap for anyone currently under audit: § 507 (a) (8) (A) (iii) extends priority to a tax “not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case.” A liability that has not yet been assessed but still can be is a priority claim, and nondischargeable, however old the year.
Penalties follow a different rule than the tax
Penalties are not simply swept along with the tax they attach to, and the difference is occasionally worth real money.
Section 523 (a) (7) excepts from discharge a debt for a fine, penalty, or forfeiture payable to a governmental unit and not compensation for actual pecuniary loss — but expressly carves out a tax penalty “(A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or (B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition.”
So a penalty attached to a tax that is itself dischargeable is dischargeable, and a penalty imposed with respect to an event more than three years before the petition is dischargeable even where the underlying tax is not. Section 507 (a) (8) (G) gives priority to a penalty “related to a claim of a kind specified in this paragraph and in compensation for actual pecuniary loss” — which is to say that a punitive penalty, as distinct from one that compensates an actual loss, does not ride along on the tax’s priority.
A discharge is not a release of the lien
This is the distinction that disappoints people, and it is the same one that governs reaffirmation decisions on a car loan: personal liability and liens are two different things, and a discharge reaches only the first.
Worse, exempt property is not a refuge here. Section 522 (c) provides that property exempted under that section is not liable, during or after the case, for debts that arose before the case — except, under § 522 (c) (1), a debt of a kind specified in § 523 (a) (1) or (a) (5), “in which case, notwithstanding any provision of applicable nonbankruptcy law to the contrary, such property shall be liable for a debt of a kind specified in such paragraph.” Section 522 (c) (2) (B) adds a parallel exception for “a tax lien, notice of which is properly filed.”
Read those together. A nondischargeable tax debt may be collected after the case out of the very property Wisconsin’s exemption statutes protect from everyone else, and a properly filed tax lien survives the case on its own terms. The exemptions that make a bankruptcy work against ordinary creditors do not work against a surviving tax.
Wisconsin’s own collection machinery
The federal rules above govern dischargeability. What the Wisconsin Department of Revenue can do about a state income tax is a matter of Wisconsin law, and it is more aggressive than most people expect.
Under Wis. Stat. § 71.91 (4), where a person liable for income or franchise tax “neglects, fails, or refuses to pay the tax, the amount, including any interest, addition to tax, penalty, or costs, shall be a perfected lien in favor of the department of revenue upon all property and rights to property.” The lien is effective when the taxes are due or when an assessment is made. It does not give the Department priority over lienholders, mortgagees, purchasers for value, judgment creditors, and pledgees whose interests were recorded before the Department’s lien was recorded — but as against the taxpayer, it attaches to everything.
Then there is the warrant. Section 71.91 (5) (ar) directs the Department, where income or franchise tax is not paid when due, to file a warrant with the clerk of circuit court and permits it to issue a copy to the sheriff, commanding a levy on and sale of enough of the taxpayer’s real and personal property in the county to pay the tax with penalties, interest, and costs. Under § 71.91 (5) (b) 1., the clerk enters that warrant as required by § 806.11, and “upon entering the amount of the warrant, together with interest required by s. 71.82 (2), the warrant shall be considered in all respects as a final judgment.” No lawsuit, no hearing, no service of a summons. An administrative filing becomes a circuit court judgment against you. Liens tied to warrants entered after May 5, 2004 run for twenty years from entry, subject to renewal under § 71.91 (5) (dm).
The interest is its own reason to move. Wisconsin adds interest to assessed taxes at 12 percent per year under § 71.82 (1) (a); once the tax is delinquent, § 71.82 (2) (a) sets the rate at 1.5 percent per month until paid. Section 71.82 (2) (b) directs the Department to provide by rule for reduction of that interest to 12 percent per year in stated instances where the secretary of revenue determines that reduction is fair and equitable.
The limitation period cuts both ways, and the asymmetry mirrors the federal one. Under § 71.77 (2), notice of an additional assessment must generally be given within four years of the date the return was filed. But under § 71.77 (3), if a person filed an incorrect return “with intent to defeat or evade” the tax, or failed to file at all, “income of any such year may be assessed when discovered.” There is no repose for an unfiled Wisconsin year. The four-year period is not absolute in the other direction either: § 71.77 (5) allows it to be extended by written agreement made before it expires, and § 71.77 (7) (a) permits assessment within six years where the taxpayer reported less than 75 percent of the net income properly assessable, subject to the dollar thresholds stated there. Separately, § 71.80 (3) lets the Department credit any overpayment or refund against other liabilities it collects before anything is sent to the taxpayer — which is why a refund a filer was counting on sometimes simply never arrives.
The Wisconsin wrinkle a married filer needs to know
Wisconsin is a marital property state, and the interaction of two statutes puts a non-liable spouse closer to a tax debt than they would be anywhere else.
Section 71.91 (3) provides that all tax obligations to this state, including interest, penalties, and costs, incurred during marriage by a spouse after December 31, 1985, or after both spouses are domiciled in this state, whichever is later, “are incurred in the interest of the marriage or family and may be satisfied only under ss. 766.55 (2) (b) and 859.18.” And § 766.55 (2) (b) says that an obligation incurred in the interest of the marriage or the family “may be satisfied only from all marital property and all other property of the incurring spouse.”
The Legislature has, in other words, classified state tax debt as a family obligation by statute, which opens up the whole pool of marital property to satisfy it — not merely the earning spouse’s share. The same structure is what makes a spouse’s hospital bill a joint problem in Wisconsin. Whether one spouse or both should file is therefore a question with real content in a tax case, and it is not answered by asking whose name was on the return.
What chapter 13 does with a tax debt
For a filer whose tax debt is nondischargeable, chapter 13 is frequently the better instrument, and not because it makes the tax go away.
Section 1322 (a) (2) requires a chapter 13 plan to provide for “the full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim.” That is the mechanism: a priority tax gets paid in full over the life of the plan, on a schedule the court approves, with the automatic stay holding levies and garnishments off in the meantime. Where this title requires interest on a tax claim, § 511 (a) fixes the rate at the one determined under applicable nonbankruptcy law, and § 511 (b) sets it, for taxes paid under a confirmed plan, as of the calendar month in which the plan is confirmed.
The discharge provision is worth reading closely. Section 1328 (a) (2) excepts from a completed chapter 13 discharge debts “of the kind specified in section 507 (a) (8) (C) or in paragraph (1) (B), (1) (C), (2), (3), (4), (5), (8), or (9) of section 523 (a).” Note what is on that list and what is not. Trust-fund taxes are on it. Unfiled and late-filed returns under § 523 (a) (1) (B) are on it. Fraud and willful evasion under § 523 (a) (1) (C) are on it. Section 523 (a) (1) (A) — the priority-tax exception — is not, nor is § 523 (a) (7), the penalty exception. The practical consequence is that a plan which pays the priority tax in full under § 1322 (a) (2) can leave the associated penalties and the older nonpriority tax to be treated as general unsecured claims and discharged at the end.
Two further mechanics. Section 1305 (a) (1) allows a proof of claim to be filed for taxes that become payable while the case is pending, which is how a tax year that arrives mid-plan can be brought inside it rather than left to grow outside. And a chapter 13 case lasts years, which means the returns have to keep getting filed on time for the duration; nothing in the Code protects a plan from a new delinquency.
What the automatic stay does not stop
Filing stops collection. It does not stop the tax apparatus from doing its job, and § 362 (b) (9) says so explicitly: the stay does not apply to an audit by a governmental unit to determine tax liability, to the issuance of a notice of tax deficiency, to a demand for tax returns, or to the making of an assessment and issuance of a notice and demand for payment — though a lien that would otherwise attach to estate property by reason of such an assessment does not take effect unless the tax will not be discharged in the case and the property is transferred back out of the estate to the debtor.
Section 362 (b) (26) permits a governmental unit to set off an income tax refund for a pre-petition taxable period against a pre-petition income tax liability. Expect the refund to be kept, not sent.
On the other side of the ledger, § 505 (a) (1) gives the bankruptcy court authority to determine the amount or legality of any tax, fine, penalty, or addition to tax, “whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction” — with the significant limit, in § 505 (a) (2) (A), that the court may not redetermine an amount or legality that was already contested and adjudicated before the case began. A liability never properly litigated can be litigated in the bankruptcy court. One already decided cannot be re-run there.
Why the order of operations decides the case
Strip the citations away and the practical sequence is short.
Get the account transcripts first, from both the Internal Revenue Service and the Department of Revenue, and build an actual timeline: for each year, the due date including any extension, the date the return was filed, the date of any assessment, and the dates of any prior bankruptcy case, offer in compromise, or collection appeal. Those are the inputs. Without them the dischargeability question cannot be answered, only guessed at.
File the missing returns. An unfiled year is permanently nondischargeable, and nothing improves while it stays unfiled.
Then wait for the right date, if waiting is what the timeline calls for. This is the rare situation in which a few weeks of patience is worth more than anything a lawyer can argue later, because the three-year line, the 240-day line, and the two-year line are jurisdictional in effect: a petition filed on the wrong side of one of them produces a nondischargeable debt that a better case, filed a month later, would have eliminated. And a case filed for no benefit is worse than neutral, because § 6503 (h) hands the Service back the time the stay cost it.
Tax debt is the one place in consumer bankruptcy where the calendar does the legal work. The filer who understands that, and who gets the dates on paper before the petition is drafted, is very often in a far better position than the one who simply owes less.
Talk to a New Berlin bankruptcy lawyer
Carson Law Office represents people through chapter 7 and chapter 13 cases in New Berlin, Waukesha County, Milwaukee, West Allis, Wauwatosa, and the surrounding communities — including building the year-by-year tax timeline that decides whether a tax debt is dischargeable, and deciding whether the right answer is to file now, to file later, or to deal with the Department of Revenue outside bankruptcy altogether. If you owe back taxes and a levy, a garnishment, or a circuit court warrant has appeared, call (262) 860-8932 or email christopher@carsonlawoffice.com. You can also read more about our bankruptcy practice or contact us to arrange a consultation.
Carson Law Office · 15350 West National Avenue, Suite 101, New Berlin, WI 53151 · (262) 860-8932
This article is general information about federal bankruptcy law, the Internal Revenue Code, and Wisconsin tax law, and is not legal advice. Statutes, rules, interest rates, and limitation periods are revised from time to time, and the dischargeability of a particular tax year turns entirely on the dates in your own account history. Obtain your transcripts and speak with an attorney before filing a bankruptcy petition that includes tax debt.