What Bankruptcy Can Do About IRS, Hawaiʻi Income Tax, and GE Tax Debt
This guide is legal information, not legal advice, and reading it does not create an attorney-client relationship. Every situation is different, and the right move in your case depends on your facts, your filing history, and your dates. For advice about your own situation, start with my free questionnaire or call me at (808) 468-7000.
I work hard to keep this page accurate, but errors or omissions are possible and the law can change. The information here is current only as of the date above.
Can bankruptcy erase tax debt in Hawaiʻi?
Sometimes, yes. Older income tax, and older Hawaiʻi general excise tax, can be wiped out completely in a bankruptcy, while recent tax debt cannot. Three dates decide it: when the return was due, when you actually filed it, and when the tax was assessed. The same three dates apply whether you owe the IRS or the State of Hawaiʻi, because the Bankruptcy Code writes the rule for any governmental unit rather than for the IRS alone. A short list of tax debts is never discharged at any age, and those are the ones to identify first.
Back taxes often come in more than one year, and the years do not all get the same answer. Some can be erased outright. Some cannot, no matter what you do. Sorting out which is which is a question of dates rather than a question of how much you owe.
Key Takeaways
- Age decides most of it. Income tax and general excise tax can both be discharged, but only after three separate clocks have run out.
- The IRS and the State follow one rule. The Bankruptcy Code sets its timing test for any “governmental unit,” so Hawaiʻi income tax runs on the same calendar as federal income tax.
- Hawaiʻi general excise tax is dischargeable. It is a tax on the business’s own gross receipts, not money collected from customers, so it is not in the never-discharged category.
- Money withheld from employees never goes away. Payroll withholding is a trust fund tax, and no amount of age makes it dischargeable in any chapter.
- A return you never filed never discharges. That includes unfiled Hawaiʻi returns. Filing the missing return is what makes the year eligible at all.
- A recorded tax lien outlives the discharge. The debt can be erased and the lien can still sit on property you owned on the day you filed.
- A completed Chapter 13 can reach further than Chapter 7 on interest and penalties. The recent tax still gets paid in full through the plan, and what the plan does not pay on it can be discharged at the end.
The Three Dates That Decide Whether a Tax Can Be Discharged
Whether a tax debt can be discharged in a Hawaiʻi bankruptcy is decided by three dates, and all three have to be behind you before the debt qualifies.
The rule sits in two places in the Bankruptcy Code, and the wording is what makes it reach so far. It applies to a tax “on or measured by income or gross receipts” owed to a “governmental unit.” It does not say the IRS, so the State of Hawaiʻi is inside the same words. And it does not say income alone, so Hawaiʻi general excise tax, which is measured on gross receipts, is inside them too. One rule, three collectors.
Three years since the return was due. Count from the date the return was last due, including any extension you took, rather than from the day you filed it. An extension pushes the date back and delays the year becoming dischargeable. Practitioners call this the three year rule.
Two years since you filed the return. This one counts from the day the return actually went in. A return filed years late starts its own two year clock on the day it is filed, which is why getting old returns filed is usually the first step rather than the last. This is the two year rule.
240 days since the tax was assessed. Assessment is the day the agency formally recorded the liability against you. On a return you filed and the agency accepted, assessment tends to follow filing within a few weeks. After an audit, an amended return, or a return the agency prepared in your place, the assessment date can land years later. This is the 240 day rule.
All three have to be satisfied for the tax to be discharged. Missing any one of them keeps the debt alive through the case and out the other side.
Certain events pause these clocks and push the dates back. A previous bankruptcy case can do it, and so can an offer in compromise or an appeal of a collection action. The pause is not the same length for every clock, so a tax year can look old enough on the calendar and still fall short.
This is arithmetic rather than judgment, and it is worth doing precisely. Filing a week too early can be the difference between a tax that is erased and a tax you keep paying for years.
Federal Income Tax: What the IRS Rule Turns On
Federal income tax owed to the IRS is dischargeable in bankruptcy once those three dates have run, and when it is discharged it is gone as completely as a credit card balance.
What is useful about the IRS is that it will hand you the dates. An account transcript for each year shows when the return was received and when the tax was assessed, which is most of the analysis in one document. You can request them from the IRS yourself, or I can pull them once you sign the authorization.
If you did not file and the IRS prepared a return in your place, that substitute is generally not treated as your return for discharge purposes, and the tax can stay alive no matter how many years pass. Filing your own return after the IRS has already prepared one does not reliably fix it in the Ninth Circuit, which covers Hawaiʻi. If the IRS has filed for you, say so at the start, because it changes the answer.
Filing a bankruptcy case stops IRS collection immediately. The automatic stay is a federal injunction, meaning a binding legal order, and it takes effect the moment the case is filed. Levies stop and wage garnishment stops. A refund is the exception: the IRS and the State can still apply a refund from a year before your case to a tax you owed from a year before your case. It does not stop everything: the IRS may still audit you, issue a notice of deficiency, demand returns, and make an assessment during the case. Those are information-gathering steps rather than collection, and they are carved out of the stay on purpose.
Hawaiʻi State Income Tax: The Same Calendar, a Different Collector
Hawaiʻi state income tax debt runs on exactly the same three dates as federal income tax debt, because the Bankruptcy Code writes the rule for any governmental unit rather than for the IRS by name.
Someone gets behind on federal and state in the same bad year, resolves the federal side through an installment agreement, and the state balance keeps sitting there collecting interest. That state balance follows the same rules as the federal one. Three years since the return was due, two years since you filed it, 240 days since assessment, and the tax is dischargeable.
The exceptions travel with it as well. A Hawaiʻi return you never filed is never discharged, exactly like an unfiled federal return. A Hawaiʻi tax lien recorded before you file survives against the property you owned on the filing date, exactly like a federal one.
What is different is how hard the state can push while you still owe it. The Hawaiʻi Department of Taxation can order your employer to withhold 25% of your gross pay without suing you first and without a court order, which is a great deal more than an ordinary judgment creditor can reach under Hawaiʻi’s garnishment statute. My guide to stopping wage garnishment covers how filing puts an end to it.
Hawaiʻi General Excise Tax: A Tax on the Business, Not on the Customer
Hawaiʻi general excise tax can be discharged in bankruptcy on the same timing rules as income tax, and the reason is that it is the business’s own tax rather than money collected from somebody else.
Start with what the tax actually is. The general excise tax is imposed on a business’s gross receipts. Hawaiʻi has no sales tax, and the Department of Taxation draws the line in its own materials: the general excise tax is a tax on businesses, while a sales tax is a tax on customers. A business may pass the tax along as a visible line on the bill, and the Department says that is not required by law. A business owes the tax whether or not it ever charged a customer for it.
That distinction is the whole reason general excise tax is dischargeable. The Bankruptcy Code has a separate and permanent exception for a tax the debtor was required to collect or withhold from someone else. Payroll withholding sits squarely in it. General excise tax does not, because the money was never anyone else’s to begin with. It is the business’s own liability on its own receipts, and it falls under the ordinary timing rules like any income tax.
What Actually Differs: Collection Power, Not Dischargeability
The real difference between the IRS, the Hawaiʻi Department of Taxation, and a general excise tax balance is not whether the debt can be discharged. It is how hard each one can push while you still owe it.
The IRS can record a lien that reaches everything you own, levy a bank account, garnish a paycheck without going to court, and keep a refund. The Department of Taxation collects both state income tax and general excise tax, and it can levy wages without a court order as well. Neither one has to sue you first, which is the single biggest difference between a tax collector and a credit card company.
None of that changes what the discharge does. A collector with strong tools can be holding a debt that is completely dischargeable, and the pressure it can apply today is not evidence that the debt survives the case. The automatic stay reaches all of it, state and federal alike: the moment a case is filed, the levies stop and the garnishment stops. Applying a refund to an older tax bill is the exception, and it can still happen.
Which is why the first question is always the calendar, not the letterhead.
The Tax Debts That Never Go Away
Some tax debt is never dischargeable in bankruptcy at any age.
Money you withheld from someone else. The income tax taken out of an employee’s paycheck was never the business’s money. The Bankruptcy Code calls it a tax required to be collected or withheld, it is excepted from discharge permanently, and there is no time limit that softens it. That covers federal withholding and the Hawaiʻi income tax withheld from employee wages. The government can also assess the unpaid amount personally against the person who was responsible for paying it over, even where the business itself was a corporation.
A return that was never filed. A tax year with no return filed is never discharged, and that includes unfiled Hawaiʻi returns. Filing the missing return does not make the tax dischargeable overnight, because it starts the two year clock on the day it goes in, but it is the only way the year ever becomes eligible.
A fraudulent return, or a willful attempt to evade the tax. This one is permanent as well, and it attaches to the specific year involved rather than to everything you owe.
A recorded tax lien, which is its own separate question. A lien recorded before you file survives against the property you owned on the filing date, even when the underlying tax is discharged. The practical result is that you owe nothing personally and the property still carries the claim, so it has to be dealt with before that property changes hands.
A self-employed person who fell behind during a bad stretch can owe both general excise tax and employee withholding, and the two get opposite answers. The general excise tax is the business’s own tax, and once the dates have run it can be discharged. The withholding was never the business’s money, and it survives every bankruptcy, in every chapter, permanently. Same client, same year, same envelope from the Department, two completely different outcomes.
My guide to debts that cannot be discharged covers the rest of that list, including support obligations, recent court fines, and how a creditor has to go about keeping a debt alive.
Chapter 13 and Tax Debt: What a Plan Has to Pay
Chapter 13 does not change the three dates. A tax that is too recent to discharge is too recent in either chapter, and a return you never filed stays nondischargeable in both.
What changes is the reason you pay. In a Chapter 13, a recent tax is a priority claim, and the Code requires the plan to pay priority claims in full over its life. You pay it because the plan has to pay it, not because it would survive the discharge at the end.
That distinction matters in one place: the interest and the penalties. Interest keeps running on a recent tax through a Chapter 7 and stays your personal responsibility afterward. In a completed Chapter 13, what the plan does not pay on that recent tax can be discharged at the end, and that often includes interest that built up during the case and penalties that are not tied to an actual loss to the agency.
Collection also stops for the entire plan, and the tax gets paid on a schedule that has to fit alongside everything else you owe, rather than on the agency’s schedule.
Older tax debt, the kind that has cleared all three dates, is not a priority claim at all. It rides along with the credit cards and the medical bills as ordinary unsecured debt, receives whatever percentage the plan pays that group, and the balance is discharged when the plan is completed.
The broader discharge comes only from completing the plan. If the case ends early and the court grants a hardship discharge instead, the full Chapter 7 tax exception comes back and the recent tax survives.
So the tax analysis does not pick the chapter by itself. It tells you what a plan would have to carry. Whether Chapter 7 or Chapter 13 is the better fit still turns on your goals, income, expenses, property, and debts. My guide to choosing between the two walks through that decision, and my Chapter 13 guide covers how a plan is put together.
Let’s run your dates.
Tell me which tax years you are behind on and I will tell you which ones can be erased and which ones cannot. That one answer usually changes what the rest of the plan should look like, and it costs you nothing to find out.
Frequently Asked Questions
Can bankruptcy discharge IRS back taxes?
Sometimes, yes. Federal income tax can be discharged once three separate periods have run out: three years since the return was last due, two years since you actually filed it, and 240 days since the tax was assessed. All three have to be satisfied. Taxes for a year you never filed, and taxes tied to a fraudulent return or a willful attempt to evade, are never discharged no matter how old they are.
Can bankruptcy discharge Hawaiʻi state income tax?
Yes, under the same rules that apply to the IRS. The Bankruptcy Code writes its tax timing test for any governmental unit rather than for the federal government alone, so Hawaiʻi income tax owed to the state Department of Taxation runs on the same three dates as federal income tax. The exception to watch is an unfiled Hawaiʻi return, because a tax year with no return filed is never discharged.
Is Hawaiʻi general excise tax treated like payroll tax in bankruptcy?
No, and that difference decides whether it can be erased. Payroll withholding is money you held for someone else, and the Bankruptcy Code excepts it from discharge permanently, with no time limit. Hawaiʻi general excise tax is the business’s own tax on its gross receipts rather than money collected from customers, so it does not fall in that category. It is discharged on the same timing rules as income tax, which means older general excise tax can be wiped out while the withholding from the very same period never is.
Key Terms, Explained
- Priority tax
- A tax debt recent enough that the Bankruptcy Code places it ahead of ordinary creditors. A Chapter 13 plan has to pay it in full, and it is not discharged in a Chapter 7.
- Trust fund tax
- A tax you were required to collect or withhold from someone else, such as the income tax taken out of an employee’s paycheck. It is never discharged in bankruptcy, at any age.
- Assessment
- The day a taxing agency formally records a tax liability against you. It starts one of the three clocks that decide whether the tax can be discharged.
- Gross receipts
- Everything a business takes in before expenses. Hawaiʻi general excise tax is measured on gross receipts rather than on profit.
- Tax lien
- A recorded claim that attaches a tax debt to your property. A lien recorded before you file survives the bankruptcy even when the tax itself is discharged.
- Discharge
- The permanent court order at the end of a bankruptcy case that erases your legal obligation to pay qualifying debts.
Sources & Legal Authorities
The authorities behind this guide.
- United States Code. 11 U.S.C. § 362(a); § 362(b)(26); § 507(a)(8)(A); § 507(a)(8)(C); § 522(c)(2)(B); § 523(a)(1)(A); § 523(a)(1)(B); § 1322(a)(2); § 1328(a)(2); § 1328(c)(2); 26 U.S.C. § 6020(b); § 6672
- Hawaiʻi Revised Statutes. HRS § 231-25; § 235-61
- Other. Hawaiʻi Department of Taxation, Tax Facts 37-1; Wage Levy for Individuals
