1. The 3-2-240 Rule: the Three Deadlines That Unlock Tax Discharge
The 3-2-240 rule is the analytical framework that determines whether a federal income tax debt qualifies for discharge under 11 U.S.C. Section 523(a)(1). A taxpayer who satisfies all three prongs of the rule and files for Chapter 7 bankruptcy can permanently eliminate the tax debt in the same way that other unsecured debts are discharged.
What Are the Three Prongs of the 3-2-240 Rule and How Do They Work?
The three-year prong requires that the tax return for the year at issue was due at least three years before the bankruptcy petition date, including any filing extensions. The two-year prong requires that the return was actually filed at least two years before the petition date, meaning a late filer must wait two full years from the date of actual filing. Finally, the 240-day prong requires that the IRS assessed the tax at least 240 days before the petition date, and that period is tolled while an offer in compromise is pending plus thirty days after the OIC is rejected or withdrawn.
IRS tax debt and IRS audit defense counsel can evaluate whether the three-year and two-year prongs of the 3-2-240 rule have been satisfied for each tax year at issue, assess whether any events have tolled the running of the statutory periods, and advise on whether the tax debt qualifies for discharge in the planned bankruptcy.
What Events Toll the 3-2-240 Periods and Delay Your Discharge Eligibility?
The 3-2-240 periods are tolled during any time an offer in compromise was pending with the IRS, extending each period by the length of the OIC pendency plus thirty additional days. A prior bankruptcy filing also tolls all three periods for the full duration of that case plus six months. A taxpayer who filed a prior bankruptcy and later submitted an offer in compromise may therefore need to wait substantially longer than the baseline periods before the tax debt qualifies for discharge.
Tax audits and adjustments and international tax compliance counsel can advise on the specific events that toll the 3-2-240 periods, assess whether a prior offer in compromise, Tax Court petition, or bankruptcy filing has extended the period before the tax debt becomes dischargeable, and develop the timing strategy for the bankruptcy filing.
2. Chapter 7 Vs. Chapter 13: Which Bankruptcy Chapter Works Best for Your Tax Debt?
The choice between Chapter 7 and Chapter 13 bankruptcy shapes not only the timeline for resolving tax debt but also how non-dischargeable taxes are handled. The comparison matrix below identifies the key differences between the two chapters as applied to a taxpayer carrying both dischargeable and non-dischargeable federal tax debts.
| Category | Chapter 7 | Chapter 13 | Law Firm Focus |
|---|---|---|---|
| Tax discharge scope | Full discharge of qualifying income taxes that satisfy the 3-2-240 rule | Non-dischargeable taxes paid through 3-5 year repayment plan | Assess 3-2-240 eligibility and recommend chapter accordingly |
| Automatic stay effect | Immediate halt to all IRS collection; case closed within months | Collection halted for duration of repayment plan | Confirm no IRS lien enforcement during plan period |
| Asset treatment | Non-exempt assets liquidated; tax debts paid from proceeds | Debtor retains assets and repays through disposable income | Analyze exemption planning before filing to protect key assets |
| Ideal candidate | Individual with mostly unsecured debt and limited regular income | Individual with regular income who wants to keep property | Conduct means test analysis and income projection |
Bankruptcy for tax relief and Chapter 7 bankruptcy counsel can evaluate which chapter produces the most favorable outcome for the taxpayer's specific mix of dischargeable and non-dischargeable tax debts, assess whether the taxpayer satisfies the means test for Chapter 7 or whether Chapter 13 is the more appropriate vehicle, and advise on the most effective bankruptcy filing strategy.
3. The Two Categories of Tax Debt That Bankruptcy Can Never Eliminate
Certain categories of federal tax debt are absolutely non-dischargeable in bankruptcy, regardless of how long ago the tax was assessed or the return was filed. A taxpayer who owes trust fund taxes or tax debts attributable to fraud or willful evasion cannot use the bankruptcy discharge to eliminate those obligations.
Why Trust Fund Taxes Are the One Category Bankruptcy Can Never Eliminate
Trust fund taxes are the income taxes, Social Security taxes, and Medicare taxes that an employer withholds from employees' wages and holds in trust for the IRS. Under 11 U.S.C. Section 523(a)(1)(A), these taxes are classified as priority obligations under 11 U.S.C. Section 507(a)(8) and the bankruptcy discharge cannot touch them. The IRS may also assess the trust fund recovery penalty under IRC Section 6672 against any responsible person who willfully failed to collect or pay over the withheld amounts.
Business tax and FATCA counsel can advise on whether the specific tax obligation qualifies as a trust fund tax that is categorically non-dischargeable, assess whether the taxpayer faces personal liability for the trust fund recovery penalty under IRC Section 6672, and develop the defense strategy for minimizing trust fund penalty exposure.
How Tax Fraud and Willful Evasion Permanently Block the Bankruptcy Discharge
The bankruptcy discharge does not eliminate a tax debt when the debtor filed a fraudulent return or willfully attempted to evade tax under 11 U.S.C. Section 523(a)(1)(C). The IRS bears the burden of proving fraudulent conduct by a preponderance of the evidence. Common indicators include under-reporting income, claiming fictitious deductions, concealing assets, and failing to file returns for multiple consecutive years despite having taxable income.
Tax fraud and Chapter 13 bankruptcy counsel can advise on whether the IRS has characterized any portion of the tax liability as resulting from fraud or willful evasion under 11 U.S.C. Section 523(a)(1)(C), assess the strength of any fraud characterization, and develop the defense strategy.
4. Automatic Stay, Tax Liens, and Protecting Your Property after Discharge
The automatic stay that takes effect the moment a bankruptcy petition is filed is the most powerful immediate protection the Code provides against IRS collection activity. However, a federal tax lien recorded before the filing survives the discharge and continues to encumber the debtor's property until it is specifically addressed.
How the Automatic Stay Stops Every IRS Collection Action the Moment You File
The automatic stay under 11 U.S.C. Section 362(a) takes effect at the instant the bankruptcy petition is filed. It immediately prohibits the IRS from levying bank accounts or wages, seizing property, auditing dischargeable tax years, or offsetting refunds. An IRS that violates the automatic stay is subject to contempt sanctions and must return any property seized in violation.
Automatic stay and IRS tax levy counsel can advise on the scope of the automatic stay as applied to IRS collection activity, assess whether any IRS action taken after the petition violated the automatic stay, and develop the motion to enforce the stay and seek sanctions against the IRS for any violations.
Why a Discharged Tax Debt Can Still Leave a Lien on Your Home
A federal tax lien recorded before the bankruptcy petition is not eliminated by the discharge and continues to encumber the debtor's property after the case closes. The debtor's personal obligation to pay the underlying tax is discharged, but the IRS retains the right to enforce the lien against the specific pre-petition property to which it attached. A debtor who wants to sell or refinance that property must resolve the lien through a discharge, subordination, or adversary proceeding.
Property liens and real property tax assessment counsel can advise on the survival of federal tax liens through the bankruptcy discharge, assess whether lien avoidance under 11 U.S.C. Section 522(f) or an adversary proceeding is available to eliminate the lien's effect on the debtor's property, and develop the post-discharge lien resolution strategy.
25 Mar, 2026
