Most income tax debt can be eliminated using bankruptcy. In general terms, if certain timing rules are met, and the tax claim is not attributable to “fraudulent conduct,” bankruptcy may represent the best solution. The “3-2-240 rule” makes all the difference. We’ll break it down in plain English with simple examples.
Many people believe that tax debt is permanent—that once you owe the IRS, you’ll carry that burden for life. The truth is different. Certain income tax debts can be discharged in bankruptcy if they meet specific conditions. The most important of these is what tax professionals often call the “3-2-240 rule.”
What the 3-2-240 Rule Means
The “3-2-240 rule” is simply a way of remembering three timing tests that must be met before a tax debt becomes eligible for discharge in bankruptcy. These are:
- 3 years since the tax return was due. The tax return for the year in question must have been due at least three years before you file for bankruptcy.
- 2 years since the tax return was filed. If you file late, you must have filed the tax return at least two years before the bankruptcy filing date (if you never filed the return, the debt generally cannot be discharged.)
- 240 days since the IRS assessed the debt. The IRS assessment—the formal act of legally recording what you owe—must be at least 240 days old. This is the case for each assessment, noting that there can be several tax assessments for a particular tax period.
All three rules must be satisfied at the time you file bankruptcy for that tax year’s debt to be potentially erased.
A Simple Example
Suppose you owe taxes for the 2020 tax year. That return was due on April 15, 2021. If you filed on time, the 3-year clock started then. By April 15, 2024, the first requirement is satisfied. Since you filed on time in 2021, the 2-year filing requirement is also satisfied. If the IRS assessed the debt shortly after filing in 2021, and there are no subsequent amended return or audit assessments, the 240-day rule would also be met long before 2024. This means that by April 15, 2024, your 2020 tax debt might be dischargeable in bankruptcy.
Now consider a different situation: you filed that same 2020 return late, in 2023. The 3-year rule is still measured from the original April 15, 2021 due date, however, the 2-year rule runs from your actual filing date. This means your earliest discharge date might not be until 2025, even though the tax itself was due years earlier.
Why the Rules Exist
The bankruptcy system is designed to give honest but unfortunate debtors a fresh start—not gamesmanship. The 3-2-240 rules exist to strike a balance: taxpayers must wait long enough that the IRS has had a fair chance to collect, but not so long that people are permanently trapped. If someone purposefully files a return late, the system ensures they cannot immediately turn around and erase the debt through bankruptcy by filing immediately before the 3 year rule is satisfied.
Important Exceptions
Not every tax debt is eligible for discharge, even if the timing rules are met. For example:
- Fraudulent or evasive returns are never dischargeable. If the IRS believes you deliberately tried to avoid filing or paying, bankruptcy won’t help.
- Payroll taxes and trust fund taxes are not dischargeable. These involve money withheld from employees, and the law treats them differently.
- Recent tax liens may survive even if the underlying tax debt is discharged. The debt might be erased, but the lien may remain attached to property you own. In this case, additional maneuvering may be necessary to resolve the entirety of the tax debt.
This is why even a straightforward set of rules like “3-2-240” requires careful application to your personal situation.
Why Professional Review Matters
At first glance, the 3-2-240 rule looks simple, but real life often complicates the timeline. Late filings, IRS audits, amended returns, installment agreements, or offers in compromise can all affect when the clocks start or stop. One miscalculation could mean the difference between walking away from the tax claim or being stuck with it after bankruptcy.
That’s why many people choose to have a professional—whether a credit counselor or a tax bankruptcy attorney—review their case. A free credit counselor can help you explore non-bankruptcy options if your tax debt is manageable. A tax-bankruptcy attorney can analyze complex tax transcripts, and determine the best bankruptcy type and time to file for maximum relief.
The Takeaway
Tax debt isn’t always forever. If enough time has passed, and “the stars are aligned,” bankruptcy can erase income tax debt that once seemed impossible to overcome. The 3-2-240 rule is the key to understanding when this relief might be available. While the rules are technical, the outcome is simple: the possibility of a genuine financial fresh start.