Can You File Bankruptcy on Taxes? IRS Debt Discharge Rules

The 3-2-240 Rule for Tax Discharge

Some income tax debts can be discharged in bankruptcy if they meet ALL of these conditions:

1. 3-year rule: The tax return was due at least 3 years before filing (including extensions)
2. 2-year rule: The return was actually filed at least 2 years before filing bankruptcy
3. 240-day rule: The IRS assessed the tax at least 240 days before filing (or the tax has not been assessed at all)

If all three conditions are met AND the return was not fraudulent or a late-filed substitute return, the income tax debt is dischargeable.

Taxes That Cannot Be Discharged

• Recent income taxes: Returns due within 3 years of filing
• Trust fund / payroll taxes: Never dischargeable
• Tax fraud penalties: If you filed a fraudulent return or willfully evaded taxes
• Unfiled returns: Taxes for years where you never filed a return (some courts also reject "substitute for return" assessments by the IRS)
• Tax liens: Even if the underlying tax is discharged, a recorded tax lien survives bankruptcy and attaches to property you owned at filing. You must pay the lien to clear title.