IRS Tax Debt Bankruptcy: Strategic Discharge and the 3-2-240 Rules

1. The Strategic Intersection of Tax Law and the Bankruptcy Code

The primary advantage of filing for bankruptcy with IRS debt is the federal Automatic Stay, which provides an immediate injunction against all IRS collection activities.

Unlike an administrative hold requested through an IRS agent, the bankruptcy stay is a court-ordered mandate that halts the IRS's collection machine with clinical precision.

Once a petition is filed, the IRS is legally prohibited from:

Issuing new bank levies or wage garnishments.
Seizing personal or real property.
Initiating or continuing tax court proceedings without a lift-stay motion.

If the IRS is currently levying your bank account or garnishing your wages, please see our IRS Tax Levy Defense guide for immediate intervention strategies. While the stay provides immediate protection, the long-term objective of IRS tax debt bankruptcy is the statutory IRS tax discharge, which permanently releases you from personal liability for the debt.

2. The 3-2-240 Rule: Clinical Criteria for Tax Debt Discharge

To successfully achieve a federal tax bankruptcy discharge, the liability must pass a rigorous, three-part forensic timing test.

These rules are strictly applied. Missing a window by a single day can result in the debt surviving the bankruptcy, leaving you liable for the full amount.

The 3-Year Rule (the Return Due Date)

The tax return must have been due, including any validly obtained extensions, at least three years before the date the bankruptcy petition is filed. It is critical to verify if an extension was filed, as an extension moves the due date and, consequently, the earliest possible filing date for bankruptcy.

The 2-Year Rule (the Filing Date)

The taxpayer must have actually filed a legitimate tax return for the debt in question at least two years before filing for bankruptcy. A critical area of litigation involves the "Substitute for Return" (SFR). If the IRS filed an SFR because you failed to file, many jurisdictions hold that the debt can never be discharged because a return was not filed by the debtor.

The 240-Day Rule (the Assessment Date)

The IRS must have assessed the tax debt at least 240 days before the bankruptcy filing. Assessment usually occurs when a return is processed or following an audit. If the IRS makes a new assessment due to an amended return or an audit, the 240-day clock resets for that specific portion of the debt.

3. Forensic Transcript Auditing: Identifying the Exact Filing Window

Success in an IRS tax debt bankruptcy case depends on the surgical accuracy of the pre-filing audit, specifically the review of IRS Account Transcripts.

We do not rely on a taxpayer's memory of when a return was filed; we rely on the internal IRS transaction codes.

At SJKP LLP, we utilize IRS Form 4340 (Certificate of Assessments, Payments, and Other Specified Matters) and TXMODA transcripts to identify:

Transaction Code 150: The date the return was processed.
Transaction Code 290: Additional tax assessments that may reset the 240-day clock.
Transaction Code 520: Previous litigation or bankruptcy stays that "toll" or pause the discharge clock.
Transaction Code 480: Offer in Compromise filings that suspend the statutory windows.

This forensic approach ensures that we do not file your petition until the exact second your tax debt becomes eligible for a full IRS tax discharge. Filing even one day early results in a permanent loss of the discharge for that tax year.

4. Taxes That Cannot Be Discharged in Bankruptcy

While many income tax liabilities can be eliminated, the Bankruptcy Code identifies specific categories of tax debt that are categorically non-dischargeable.

Trust Fund Taxes: Unpaid payroll taxes (the portion of tax withheld from employees) can never be discharged. The IRS views these funds as being held in trust, and personal liability for these taxes survives any bankruptcy filing.
Recent Income Taxes: Any tax debt that fails to meet the 3-year, 2-year, or 240-day rules is considered a "Priority Claim" and must be addressed outside of a Chapter 7 discharge.
Excise Taxes and Custom Duties: Certain types of business-related taxes are prioritized by the government and are generally non-dischargeable regardless of their age.
Fraudulent Returns and Willful Evasion: If the IRS proves that a taxpayer filed a fraudulent return or willfully attempted to evade or defeat the tax, the debt will remain non-dischargeable.

5. Who IRS Tax Debt Bankruptcy Is (and Is Not) for

IRS tax debt bankruptcy is a powerful tool, but it is a strategic choice that requires a specific financial profile to be successful.

Ideal Candidates for Tax Discharge

Older Income Tax Debt: Individuals with significant liabilities from tax years that have aged beyond the 3-year window.
Clean Filing History: Taxpayers who filed their own returns, even if late, more than two years ago.
Active Collection Pressure: Those currently facing IRS levies or garnishments who need an immediate federal stay.

Non-Ideal Candidates

Payroll Tax Liabilities: Business owners whose primary debt is unpaid trust fund taxes.
Recent Assessments: Individuals whose tax debt was just determined via a recent audit or late filing.
Fraud Risk: Taxpayers with documented histories of hiding assets or utilizing shell companies to evade the IRS.

6. Chapter 7 Vs. Chapter 13: Choosing the Correct Litigation Path

In an IRS tax debt bankruptcy case, the choice between Chapter 7 and Chapter 13 is a tactical decision based on your income, assets, and the age of your tax liabilities.

Chapter 7: Surgical Elimination of Aged Tax Liabilities

Chapter 7 should not be viewed as a simple liquidation, but as a clinical termination of the IRS’s collection authority over specific tax years. In an IRS tax debt bankruptcy context, a successful Chapter 7 discharge acts as a permanent injunction, stripping the IRS of its status as a creditor for those liabilities. This is particularly effective for high-balance income tax debts that have already undergone the mandatory waiting periods. At SJKP LLP, we perform a forensic "Means Test" audit to ensure your eligibility, focusing on the preservation of your current assets while legally extinguishing the federal government’s right to personal recovery. If the 3-2-240 criteria are met, the IRS is forced to zero-out the account, including all accrued interest and failure-to-pay penalties.

Chapter 13: Forced Amortization and Priority Restructuring

When tax debts are too recent to qualify for a total discharge, Chapter 13 functions as a court-ordered restructuring of the federal government’s repayment terms.

Unlike an IRS Installment Agreement, where the IRS dictates the monthly amount, a Chapter 13 plan is governed by the Bankruptcy Court’s determination of your "disposable income." This allows us to reclassify your tax debt into three strategic tiers:

Priority Tax Claims: Recent debts (post-assessment) that are paid over 60 months without further IRS penalties.
Secured Tax Claims: Debts backed by a pre-petition Federal Tax Lien, which are addressed based on the actual value of your collateral.
General Unsecured Tax Claims: Older debts that may be partially paid at a fraction of their value, with the remaining balance permanently discharged at the completion of the plan.

This tiered approach ensures that you only pay the IRS what the law requires, effectively bypassing the aggressive collection tactics of the IRS's automated enforcement system.

7. Tolling Events: How the IRS Extends the Discharge Clock

Tolling events are legal pauses that stop the 3-2-240 clock, and they are the most common cause of failed tax bankruptcy filings.

Any action that prevents the IRS from collecting debt typically adds time to your waiting period.

Common tolling events include:

Offer in Compromise (OIC): The clock stops while an OIC is pending, plus an additional 30 days.
Collection Due Process (CDP) Hearings: Requesting a hearing pauses the 240-day assessment rule.
Previous Bankruptcy Filings: The time spent in a prior bankruptcy, plus 90 days, is added to the waiting period.
Innocent Spouse Claims: The investigation of these claims pauses the statutory windows.

8. Handling Federal Tax Liens in Bankruptcy Litigation

It is a critical tactical error to assume that a discharge of tax debt automatically removes a recorded Federal Tax Lien.

While the bankruptcy discharge eliminates your personal liability (in personam), the lien remains an "in rem" claim against your property.

If the IRS filed a Notice of Federal Tax Lien before you filed for bankruptcy, the lien remains attached to the equity you owned at the time of filing. In many cases, we must initiate an Adversary Proceeding or a specific motion to determine the validity and extent of the lien. If the value of your assets is less than the amount of the lien, we may be able to "strip" the lien or negotiate a favorable release once the underlying personal liability is discharged.

9. Why Sjkp Llp Is the Authority in Tax Bankruptcy Litigation

Successfully discharging tax debt requires a partner who can perform a surgical audit of IRS Account Transcripts to verify every date and assessment code.

At SJKP LLP, we do not guess when it is safe to file. We utilize forensic data to calculate the exact Discharge Date.

We move with precision to identify tolling events, challenge incorrect IRS assessments, and ensure your bankruptcy petition is timed to maximize the amount of debt eliminated. A properly timed IRS tax debt bankruptcy can permanently eliminate federal income tax liabilities. Timing is not just a strategy in tax bankruptcy: it is the law. We recognize that for our clients, tax debt requires a final, statutory conclusion rather than a temporary settlement.

21 Jan, 2026