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The 3-2-240 Rule Explained: Discharging Tax Debts in Bankruptcy


Navigating the complexities of bankruptcy and IRS tax debts can be confusing for many individuals. A crucial aspect of understanding how to manage or discharge tax debts through bankruptcy involves the “3-2-240 Rule.” This rule outlines specific conditions under which tax debts may be eligible for discharge in bankruptcy proceedings. At Wadhwani & Shanfeld, we recognize the importance of demystifying these conditions to empower those grappling with financial burdens. Contact our Los Angeles bankruptcy attorneys to discuss your specific situation with regard to the 3-2-240 Rule and its implications for discharging tax debts in bankruptcy.

The 3-2-240 Rule is a shorthand reference to the time-related criteria that tax debts must meet to be considered dischargeable in bankruptcy. It encompasses three critical timelines related to the tax return’s due date, the actual filing date, and the IRS’s assessment of the tax debt. Let’s break down each component:

The Three-Year Rule

The first part of the rule stipulates that the tax debt must be related to a tax return due at least three years before the bankruptcy filing, including any extensions. For example, if your tax return were due on April 15, 2018, you wouldn’t be eligible to discharge the related tax debt in a bankruptcy filed before April 15, 2021. This criterion ensures that only tax debts from previous years are considered, not recent liabilities.

The Two-Year Rule

The second component requires that the tax return was actually filed at least two years before the bankruptcy petition. This rule emphasizes the importance of filing tax returns, even if you can’t pay the tax owed at the time. It’s crucial to note that this applies to returns filed by the taxpayer, not substitute returns filed by the IRS on behalf of a taxpayer who failed to file.

The 240-Day Rule

Finally, the tax debt must have been assessed by the IRS at least 240 days before filing for bankruptcy or not assessed at all. This part of the rule accounts for the IRS’s actions in determining the amount owed. The assessment period can be extended if the IRS suspended collection activity due to an offer in compromise or a previous bankruptcy filing.

Application in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, also known as liquidation bankruptcy, meeting the 3-2-240 Rule criteria can lead to the discharge of eligible tax debts. This means that the debtor can be relieved of the obligation to pay these debts, assuming no disqualifying factors such as fraud are present.

Application in Chapter 13 Bankruptcy

Chapter 13 bankruptcy, which involves a repayment plan over three to five years, also considers the 3-2-240 Rule for determining which tax debts can be treated as unsecured claims. Unsecured tax debts that meet the rule may be discharged at the end of the repayment period, similar to other unsecured debts like credit card balances.

Exceptions and Considerations

While the 3-2-240 Rule provides a framework for discharging certain tax debts, there are exceptions and additional considerations:

– Fraud and Willful Evasion: Tax debts related to fraudulent tax returns or willful attempts to evade taxes are not dischargeable, regardless of the 3-2-240 Rule.

– Tax Liens: If the IRS has placed a tax lien on your property before you file for bankruptcy, the lien may remain attached to the property, even if the underlying tax debt is discharged.

– Non-Dischargeable Taxes: Certain taxes, such as payroll taxes or penalties related to non-tax debts, are not dischargeable in bankruptcy.

Navigating Your Bankruptcy and Tax Debt Strategy

Understanding the nuances of the 3-2-240 Rule and its application to your specific situation requires careful analysis and strategic planning. Here are steps to consider:

  1. Review Your Tax History: Assess your tax returns, payments, and IRS assessments to determine if your tax debts meet the 3-2-240 criteria.
  2. Consult with a Bankruptcy Attorney: An experienced bankruptcy attorney can help you navigate the complexities of discharging tax debts and advise you on the best course of action.
  3. Consider Timing: The timing of your bankruptcy filing can significantly impact the dischargeability of tax debts. Strategic planning can maximize the debts eligible for discharge.

Contact Wadhwani & Shanfeld

The 3-2-240 Rule is a critical component of discharging tax debts in bankruptcy, offering a pathway to financial relief for those burdened by eligible tax liabilities. By understanding and meeting these specific conditions, individuals can navigate the bankruptcy process with greater clarity and confidence.

At Wadhwani & Shanfeld, we’re dedicated to guiding our clients through these challenging financial landscapes, providing expert advice and support every step of the way. If you’re struggling with IRS tax debts and considering bankruptcy, we’re here to help you explore your options and find a solution tailored to your needs. Contact us for a consultation.



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