Contrary to popular belief, some income tax debts CAN be discharged in bankruptcy if they meet the "3-2-240" rule.
The Rules
To be dischargeable in a Chapter 7 bankruptcy:
- 3-Year Rule: The tax return for the debt must have been due at least 3 years before you file for bankruptcy (including extensions).
- 2-Year Rule: You must have actually filed the tax return at least 2 years before filing for bankruptcy.
- 240-Day Rule: The tax must have been assessed by the IRS at least 240 days before filing for bankruptcy.
Exceptions
You cannot discharge taxes if:
- You filed a fraudulent return.
- You willfully attempted to evade paying taxes.
- The debt is for "trust fund" taxes (like payroll taxes withheld from employees).