3-Year, 2-Year & 240-Day Rules for Tax Discharge in Bankruptcy

Income tax debt can be wiped out in a bankruptcy case, but only when it clears three timing gates at once: the return must have been due more than three years before you file, the return must have actually been filed more than two years before you file, and the IRS must have assessed the tax more than 240 days before you file. Those are the core rules for discharging tax debt in bankruptcy, and missing any one of them by a single day keeps the full liability alive on the other side of the case. The rules come from 11 U.S.C. § 507(a)(8) and 11 U.S.C. § 523(a)(1), and they apply to federal, state, and local income taxes alike.¹²

Which Tax Debts Can Be Discharged at All

Only income taxes are candidates. Payroll taxes withheld from employees, sales taxes a business collected from customers, excise taxes, and customs duties are trust-fund obligations that can never be eliminated in bankruptcy.²

Even income taxes are permanently off the table if the return was fraudulent or the taxpayer willfully tried to evade the tax. A court that finds hidden assets or intentional underreporting will deny discharge on those amounts no matter how old the debt is.²

Interest and Penalties

Interest on a dischargeable tax is discharged along with the tax. Penalties are analyzed on their own. Under 11 U.S.C. § 523(a)(7), a tax penalty tied to a transaction or event that occurred more than three years before the bankruptcy filing is dischargeable, even if the underlying tax is not.² Late-filing and late-payment penalties alone can run to 25% of the original tax, so discharging just the penalties on an otherwise surviving tax can still save real money.

The Three-Year Rule: When the Return Was Due

The first gate looks at the last due date of the return, including any extension. It has nothing to do with when you actually filed or when you paid. Under 11 U.S.C. § 507(a)(8)(A)(i), an income tax is a non-dischargeable priority claim if the return for that year was due within three years before the petition date.¹ For the tax to qualify for discharge, the return must have been due more than three years before your filing date.

Extensions move the date. A federal return for the 2022 tax year was originally due April 15, 2023, which sets the three-year mark at April 15, 2026. If you requested an extension to October 15, 2023, the three-year mark shifts to October 15, 2026, and filing bankruptcy even one day earlier keeps the tax as a priority claim. You do not get to ignore the extension because it is inconvenient; if the IRS granted it, the clock runs from the extended date regardless of when you actually submitted the return.

The Two-Year Rule: When the Return Was Filed

Clearing three years since the due date is not enough. Under 11 U.S.C. § 523(a)(1)(B), a tax stays non-dischargeable if no return was ever filed, or if a late return was filed less than two years before the petition.² The clock runs from the date the IRS received your return, not the postmark and not the due date.

The rule blocks a specific move: filing years of delinquent returns and immediately racing to bankruptcy court. If you owed for 2018 and did not file that year’s return until 2024, the two-year window would not even open until 2026.

What Counts as a Return

When a taxpayer does not file, the IRS often prepares a Substitute for Return based on W-2s and 1099s. The Bankruptcy Code says outright that an SFR prepared under IRC § 6020(b) is not a “return” for discharge purposes.² If the only document on file for a tax year is an IRS-prepared SFR, that liability may be permanently non-dischargeable no matter how much time passes.

The statute also requires a qualifying return to satisfy “applicable filing requirements.” Some courts read that phrase to mean any return filed after its original due date is disqualified — the so-called one-day-late rule. Other courts reject that reading and apply an older four-part test that asks whether the document was signed under penalty of perjury, contained enough information to compute the tax, and reflected an honest attempt to comply. The Supreme Court has not resolved the split, so the answer can depend on the circuit you file in. The safe practice is to file every return on time, even in years you cannot pay.

The 240-Day Rule: When the Tax Was Assessed

The third gate is the IRS’s formal recording of the tax, called an assessment. Under 11 U.S.C. § 507(a)(8)(A)(ii), a tax assessed within 240 days before the petition is a priority claim and cannot be discharged.¹ You need at least 240 days of daylight between the assessment and your filing date.

For a return that gets filed and processed on the normal timeline, assessment happens within a few weeks and the three-year rule ends up being the longer wait. The 240-day rule becomes decisive after an audit. If the IRS examines an old return and determines you owe more, that additional liability carries a new assessment date, and the 240-day clock starts over for the new amount, potentially years after the original return was processed.

Finding Your Assessment Date

The assessment date is not the date you filed and it is not the date on any notice you received. The only reliable source is your IRS account transcript, available through your online IRS account or by submitting Form 4506-T.³ Transaction Code 150 shows the original assessment when the return was processed, and any later assessment from an audit shows up as its own transaction code with its own date.⁴ Guessing the assessment date from when a letter arrived is a good way to file bankruptcy a few weeks too early.

Tolling Events That Push the Dates Out

The clocks above do not necessarily run continuously. Certain events pause them, and different events pause different rules, which is the detail most people miss when doing the math themselves.

A Prior Bankruptcy

An earlier bankruptcy pauses the three-year rule and the 240-day rule for the length of that case plus another 90 days.¹ A prior case that lasted five months adds roughly 240 days to both those calculations. The two-year filing rule under § 523(a)(1)(B) has no statutory tolling for prior bankruptcies, so that clock keeps running the whole time.

An Offer in Compromise

Submitting an Offer in Compromise pauses the 240-day assessment clock for the entire time the offer is pending plus 30 days.¹ The IRS often takes six months to a year to work an offer, so the tolling can be substantial. It applies whether the offer is accepted, rejected, or withdrawn. Anyone eyeing bankruptcy as a backup should think twice about submitting an OIC first.

Collection Due Process Hearings and Appeals

A Collection Due Process hearing or other administrative appeal that legally stops IRS collection suspends the § 507(a)(8) lookback periods for the duration of that prohibition plus 90 days.⁵ Every action that keeps the IRS at bay also delays the day you can eliminate the debt in bankruptcy.

All Three Clocks Have to Clear Together

A tax is dischargeable only when all three tests are satisfied on the same date. Passing two of three is the same as passing none. Consider a 2021 federal return with no extension, due April 15, 2022:

You filed on time, and the IRS assessed it in May 2022. The two-year and 240-day rules cleared long ago. The three-year rule clears April 15, 2025, and you can file bankruptcy after that.
Same year, but you did not file the return until March 2024. The three-year rule still clears April 15, 2025, and the 240-day rule is likely fine from the mid-2024 assessment. But the two-year filing rule keeps the tax non-dischargeable until March 2026.
Same year, and an audit produced a new assessment in January 2025. Even with the three-year and two-year rules satisfied, the 240-day clock restarted, so the earliest safe filing date is roughly September 2025, and later if any tolling event applies.

Mapping every deadline on a calendar, with every tolling event added in, is the only reliable way to find the earliest safe filing date. A forgotten OIC from years ago or a dismissed prior bankruptcy can push it out by months.

Tax Liens Survive the Discharge

Discharge eliminates your personal obligation to pay a qualifying tax. It does not remove a federal tax lien that was already recorded before you filed. The IRS states that “your tax debt, lien, and Notice of Federal Tax Lien may continue after the bankruptcy.”⁶ After discharge the IRS can no longer garnish wages or levy accounts for that debt, but a pre-petition lien continues to encumber the property you owned when you filed.

The lien does not attach to property you acquire after the petition date, and it cannot grow beyond the value of the encumbered property as of that date. A home worth $200,000 with a $50,000 tax lien at filing keeps that $50,000 lien after discharge, but a car you buy the following year is untouched.

Once the underlying liability becomes legally unenforceable, the IRS is required to release the lien.⁷ In Chapter 7 cases the release generally follows within about 30 days of closing actions, but it does not always happen automatically. You may need to contact the IRS Centralized Insolvency Operation at 800-973-0424, and occasionally a court motion is required. Plan for that timing if you intend to sell or refinance the property.

Chapter 7 and Chapter 13 Handle Tax Debt Differently

In Chapter 7, tax debts that pass all three timing tests are discharged outright and you owe nothing further. Taxes that fail any test survive the case in full.

Chapter 13 restructures the debt through a three-to-five-year plan. Priority tax debts — the ones that flunked the timing tests — must be paid in full through the plan, though no additional penalties or interest accrue during the plan period. Non-priority tax debts are treated like other unsecured claims and may be paid only partially, with the remainder discharged when the plan completes. Chapter 13 can still discharge certain tax penalties and post-petition interest that would survive a Chapter 7 case. The choice between the two chapters usually turns on non-exempt assets, whether property needs protection from a tax lien, and whether structured payments on priority taxes are more workable than owing the full amount at once.

State Income Taxes Run on the Same Framework

The three-year, two-year, and 240-day rules apply to state and local income taxes as well. The Bankruptcy Code speaks in terms of “a tax on or measured by income or gross receipts” without limiting the analysis to federal taxes.¹ A state income tax return also has to have been due more than three years ago, filed more than two years ago, and assessed more than 240 days ago.

State due dates, extensions, and assessment practices do not always match the federal calendar. Run the analysis separately for each taxing authority, because a debt can be dischargeable federally but not at the state level or vice versa. State tax liens follow the same rule as federal ones and survive discharge to the extent they attached to pre-petition property.

1
Office of the Law Revision Counsel. 11 USC 507 – Priorities
2
Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge
3
Taxpayer Advocate Service. How Long the IRS Can Collect Your Taxes (CSED Explained)
4
Taxpayer Advocate Service. Decoding IRS Transcripts and the New Transcript Format Part II
5
Internal Revenue Service. General Provisions of Bankruptcy
6
Internal Revenue Service. Understanding a Federal Tax Lien
7
Internal Revenue Service. Lien Release and Related Topics