For some people, filing for bankruptcy is the best choice for getting a clean financial slate.  Before opting for that choice, however, individuals should be aware of all of the pros and cons of filing, including timing requirements related to discharging tax debts.

Unpaid tax debt can be discharged in bankruptcy. In order for them to be discharged in bankruptcy, however, a taxpayer must make sure to meet the required time requirements for when taxes were due, if tax returns were filed, and when the IRS completed an assessment.

The 240-day rule refers to the IRS assessment. The IRS must have assessed any federal tax debt at least 240 days before a taxpayer files for bankruptcy. Assessments can come from self-reporting or an IRS audit. It's part of the 3-2-240 Rule, which details the three timing rules about taxes in bankruptcy.

The 3-2-240 Rule

The three refers to requiring that, for a tax to be eligible for discharge during bankruptcy, the tax must have been due at least three years before a bankruptcy filing. The two refers to requiring taxpayers to have filed their taxes for at least two years before they file for bankruptcy.

Not all taxes can be discharged in bankruptcy, but those that can be discharged must follow all three parts of this rule. Failure to follow any one of these three rules can result in a taxpayer still owing all taxes due even after filing for bankruptcy.

Timing requirements are just one component of tax discharge as part of filing for bankruptcy. For example, taxpayers cannot have tax debts discharged that relate to unfiled tax returns.

Beyond bankruptcy, Taxpayers should consider if other settlement and payment options with the IRS would be a better fit for their situation. Alternatively, they may not qualify for discharge under the 3-2-240 Rule.

Get Help From an Experienced CPA and Tax Attorney

An experienced tax attorney can walk taxpayers through the various options, including which ones are the best options for them.

If you have questions about bankruptcy and how it can affect your tax debts, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.