When Can You Discharge Tax Debt in Chapter 7? Florida's Three-District Guide

Most people believe that tax debt can never be discharged in bankruptcy. That belief is incorrect. Under specific conditions set forth in 11 U.S.C. Section 523(a)(1) and Section 507(a)(8), certain income tax obligations can be discharged in a Chapter 7 bankruptcy just like credit card debt or medical bills. The key is meeting a set of timing requirements that practitioners commonly refer to as the "3-2-240 rule."

Attorney Steven C. Fraser evaluates tax discharge eligibility for every client who reports outstanding IRS or state tax obligations. This guide explains the rules, the exceptions, and how they apply across Florida's three bankruptcy districts.

The 3-2-240 Rule Explained

For an income tax debt to be dischargeable in Chapter 7, all three of the following timing requirements must be satisfied at the time of filing:

Rule 1: The Three-Year Rule

The tax return for the year in question must have been due at least three years before the bankruptcy filing date. This includes any extensions. For example, a 2022 federal income tax return was originally due April 15, 2023. If the taxpayer obtained an automatic six-month extension, the extended due date was October 15, 2023. The three-year period runs from the applicable due date.

Rule 2: The Two-Year Rule

The tax return must have been actually filed at least two years before the bankruptcy filing date. If you filed a late return for the tax year in question, the two-year period runs from the date the return was received by the IRS -- not the date it was due.

This rule has a critical corollary: if the IRS prepared a Substitute for Return (SFR) on your behalf because you did not file, that SFR is generally not considered a "filed return" for purposes of the two-year rule. You must actually file your own return. Some courts have held that a late-filed return after an SFR assessment does not qualify as a "return" at all under the definition in Section 523(a), potentially making the tax debt non-dischargeable regardless of timing.

Rule 3: The 240-Day Rule

The tax must have been assessed by the IRS at least 240 days before the bankruptcy filing date. Assessment typically occurs when the IRS processes your filed return and records the tax liability on its books. For most taxpayers who file timely returns, assessment occurs within weeks of filing. For those who file late or are subject to audit, the assessment date may be significantly later.

The 240-day period is extended by any time during which an offer in compromise (OIC) was pending with the IRS, plus 30 days. It is also tolled during any prior bankruptcy case.

Priority vs. Non-Priority Tax Claims

The Bankruptcy Code distinguishes between priority and non-priority tax claims. Priority tax claims -- those that do not meet the 3-2-240 requirements -- must be paid in full and are not dischargeable. They are classified as eighth-priority claims under Section 507(a)(8).

Non-priority tax claims -- those that satisfy all three timing rules -- are treated as general unsecured claims. In Chapter 7, general unsecured claims receive distributions only if there are assets remaining after secured and priority claims are paid. In most no-asset consumer Chapter 7 cases, non-priority tax claims receive nothing and are discharged.

Exceptions That Block Discharge

Even if the 3-2-240 timing requirements are met, certain conduct by the taxpayer can render the tax debt non-dischargeable:

• Fraud or willful evasion: Tax debts arising from fraudulent returns or willful attempts to evade tax are never dischargeable under Section 523(a)(1)(C). This includes filing false returns, concealing income, or destroying records.
• Failure to file: If you never filed a return for the tax year, the debt is generally non-dischargeable. As noted above, an IRS Substitute for Return does not satisfy the filing requirement.
• Late-filed returns after SFR: Several circuit courts, including some that affect Florida practice, have held that a return filed after the IRS has already assessed the tax through an SFR is not a "return" for discharge purposes. The Eleventh Circuit's position on this issue should be evaluated carefully.

IRS Tax Liens and Chapter 7

A critical nuance is the distinction between personal liability and lien rights. Chapter 7 discharge eliminates your personal liability for dischargeable tax debt -- the IRS can no longer garnish your wages, levy your bank accounts, or sue you personally. However, if the IRS recorded a Notice of Federal Tax Lien (NFTL) before you filed bankruptcy, the lien survives the discharge and remains attached to any property you owned at the time of filing.

In practice, this means:

• If you own a home with equity and the IRS has a recorded tax lien, the lien attaches to the equity and must be satisfied when the property is sold.
• If you have no significant assets and the IRS lien attaches to nothing of value, the lien is effectively worthless and expires on its own after the Collection Statute Expiration Date (CSED).
• The lien does not attach to property acquired after the bankruptcy filing date -- only pre-petition property.

Florida-Specific Considerations

Florida does not impose a state income tax, which simplifies tax discharge analysis for most Florida residents. The primary tax debts at issue in Florida bankruptcy cases are federal income taxes. However, Florida residents who previously lived in income-tax states (New York, California, Illinois, etc.) may carry state tax obligations from those prior residences.

State tax debts from other jurisdictions are treated under the same 3-2-240 framework. The bankruptcy court in Florida can discharge qualifying state tax debts from other states, provided the timing requirements are met and no exceptions apply.

For self-employed Florida residents, payroll taxes (trust fund taxes withheld from employee wages) are never dischargeable in bankruptcy. The "trust fund recovery penalty" under IRC Section 6672 is a personal liability of the responsible person and is excepted from discharge under Section 523(a)(1)(A).

Obtaining IRS Transcripts for Analysis

Accurate discharge analysis requires detailed IRS records. Attorney Fraser obtains the following transcripts for every client with potential tax discharge issues:

• Account Transcript: Shows the filing date, assessment date, payments, penalties, and interest for each tax year. This document is essential for verifying the 240-day assessment rule.
• Return Transcript: Confirms that a return was filed and the date it was received by the IRS. This verifies the two-year filing rule.
• Record of Account: A combined view of both the account and return transcripts.
• Tax Lien Search: A search of county records to determine whether a Notice of Federal Tax Lien has been recorded.

These transcripts are obtained through IRS Form 4506-T (Request for Transcript of Tax Return) or through the IRS's e-Services portal. The analysis must be current -- IRS records change as payments are applied, penalties accrue, and assessment dates are updated.

Practical Example: Multi-Year Tax Debt

Consider a Florida resident who owes the IRS $45,000 across three tax years:

In this scenario, filing in April 2026 would discharge $18,000 of the $45,000 owed. Strategic timing -- waiting until October 2025 or later for the 2021 late-filed return to satisfy the two-year rule -- could increase the dischargeable amount. Attorney Fraser calculates the optimal filing date to maximize tax discharge for every client.

This article is for general informational purposes only and does not constitute legal advice. Consult with a licensed attorney for advice specific to your situation.