Discharging Tax Debt in Bankruptcy: When Can IRS and State Tax Bills Be Wiped Out?
In Mississippi, tax debt feels like a weight that never lifts. Many people assume tax bills stay with them forever, no matter what. But that is not always true. In some cases, bankruptcy can help clear certain tax debts. The process is not simple, though, and the details matter more than most people realize.
What Is the 3-2-240 Rule?
Taxes do not disappear easily in bankruptcy. The key timing rule, known as the 3-2-240 rule, decides if federal and state income taxes can be wiped out.
The first part, the “3-year rule,” means the tax return was due at least three years before you file for bankruptcy. The “2-year rule” requires that you filed that tax return at least two years before the bankruptcy. Finally, the “240-day rule” states that the IRS or the Mississippi Department of Revenue assessed the tax at least 240 days before you filed.
If these conditions are not met, the taxes stay. Fraud or willful evasion makes the debt non-dischargeable, no matter how old it is.
Chapter 7 vs. Chapter 13
Chapter 7 can completely erase qualifying tax debts if they meet the timing rules. However, you have to pass the means test to file Chapter 7, and some assets might be sold to pay creditors.
On the other hand, Chapter 13 allows you to set up a payment plan over three to five years. While it does not automatically wipe out all taxes, it stops aggressive IRS collection actions and gives you more time to pay priority tax debts in full. Older taxes that qualify can sometimes be discharged at the end of the plan.
Planning Strategies Beyond Bankruptcy
Some people consider an Offer in Compromise, where the IRS agrees to settle for less than owed if you prove you cannot pay. In other cases, waiting a bit longer to meet the 3-2-240 timing can make a huge difference before filing for bankruptcy.
Call for Help Today
At O’Brien Law Firm, we understand how stressful tax debt can feel. We help clients across Mississippi figure out if bankruptcy can truly clear tax bills or if another strategy makes more sense. If you feel stuck and want to explore a fresh start, reach out to us today. We are ready to guide you and help protect your financial future.
