STOCKTON, CA – Income taxes owed to the Internal Revenue Service or the California Franchise Tax Board may qualify for discharge in Chapter 7 or Chapter 13 bankruptcy, but only when the debt satisfies a specific set of timing requirements known as the 3-2-240 rule. Stockton bankruptcy attorney Alia Khan Abedelal of Khan Law (https://akhanlawoffices.com/are-taxes-dischargeable-in-bankruptcy/) is providing guidance on which tax debts qualify, how Chapter 7 and Chapter 13 treat tax obligations differently, and what happens to tax liens after a bankruptcy case closes.
According to Stockton bankruptcy attorney Alia Khan Abedelal, certain income taxes may be dischargeable under 11 U.S.C. Section 523(a)(1) when they meet all required conditions. The rules apply to both federal income taxes owed to the IRS and state income taxes owed to the FTB. “Not every tax obligation qualifies for discharge,” Abedelal explains. “Payroll taxes, trust fund taxes, taxes connected to fraud or willful evasion, and tax debts tied to unfiled returns are generally not dischargeable, regardless of how old they are.”
Stockton bankruptcy attorney Alia Khan Abedelal notes that the 3-2-240 rule is a shorthand for three separate timing requirements, all of which must be satisfied. The Three-Year Rule under 11 U.S.C. Section 507(a)(8)(A)(i) requires that the tax return was due, including extensions, at least three years before the bankruptcy filing date. The Two-Year Rule under 11 U.S.C. Section 523(a)(1)(B) requires that the return was actually filed at least two years before the petition date. The 240-Day Rule under 11 U.S.C. Section 507(a)(8)(A)(ii) requires that the tax was assessed by the IRS or FTB at least 240 days before filing.
Attorney Abedelal highlights that filing a late return restarts the two-year clock from the date the return was actually submitted. If a 2020 return was filed late in January 2024, the borrower would generally need to wait until at least January 2026 before filing bankruptcy to discharge that tax year’s debt. Additionally, the 240-day period can be extended in certain circumstances, including when an offer in compromise was pending, plus 30 days, or when a prior bankruptcy stayed collection during that window, plus 90 days.
In Chapter 7, qualifying tax debts that meet the 3-2-240 rule may be classified as general unsecured claims and discharged at the conclusion of the case, typically within three to four months of filing. Bankruptcy cases for San Joaquin County are filed in the United States Bankruptcy Court for the Eastern District of California, Sacramento Division, and the U.S. Trustee Program’s Sacramento office serves both the Sacramento and Modesto Divisions in this district.
Attorney Abedelal explains that Chapter 13 treats tax debt differently. Tax obligations that fail the 3-2-240 timing rules are typically priority tax claims that generally must be paid in full through the three-to-five-year repayment plan. However, tax debts that meet all three timing requirements may be reclassified as nonpriority unsecured claims, receiving only a portion of the available funds and having any remaining balance discharged when the plan is completed. Chapter 13 may be a better option for filers with recent tax debts, existing tax liens, or income too high to qualify for Chapter 7 under the California means test.
The firm notes that filing any bankruptcy petition triggers the automatic stay under 11 U.S.C. Section 362, which immediately stops the IRS and FTB from garnishing wages, levying bank accounts, or seizing property while the case is pending. This protection can offer breathing room for individuals facing active collection efforts, though there are exceptions and creditors can ask the court for relief from the stay.
“Chapter 7 can eliminate qualifying income tax debt,” Abedelal adds. “But pre-existing tax liens on property usually survive. The IRS or FTB can no longer pursue wages or bank accounts for the discharged balance, but a properly recorded lien may still need to be addressed before selling or refinancing the property.”
The firm also notes that California state income tax debts owed to the FTB follow the same federal timing framework as IRS debts. After a discharge, the FTB will send a post-bankruptcy letter, Form FTB 4783, outlining any remaining tax debt. Sales and use tax issues handled by the California Department of Tax and Fee Administration, however, can be more complicated and should be reviewed on a case-by-case basis rather than assumed to follow the same discharge rules as income taxes.
Khan observes that one important distinction involves how the Bankruptcy Code treats substitute returns. Under 11 U.S.C. Section 523(a)(1)(B), a return prepared by the taxing authority under IRC Section 6020(b) generally does not start the two-year clock, meaning that in many substitute-for-return situations, the underlying tax debt may never become dischargeable through bankruptcy alone.
For individuals owing back taxes to the IRS or FTB, reviewing tax transcripts to identify discharge eligibility dates is often the first step toward determining whether bankruptcy offers a viable path to relief.
About Khan Law:
Khan Law is a Stockton-based bankruptcy practice focused on Chapter 7 and Chapter 13 cases for individuals and small businesses across California. Led by attorney Alia Khan Abedelal, who has practiced law since 2007 and is admitted to federal practice in the Eastern, Northern, and Central Districts of California and the Ninth Circuit Court of Appeals, the firm serves clients throughout San Joaquin County and beyond. For consultations, call (800) 419-8950.
Email: info@akhanlawoffices.com
Media Contact
Name
Alia Khan Law
Contact name
Alia Khan
Contact phone
(800) 419-8950
Contact address
11 S San Joaquin St
City
Stockton
State
CA
Zip
95202
Country
United States
Url
https://akhanlawoffices.com/
