When tax bills start to pile up, the weight can feel crushing. As penalties grow and the letters keep coming, you might be wondering if there’s any way out. For some Tennessee residents, bankruptcy offers a real path to relief.
But can bankruptcy eliminate tax debt in Tennessee? Here is what you need to know about whether you can erase your tax debt so that you can finally breathe again.
It Can Help in Certain Situations
Bankruptcy can eliminate tax debt in certain situations, but that is not always the case. Some taxes are dischargeable. That means you can wipe them out in bankruptcy, but others stick around no matter what.
Bankruptcy law makes a big distinction between the different types of tax obligations. For example, income tax debts may qualify for discharge if they meet specific timing rules. On the other hand, trust-fund taxes, such as payroll withholding taxes or debts resulting from fraud, are almost never dischargeable.
What Is the 3–2–240 Rule?
If you want to know if your tax debt can be wiped out, bankruptcy courts use the 3–2–240 rule. Here is how it works:
- The 3-year rule: The tax return must have been due at least three years before you file for bankruptcy. So, if you are filing in 2025, your 2021 taxes might qualify, but your 2023 taxes will not.
- The 2-year rule: You must have filed the tax return at least two years before your bankruptcy. If you never filed, or if the IRS filed a “substitute return” for you, that debt usually will not qualify.
- The 240-day rule: The IRS or Tennessee Department of Revenue must have assessed the tax at least 240 days before your bankruptcy filing.
If all three of these timing conditions are met, your income tax debt might be eligible for discharge.
What You Cannot Discharge
Even if your tax debt passes the timing test, not every type of tax goes away. Here are a few examples of what could stick around:
- Payroll and trust-fund taxes: If you owned a business and withheld employee payroll taxes, those are considered “trust funds.” Bankruptcy will not touch them.
- Fraudulent or intentionally evasive tax debts: If you knowingly filed a false return or tried to hide income, the court will not forgive it.
- Tax liens: Even if the debt itself is discharged, a previously filed federal or state tax lien can still attach to your property. The bankruptcy removes your personal obligation to pay, but the lien stays until it is paid or released.
What About Tennessee Taxes?
In Tennessee, the state no longer has a personal income tax. Many of the residents are dealing with federal IRS debts, not state ones.
However, Tennessee businesses still owe franchise and excise taxes to the Department of Revenue. And those debts follow their own rules in bankruptcy. Some may be dischargeable, while others are treated as priority debts and remain unaffected. Business owners should always consult with a bankruptcy attorney who understands both federal and Tennessee tax systems before filing.
Plan Before You File
Because the timing is so important in these situations, planning your bankruptcy filing date can make or break whether your tax debt gets wiped out. You will want to double-check your records before moving forward:
- Confirm exactly when your tax returns were filed and assessed.
- Review any IRS or Tennessee tax liens currently recorded.
- Make sure all returns are filed, even if you cannot pay them.
- Wait until the 3–2–240 timeframes are satisfied before filing.
- Be honest about your tax history. Remember that fraud or evasion removes any chance of discharge.
A Tennessee tax debt lawyer will help you map out the right timing to maximize your relief.
Without the right planning, filing too soon, or misunderstanding which debts qualify can leave you stuck with taxes you thought would disappear.
For this reason, you want to work with a Tennessee tax law and federal bankruptcy lawyer. They can help you create a plan that gives you a financial fresh start.
We Can Help with Your Tax Issues
Can bankruptcy eliminate tax debt in Tennessee? The answer is sometimes, like in situations where federal income taxes meet the 3–2–240 rule.
If you are struggling with tax debt and wondering whether bankruptcy could help, a Tennessee bankruptcy lawyer can review your specific situation. At Easter & DeVore, Attorneys at Law, we can help you find out if a clean slate is possible. Schedule a consultation today.
