When can taxes be discharged through bankruptcy in Tennessee?

It is possible to discharge income tax debt as long as the person filing for bankruptcy meets certain qualifications.

On a national level, bankruptcy filings decreased by 12 percent in the first half of this year. However, as ACA International reports, Tennessee remains at the top of the list when it comes to the number of per capita filings with 5.68 per every 1,000 per population.

With so many people filing for debt relief, it is important to understand which items can be discharged through bankruptcy. Many have the misconception that taxes are not dischargeable through the filing process. While in many cases that may be true, there are some situations in which people can eliminate tax debt as long as they meet specific requirements.

The 3-2-240 rule

Only federal or state income tax debt may be eligible for removal. Any penalties or interest associated with the tax could also be discharged. Bankruptcy cannot eliminate any other tax, such as real estate or payroll taxes.

Someone wishing to discharge income taxes will have to meet what is known as the 3-2-240 rule. According to the American Institute of CPAs, this means the following:

  • The due date on the tax return is more than three years old (due dates for federal and state taxes are typically April 15).
  • The tax return was filed two years prior to filing for bankruptcy.
  • The tax had been assessed 240 days or more before filing for bankruptcy.

Bankrate.com reports that these deadlines could be extended under certain circumstances. For example, if a debtor requested an offer in compromise or filed for a collection due process hearing, the timeline for some or all of these factors might be stretched. Also, someone who files for a tax extension will note that the due date on the taxes changes, affecting when the three-year mark falls.

Factors that affect discharge

In addition to the 3-2-240 rule, there are other requirements one must meet to discharge a tax debt. For example, if a tax return for the debt was never filed or was filed late, then according to the Bankruptcy Code, there is no possibility for discharge.

Secondly, if the IRS has already filed a notice of federal tax lien, then the debt is considered secured. While it is still possible that the debt could be discharged, the IRS would still be able to retain the lien and try to collect on other assets. For example, the IRS can record a tax lien on someone's property. Before selling that property, the owner will have to pay the taxes due.

Lastly, if the person filing for bankruptcy has committed willful evasion or fraud, the debt will not be discharged. It is important to note that this only applies to people who knowingly submit false information and not those who make an honest mistake.

People filing for bankruptcy should work with an attorney who can help determine which debts can be eliminated in order to get the best financial future possible.