Nondischargeability of "trust" taxes

by Greg Dow on Dec. 28, 2016

Bankruptcy & Debt Bankruptcy Tax  Tax Litigation 

Summary: Employers who fail to remit withheld amounts from their employees are not entitled to a discharge in bankruptcy, ever.

11 U.S.C. 507(a)(8) says several categories of allowed unsecured claims of governmental units have priority (must be paid in spite of bankruptcy, either during a Chapter 13 or 11 Plan or after a Chapter 7).  

Section (a)(8)(C) goes on to clarify specific priority "...if such claim is for a tax required to be collected or withheld and for which the debtor is liable in whatever capacity."   There are two very common examples of this.  One is a retailer who fails to remit collected sales tax to the state.  A second is an employer who fails to remit to IRS the amounts withheld from his employees for income taxes. As a small employer for 35 years of trying make timely payroll, I know only too well how easy it can be to miss the remission date and how hard it is to struggle to pay it later.  Those who do not understand the problem feel (and are) justified in labeling this practice as stealing. Suffice it to say there is a special place in hell for those employers who do not timely remit.  

In addition to ghastly penalties, 11 U.S.C 523 (a)(1)(A) sweeps 507(a)(8) into the nondischargeable category and I mean the forever nondischargeable category.  

In my experience, IRS takes the position that if your client's name was on the operations bank account he/she is fully responsible for the unremitted amount.  I have cautioned many a client to get their name off such a bank account.

If your lawyer cannot find this statutory language, you need a new bankruptcy lawyer. Every bankruptcy lawyer with any business clients will have dealt with this issue.

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