TAXES THAT ARE NON-DISCHARGEABLE IN BANKRUPTCY
I am often confronted by a client who has had employees and failed to pay to the IRS the taxes that were withheld from the paychecks of employees. The first thing to understand that the employee will not be hurt by this. The employees will get full credit for the amounts that should have been withheld and paid as well as the unpaid employer match payment.
Before you can understand about taxes and dischargeability in bankruptcy, you need to understand that the Internal Revenue Service classifies taxes into different categories.
Un-filed tax returns are simply never dischargeable. For that reason, you need to file the tax returns. This rule is the most basic rule of tax law. If the Internal Revenue Services files the return for you, most of the time you are not considered as having filed the tax returns. Make sure you filed the tax returns is the most basic rule.
Was the entity filing the tax returns and responsible for paying the employee withholding taxes you or corporation or other legal entity. If an entity was supposed to collect and pay the taxes that you controlled, you will, in most cases, only be responsible for the portion of the taxes that were withheld from the paychecks of employees. If your business was a sole proprietorship, then you will be personally liable for all the taxes owed. So you need to make sure that the tax returns were filed.
The Internal Revenue Service breaks employer taxes into trust taxes and non-trust taxes. Trust taxes are never dischargeable and are comprised of amounts taken out of the paycheck of an employee. The Internal Revenue Service takes the position the employer held the taxes in trust for the employee and promised to send those taxes to the Internal Revenue Service. The liability for paying these taxes runs to any person who was in position to control these withholdings and an employee and the boss may both be liable for these taxes.
If you are not a company owner, but, you had access to the checkbook or regularly signed checks, you may have trouble. The Internal Revenue Service may be claiming that you are liable for the unpaid monies taken from paychecks of employees. You need to show that even though you signed checks, you only signed checks at the direction of other persons.
What can you do if you owe unpaid employee withholding taxes?
Try to pay the taxes before you pay anything else. If the amounts are so large that there is no way to pay the full amount with penalties, save up money and keep it where no one can get to it. When you file bankruptcy, you declare the monies you have been holding and apply that money only to the Trust portion of the taxes.
Some people will try to charge money for the taxes owed on charge cards or otherwise borrow money that would be owed when the bankruptcy case is filed. This will not work as the Bankruptcy Code has a specific provision that makes a loan to pay taxes non-dischargeable if the taxes were non-dischargeable. Of course, there are strategies that can be taken that may work to lessen your tax liability, but, you need to meet with a competent attorney regarding these issues.
As you see, tax liability is something that needs to be addressed when your business first begins to have financial troubles. Waiting until the last minute may not leave you the time to make certain changes that could make your life after filing bankruptcy much easier. Meeting with an attorney such as myself early is not an admission that you are going to file bankruptcy. Once you first begin having financial problems, you should meet with an attorney then.
If you have having financial problems, call me Nathan Davis at 843-571-4042 so that you can begin making the plans and adjustments to help you get through the financial problems. Many times, I can help you take steps so that you will not even have to file bankruptcy and that is the best result. Unlike many bankruptcy attorneys, I handle many types of financial issues and it is always the most fun for you and I if you and I can figure out a way to avoid filing bankruptcy and save your business.