By Anerio Altman

Don’t take money from the Government.

They are big, they are powerful, and they are very possessive.

If you take their money, they become very angry.

One type of fund that an employer may wrongfully withhold from the government, and for which the employer will not discharge in Bankruptcy, are Payroll Taxes that the employer was supposed to collect on behalf of the U.S. Government from the employer’s employees.

The non-dischargeability of these taxes arises under Federal Law.  All things in Bankruptcy Practice are based on the U.S. Code.  (Bankruptcy Attorneys are not a horribly imaginative bunch so everything we do is based on the U.S. Code.)  The Non-Dischargeability originates from 11 U.S.C. 523(a)(1).  Everything under the code section of 11 U.S.C. 523 et seq. lists non-dischargeable debts in Bankruptcy.

11 U.S.C. 523(a)(1)  cross-references 11 U.S.C. 507(a)(8)(c) which specifically mentions as a non-dischargeable debt:  “(C) a tax required to be collected or withheld and for which the debtor is liable in whatever capacity;”

(If that isn’t self-explanatory as to why that clause applies to payroll taxes, stop reading now and call our law office at (949) 218-2002;  You are obviously a legal danger to yourself and others.)

The Government wrote the Bankruptcy Code.  In writing the Bankruptcy Code, the Government made it very clear that taxes that are owed to the Government, that you were never supposed to touch as an employer, are still owed after your file your Bankruptcy. Keep in mind that income taxes, taxes you yourself owe as an employer on your own income may be discharged under certain conditions.  If you owe income taxes as the business owner, they can be addressed in Bankruptcy.  (But see an attorney….and for goodness sake don’t rely on this blogpost for a full legal explanation!)

Conversely, payroll taxes are taxes that the government requires an individual to deduct from the salary of their employees when the employees are paid.  The employer was supposed to hold onto them on behalf of the government. So if you “lose” these funds for some reason, the government becomes particularly distraught…and may want to talk to you. They just want to talk.

If you’ve been naughty, and “lost” these funds as an employer, you can propose a Chapter 13 plan or Chapter 11 plan to payback the “lost” payroll taxes over the life of the plan. But they aren’t going away just because you would like them to.