Chapter 7 & taxes I'm responsible for that my business owes

[phoenyx]

I'm filing Chapter 7 bankruptcy due to a failed business (S-Corporation, I'm the sole owner).

The business has unpaid tax debts that it is unable to pay off. I know in general, I'm responsible for at least the principal of the taxes, and that they aren't dischargable under Chapter 7.

Here's the specific taxes that the business owes. Are there any that I'm not responsible for, or discharge?

* Employee FICA Withholdings
* Employee Federal Withholdings
* Employee State Withholdings
* Employer FICA Withholdings
* Employer FUTA (Federal Unemployment Tax)
* Employer SUI (State Unemployment Tax)
* Company Sales Tax

Also, on all of those taxes there are penalties and interest charged on top of the principal balance. Am I responsible for both the penalties and interest personally? Are the penalties or interest dischargeable under Chapter 7?


The principal alone is a huge amount that's going to be painful for me to pay off. I don't have any assets to make settlement offers from - and even if I borrow from family, it looks like you can't get settlements for less really, right? Is there anythinig I can do to make this less painful than a long lasting payment arrangement that takes years to cover?

[Granny]

A while back and ran across a website of a tax professional who stated that as far as trust fund taxes go, only the employee withheld portion is considered trust fund and the employer portion was dischargable because it wasn't trust fund.

This may be what I ran across.

http://www.bjhaynes.com/practice_trustfund.php

and a related link on the same website

http://www.bjhaynes.com/articles_trust.php

My personal experience is that all of it is considered trust fund, but I don't have that much experience in this area and what he stated made sense. You are holding the employee portion in trust for the employee, the employer portion is not held in trust.

Are you aware that you can pay the trust fund taxes in a Ch 13 without interest and penalties?

[phoenyx]

A while back and ran across a website of a tax professional who stated that as far as trust fund taxes go, only the employee withheld portion is considered trust fund and the employer portion was dischargable because it wasn't trust fund.

This may be what I ran across.

http://www.bjhaynes.com/practice_trustfund.php

and a related link on the same website

http://www.bjhaynes.com/articles_trust.php

My personal experience is that all of it is considered trust fund, but I don't have that much experience in this area and what he stated made sense. You are holding the employee portion in trust for the employee, the employer portion is not held in trust.

Are you aware that you can pay the trust fund taxes in a Ch 13 without interest and penalties?

Thank you for those links, that'll provide me some good reading material.

I have been told that I shouldn't have to pay interest or penalties on my company's sales tax, but hadn't heard anything about the other taxes.

I'm planning on filing Chapter 7, because although the taxes are a larger amount, loans to the company which I personally guaranteed are about 4 times larger. Does the paying trust fund taxes without interest and penalties apply also for a Chapter 7? I haven't read through your links yet, but will next. Maybe I'll find the answer there.


EDIT: WOW! I am not sure if the IRS has actually issued the TFRP (Trust Fund Recovery Penalty) against me. According to that article you linked, they often won't issue it if they deem it to be uncollectable due to the person's financial condition. First thing I'm doing Monday morning is finding out if it's been issued. If not, maybe I can head it off... I have no assets and no income, any penalty that I would have to pay would be in the future from an unknown income source. Thanks Granny!!!

EDIT 2: WOW! http://www.irs.gov/businesses/small/...108357,00.html seems to cooberate that the TFRP is only for withhold income taxes, and the employee's FICA taxes - and doesn't include the employer's FICA taxes. If this is the case, that sure helps me out a bit.

[Granny]

I have been told that I shouldn't have to pay interest or penalties on my company's sales tax, but hadn't heard anything about the other taxes.

Don't take any bets on that one, they charge penalties and interest in Texas, and it gets quite high. I bet most states do too.

I'm planning on filing Chapter 7, because although the taxes are a larger amount, loans to the company which I personally guaranteed are about 4 times larger. Does the paying trust fund taxes without interest and penalties apply also for a Chapter 7?

There are no payments in a ch 7. When you file the ch 7, those taxes will remain.

EDIT: WOW! I am not sure if the IRS has actually issued the TFRP (Trust Fund Recovery Penalty) against me. According to that article you linked, they often won't issue it if they deem it to be uncollectable due to the person's financial condition. First thing I'm doing Monday morning is finding out if it's been issued. If not, maybe I can head it off... I have no assets and no income, any penalty that I would have to pay would be in the future from an unknown income source. Thanks Granny!!!

EDIT 2: WOW! http://www.irs.gov/businesses/small/...108357,00.html seems to cooberate that the TFRP is only for withhold income taxes, and the employee's FICA taxes - and doesn't include the employer's FICA taxes. If this is the case, that sure helps me out a bit.

Don't hold your breath on them not assessing the TFRP just because you don't have assets or sufficient income. I've seen them do it plenty of times and then they just sit and wait till you do. I don't believe their statue of limitations applies here. These taxes are always gonna be collectible, at some point. Your best bet may be to file Ch 7 and then hire someone like the guy in the link to work in your interest to make sure you pay only the employee portion. I think what that fellow is doing is a specialty so you'll want to make sure that whoever you hire is aware of those nuances of the tax law. You may not need someone local for this. The IRS will work with them through a power of attorney....they won't like it, but it's do-able.

Oh, one more thing....while your bk is pending, the statue of limitations clock stops ticking and is added to the end of the usual 10 years for collections

Good luck and please report back ok?

[phoenyx]

Don't take any bets on that one, they charge penalties and interest in Texas, and it gets quite high. I bet most states do too.

I should have stated that differently. Penalties and interest were charged to the company, but I thought that like the federal withholding and fica taxes, that I wouldn't be personally responsible for the penalties and interest. (I hope!)

There are no payments in a ch 7. When you file the ch 7, those taxes will remain.

Gotcha. Looks like I'll have to try to make a payment arrangement with the IRS after the Chapter 7, or turn around a file a Chapter 13 after the Chapter 7 is finished.

Don't hold your breath on them not assessing the TFRP just because you don't have assets or sufficient income. I've seen them do it plenty of times and then they just sit and wait till you do. I don't believe their statue of limitations applies here. These taxes are always gonna be collectible, at some point. Your best bet may be to file Ch 7 and then hire someone like the guy in the link to work in your interest to make sure you pay only the employee portion. I think what that fellow is doing is a specialty so you'll want to make sure that whoever you hire is aware of those nuances of the tax law. You may not need someone local for this. The IRS will work with them through a power of attorney....they won't like it, but it's do-able.

Oh, one more thing....while your bk is pending, the statue of limitations clock stops ticking and is added to the end of the usual 10 years for collections

Good luck and please report back ok?

Makes sense. I'll hope but won't hold my breath on it. I'll certainly report back on all the posts I've made, for how it turned out in my situation.

[Granny]

I should have stated that differently. Penalties and interest were charged to the company, but I thought that like the federal withholding and fica taxes, that I wouldn't be personally responsible for the penalties and interest. (I hope!)

I don't have any experience with other states policies on collecting past due sales tax, so I'm guessing it could go either way. With Texas being a debtor friendly state, I think the state would just eat it once the business has no funds for them to levy. Your state may have different laws.

Gotcha. Looks like I'll have to try to make a payment arrangement with the IRS after the Chapter 7, or turn around a file a Chapter 13 after the Chapter 7 is finished.

Yes, you'll have to make payment arrangements after you complete the ch 7. You can't file both kinds of bk anymore. It was previously referred to as a Ch 20. Ch 7 + Ch 13 = Ch 20, but BAPCPA but an end to that. Now I'm not certain about what the business can do, and someone else will correct me if I am wrong, but I think businesses file a Ch 11 to re-organize and that's not what you are doing. So it falls on you and you unfortunately, can't do both a Ch7 and a Ch 13.

Start learning about the IRS collection standards and Form 433-a and Form 433-b, although B won't apply if you aren't in business anymore. There's also Form 433-F, but it's a shortened version of 433-A. As with a Ch 13, it's a good idea to get a firm grasp on where you spend your money each month. There's not much arguing with the collection standards, but for certain areas, there is some leeway.

Makes sense. I'll hope but won't hold my breath on it. I'll certainly report back on all the posts I've made, for how it turned out in my situation.

Thanks, there's always more to learn about how the IRS handles different situations. And I get a kick out of reading about IRS situations....yes I am demented.

[southernbelle]

This post has been extremely helpful since it gave several resources so that I could do some extensive research and reading on my own. Phoenyx your situation is similar to mine, with the exception to the fact that I have a kinda decent job (over the median income for my state) and the overall business debts (including extensive Trust Fund taxes) allow me to qualify for a Chapter 7. I have contacted and made arrangements with the local taxing authorities and am in repayment, but the only monster left to contend with is the IRS. They haven't contacted me yet, so I called about 1 1/2 weeks ago to find out exactly which returns weren't filed yet to get it over with. I am working on sending that stuff to them now so that I will know the full extend of the damage. My ex was responsible for handling the business paperwork and fouled it up big time. I am still cleaning up the mess.

My first question is this....since my objective is to stay away from filing Ch. 13, I plan to file the required returns with the IRS to get the total balance, then plan to enter into an Installment agreement (if they accept it) for repayment. If I enter into this agreement with them prior to them contacting me with a collection notice or anything else, would they still place a lien on my property even with the Installation agreement in place or does that normally happen if I miss payments?

Another question is, worst case scenario, if a lien is placed on my home, is it possible to sell the home with the understanding that all liens would be paid from any proceeds before I see a dime? The local taxing authorities said that they would allow the sale of a home if the total due to them was paid from the proceeds. Is the IRS the same way?? Does anyone have any experience with the IRS and tax liens? Thank you again. This is one of the best resources available.

[Granny]

My first question is this....since my objective is to stay away from filing Ch. 13, I plan to file the required returns with the IRS to get the total balance, then plan to enter into an Installment agreement (if they accept it) for repayment. If I enter into this agreement with them prior to them contacting me with a collection notice or anything else, would they still place a lien on my property even with the Installation agreement in place or does that normally happen if I miss payments?

Another question is, worst case scenario, if a lien is placed on my home, is it possible to sell the home with the understanding that all liens would be paid from any proceeds before I see a dime? The local taxing authorities said that they would allow the sale of a home if the total due to them was paid from the proceeds. Is the IRS the same way?? Does anyone have any experience with the IRS and tax liens? Thank you again. This is one of the best resources available.

Yes, it is possible to sell your home with a lien in place, even an IRS lien. Just know that all proceeds will go to the taxing authorities before you see any money.

Their S.O.P. is to place a lien, especially if the amount of taxes exceeds some unknown threshold.

There is an advantage of paying the taxes through a Ch 13. If you file before they place the lien, then the penalty and interest will be unsecured. If you file after they place the lien then I think the accrued interest is part of the lien and considered secured, but there will be no ongoing penalty and interest. Whereas, if you file Ch 7 and then have an installment agreement, interest will continue to accrue while you are making payments.

Either way, a ch 7 with an installment agreement or a ch 13 will require all of your disposable income. It become a matter of how long it would take you to pay off the taxes with penalty and interest with an installment agreement. If this is less than 5 years, then a ch 7 would be the way to go...but if it would take 5 or more years, you might as well go with a 13 and not pay any additional interest, even if that means that your unsecured's get something.