Chapter 11 Bankruptcy: Liability for Payroll Taxes

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When a business is facing debts that are too high to pay off with current income, bankruptcy is a possible option to explore. A Chapter 11 filing, for example, can provide a business relief from the pressures of full, immediate repayment. This type of filing will not remove all obligations to pay back creditors though. Even under bankruptcy liability for certain debts will remain intact. This is especially so in relation to taxes, including payroll taxes.

About Payroll Taxes

Payroll taxes are not a dischargeable bankruptcy liability. A business owner, however, can take steps during a Chapter 11 filing or outside of one to make repayment more manageable. Some of the measures that can be taken, for example, include:

  • Negotiating for a partial payment – During a Chapter 11 reorganization, a business can request the IRS to accept partial payment for the payroll taxes owed. An offer in compromise can provide a business owner some relief while protecting personal assets from seizure by the IRS. It is also possible for a business to request an offer in compromise even if a Chapter 11 filing isn’t anticipated.
  • Creating a payment plan – It is also possible for a business owner to request a payment plan to repay all back payroll taxes owed. This can take some of the immediate pressures off the business owner while ensuring that obligations are met.

Consequences of Not Paying

The IRS does hold power over a business owner personally if back payroll taxes are not paid in full. Even with Chapter 11 bankruptcy protection, an owner can face the potential seizure of personal, not just business, property to cover the taxes owed. This may include a business owner’s residence. This makes it very important for a business owner to try and work with the IRS to reach an agreement.

What Chapter 11 Provides

While bankruptcy liability for taxes will remain under Chapter 11, some benefits from this action could help a business owner. This type of filing enables a business to:

  • Reorganize its operation rather than close
  • Create a repayment plan for debts owed that may lend itself to future financial stability
  • Protect the business and its owner from financially related lawsuits

Hiring a Lawyer

Business owners who are contemplating bankruptcy to relieve financial obligations should contact a reputable, experienced lawyer to help them. A skilled attorney can help guide a business through decision making and may also be able to assist in working with the IRS in relation to back payroll taxes owed.