Most people I talk to about their IRS problem have already built the worst-case scenario in their head. The reality is usually much more manageable. I'm Darrin Mish, and I've been representing taxpayers before the IRS for 32 years. Here's what actually tends to happen.
The Answer Nobody Wants to Hear
Payroll taxes do not get discharged in bankruptcy. Not in Chapter 7, not in Chapter 13, not under any chapter of the Bankruptcy Code. The trust fund portion is permanent. If a tax attorney tells you otherwise, get a second opinion before you file.
I understand why people ask. Bankruptcy can clear most other tax debt under the right timing rules. Payroll taxes feel like just another IRS balance. They are not. They sit in a separate, protected category that Congress designed to be untouchable.
Understanding the Two Halves of Payroll Tax
Payroll tax comes in two pieces. The employer half is the company’s portion of Social Security and Medicare plus federal unemployment. The employee half is the income tax withheld from worker paychecks plus the employee’s share of FICA.
That second piece is called the trust fund portion. It was never the employer’s money. The employer collects it on behalf of the federal government and holds it in trust until deposit. When a business fails to remit those funds, the IRS treats it as a breach of fiduciary duty – and Congress treats it the same way.
Under IRC §6672, the IRS can assess that trust fund liability personally against any responsible person who willfully failed to pay it over. That assessment is called the Trust Fund Recovery Penalty, or TFRP. It is technically labeled a penalty, but in substance it is the tax itself, collected directly from the individual rather than the entity.
What the Bankruptcy Code Actually Says
Three statutory provisions control here. None of them are friendly.
First, 11 U.S.C. §507(a)(8)(C) gives priority status to “a tax required to be collected or withheld and for which the debtor is liable in whatever capacity.” That is the trust fund portion. Priority means it gets paid before general unsecured creditors and survives if not paid in full.
Second, 11 U.S.C. §523(a)(1)(A) makes all priority taxes non-dischargeable. The two provisions interlock – if a tax is priority under §507, it is non-dischargeable under §523. Trust fund taxes are both.
Third, 11 U.S.C. §523(a)(7)(B) makes penalties related to non-dischargeable taxes non-dischargeable in their own right. So the TFRP assessment against a responsible officer follows the same rule whether you call it a tax or a penalty.
There is no time-based exception for trust fund taxes the way there is for income tax. The three-year rule, the two-year rule, the 240-day rule – none of those apply here. Trust fund taxes are non-dischargeable forever.
What About the Employer Portion?
The employer-side payroll tax has limited dischargeability under specific timing tests. Under 11 U.S.C. §507(a)(8)(D), employer FICA and FUTA for a return last due more than three years before the bankruptcy filing can lose priority status, and if not assessed within 240 days, the priority drops further.
But even when the employer portion can be discharged, it is rarely the bulk of the debt. The trust fund portion almost always dwarfs the employer half. And the IRS knows exactly how to characterize collection deposits – they apply payments to the employer side first, leaving the trust fund balance intact and personally collectible.
If you file bankruptcy expecting the employer-side portion to clear, do the math first. You may discharge a small slice while leaving the entire personal §6672 assessment exactly where it was the day before you filed.
Why This Hits Business Owners Hard
Owners of failed businesses often come in believing bankruptcy will wipe out the IRS problem. It will not. The corporation can dissolve. The LLC can wind up. But the §6672 assessment against the individual stays.
And the IRS goes after individuals more aggressively for trust fund liability than for almost any other tax debt. They will levy bank accounts. They will seize wages. They will file a Notice of Federal Tax Lien against personal residences. If you were a responsible officer at multiple businesses, they will pursue you across all of them.
After 32 years of working trust fund cases, I have watched dozens of business owners file bankruptcy on the corporate debts only to discover the §6672 assessment is waiting for them on the other side, plus interest accrued during the bankruptcy stay.
What Actually Works for Payroll Tax Debt
Three real options exist. None of them involve a bankruptcy court.
The first is an installment agreement. The IRS will accept payment plans for trust fund liability, but typically requires full payment within the collection statute (10 years from assessment). Long payment terms are rare and require detailed financial disclosure under Form 433-B and Form 433-A.
The second is an Offer in Compromise. Trust fund taxes are not excluded from OIC eligibility. If your Reasonable Collection Potential is less than the assessed liability, you can settle for the lower number. I have closed many OICs on TFRP cases – the IRS will settle trust fund debt for pennies on the dollar when the math justifies it, just as it will with any other tax.
The third is Currently Not Collectible status. If you genuinely cannot pay anything without falling below allowable living expenses under the IRS National and Local Standards, the IRS will suspend collection. The debt does not go away, but levies stop and the CSED runs in the background.
Each path has trade-offs. None of them is bankruptcy.
Get Help Now
If you are facing personal liability for unpaid payroll taxes, you have options – but bankruptcy is not one of them. Contact the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100 for a free consultation. We resolve trust fund cases without sending clients into bankruptcy court where the law will not protect them.