Is a business owner personally liable for unremitted payroll taxes in a bankruptcy filing?

In most business tax structures, the company owner is not personally liable for any debts of the company itself, including tax debts. However, if a situation arises in which payments to the IRS were deliberately withheld or otherwise fraudulently handled, the company owner and/or the person in the company who handles the money can be held personally responsible for the debt.

If the IRS can show that the act was done willfully, or “recklessly”, then you must pay, even if the debt belongs to the entire business.

Who Bears Responsibility for Unremitted Payroll Taxes?

The rules regarding the ability of the IRS to personally pursue a company owner for tax debts apply to both state and federal governments and to all types of tax withholding, including income, social security, and franchise taxes.

  • When you collected this money from your employees, you were acting as a collection agent of the IRS and you owed a duty to both the employees and the IRS to pay the appropriate taxes. Failure to do so can make you personally accountable.
  • Typically, the business owner is the person held liable, provided he or she oversees employee payments, creditor payments, or other types of fund distribution within the company. In some cases, the responsibility may roll down to the next-highest individual involved with the money aspects of the business.
  • Along with the requirement of paying all back tax debts, this situation typically results in a fine equal to the amount of the unremitted payroll taxes, which effectively doubles what is owed to the IRS. 

Getting Help

If you are facing liability for unpaid tax debt, you could find yourself shouldering a large financial obligation. It is in your best interests to consult with a tax attorney as soon as possible to find out what, if anything, you can do to minimize the burden of paying the unpaid taxes.