Chapter 7 of the Bankruptcy Code may provide relief
for individuals who owe non-income taxes and penalties
assessed at the state and federal level. This
Article includes a general discussion of the different
types of non-income taxes and the dischargeability
of each.
Property Taxes
Debts for unpaid property taxes generally
will be discharged in a bankruptcy. Although
personal liability is eliminated, the tax remains
attached to and as a lien against the real property.
State Sales Taxes and Employment Taxes
(the “Trust Funds”)
Trust fund taxes are those that have been collected
by the debtor from a third party to be paid over
to a governmental unit. Examples include sales
taxes collected on the sale at retail of property
to customers, as well as income taxes and FICA taxes
withheld by an employer from the checks of its employees.
In both cases, the individual debtor may not have
been the actual seller at retail or the actual employer
incurring the unpaid debt for employment taxes. The
individual debtor, however, may find himself personally
liable for the collected and unpaid sales and/or
employment taxes of a corporate seller or employer,
IF the individual debtor was “responsible” for the
collection and payment to the government, and said
individual “willfully” failed to do so. Usually
the amount of personal liability is limited to the
actual taxes withheld and collected, and not for
any penalties or interest or any employer-matching
obligation (these are referred to as “Non-Trust Fund”
tax debts). On the other hand, if the debtor
was himself the seller or employer, not operating
through an entity, then the debtor is liable for
both the trust fund and non-trust fund taxes. Non-trust
fund taxes may be dischargeable once (i) the related
returns have been filed at least two (2) years and
(ii) were “due” to be filed at least three (3) years.
Discharge of Tax Penalties and Interest
Generally, tax penalties and related interest on
tax debts are dischargeable if the underlying tax
indebtedness is dischargeable. Thus, interest
on a civil penalty is not dischargeable because civil
penalties are not dischargeable. Curiously, though,
the civil fraud penalty IS dischargeable (as well
as the interest on the civil fraud penalty) even
though the underlying income tax debt is not dischargeable
due to the existence of the civil fraud penalty (provided
the fraud penalty relates to a transaction or event
that occurred more than three years prior to the
bankruptcy filing).
Federal Tax Liens
The tax lien imposed by the IRS arises by operation
of law on the date of tax assessment and attaches
to all the taxpayer’s property, including real and
personal property, until the tax and related penalties
and interest are paid. The lien exists without
the necessity as to any filing in the public records
at least as to those with actual knowledge. However,
in order for a lien to be valid against judgment
lien creditors and purchasers of property to which
the lien attaches, the lien must be filed according
to law. A lien is not effective against real
property in Florida unless it is filed in the county
where the real property is located. A lien is not
effective against personal property in Florida unless
it is filed in the Secretary of State’s offices in
Tallahassee.1
The IRS is a secured creditor as a result of the
filed tax lien. Therefore,
even if the underlying tax debt is discharged, the
lien survives and remains a lien on the debtor’s
property, even as to property which might otherwise
be exempt as to other creditors.
Conclusion
For more information or detail about the dischargeability
of these or other state or federal tax debts, please
feel free to contact us.
1 Although beyond the scope of this
article, to protect the integrity of commerce,
the tax lien does not attach and follow personal
property sold basically in the normal course of
business. Otherwise,
shoppers could not safely buy clothing from J.C.
Penny’s without first confirming a tax lien had
not been filed against it in Tallahassee, an obvious
absurdity. But
it would not require too much for a purchaser other
than in the normal course (such as a purchaser at
a liquidation of a retail clothing store) to ascertain
the existence of a federal tax lien.
This article has been condensed by Larry Heinkel,
Esq., with permission of attorney-authors Camille
J. Iurillo and Sabrina C. Beavens. Camille J. Iurillo
is the Shareholder of, and Sabrina C. Beavens is
an Associate at, Iurillo & Associates,
P.A., of St. Petersburg, Florida.
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