Feb 3, 2026
For a while, Carlos was winning. The San Francisco business owner built a janitorial business and became a millionaire within a couple years. Then his financial life “spiraled out of control.” (1)
By the time he called into The Ramsey Show, 38-year-old Carlos was facing approximately $350,000 in debt. This included more than $70,000 in credit cards, an SBA loan and a $30,000 commercial line of credit.
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But the most alarming part of his story was that he hadn’t filed taxes for 2017 and 2018 and also failed to remit payroll taxes withheld from employees.
Carlos wanted to know if filing for bankruptcy would help him regain financial stability.
What to know about bankruptcy
Many people might think of credit cards, personal loans or business lines of credit when they think of the types of debts that can be wiped away in bankruptcy. In reality, the rules are far more limited.
Dave Ramsey focused immediately on payroll taxes, which the IRS treats differently from other business obligations.
According to the IRS, that money never belongs to the business; instead, the employer holds it in trust for the government. Federal income tax withholding, Social Security, and Medicare taxes taken out of employees’ paychecks are considered “trust fund taxes.” (2)
That’s why unpaid payroll taxes trigger some of the most aggressive enforcement tools the IRS has.
Under the Trust Fund Recovery Penalty (TFRP), the IRS can hold business owners personally liable for unpaid payroll taxes. (3)
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This means that closing the business does not erase the debt, and bankruptcy doesn’t automatically eliminate it. As Ramsey put it, the trust accounts “live forever.”
According to IRS guidance, bankruptcy may help discharge:
- Credit card debt
- Personal guarantees on business loans
- Some unsecured business debts
But bankruptcy generally does not discharge:
- Payroll taxes withheld from employees
- Recent income tax liabilities
- Penalties tied to trust fund taxes
The key thing to remember is that not all debts are dischargeable. (4)
That’s why Ramsey warned Carlos that filing bankruptcy without first addressing his IRS obligations would not make all of his problems go away. Ramsey called the situation “a monster in the closet” and something Carlos needs to deal with as soon as possible.
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Takeaways for small business owners
Ramsey also emphasized that the IRS treats owing taxes and failing to file tax returns differently, telling Carlos, “apparently you didn’t realize not paying income taxes is not a criminal offense. Not filing is a criminal offense.”
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Failure to pay is generally a civil penalty issue, whereas willful failure to file is a civil penalty and also may be prosecuted as a criminal offense under federal law. (5)
While criminal prosecution isn’t automatic in every case, the IRS does have discretion to pursue charges.
Ramsey urged Carlos to deal with it immediately, since voluntary disclosure — or coming forward when you realize there’s an issue — can help improve the outcome.
The IRS emphasizes that payroll tax compliance is critical and if you don’t comply, there can be serious consequences. When cash gets tight, many businesses prioritize paying employees, rent, suppliers and customers, but just remember that payroll taxes are not flexible.
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For business owners, the lesson is straightforward:
- File your tax returns and pay what you owe
- Never treat payroll taxes as optional
- Consider seeking professional help from a qualified tax professional
Even if it feels overwhelming, dealing with the problem head-on and as early as possible can give more options in a situation like Carlos’s. The IRS offers payment plans and other relief options for taxpayers who come forward voluntarily.
On the other hand, ignoring payroll tax obligations can escalate, leading not only to financial strain, but also potential personal liability for business owners.
If you stay proactive, you can prevent a small issue from becoming a long-term crisis, protect your personal assets, and take control over your business finances again. Planning, transparency, and timeliness are key.
As for Carlos, Ramsey advised him to focus on working and repaying the taxes owed so that he can get himself out of the “terrifying” situation.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
The Ramsey Show (1; IRS (2); (3); (4); IRS (5).
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Jessica is a freelance writer with a professional background in economic development and small business consulting. She has a Bachelor of Arts in Communications and Sociology and is completing her Publishing Certificate.
