Millionaire caller is considering bankruptcy due to unpaid taxes and $350K debt. Dave Ramsey says he must deal with this ‘monster in the closet’ first

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)

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.

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.”

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.

For business owners, the lesson is straightforward: