IRS Debt in Subchapter V: Priority, Secured, and Nondischargeable Taxes

Melissa Youngman, PA and Winter Park Estate Plans & ReOrgs represent businesses in Chapter 11 and Subchapter V cases before the United States Bankruptcy Court for the Middle District of Florida, including the Orlando, Jacksonville, Tampa, and Fort Myers divisions, with a primary practice footprint in Orange, Seminole, Osceola, Volusia, Lake, and Brevard counties.

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Business owners who owe the IRS often assume that filing Subchapter V wipes the slate clean the way it can with a credit card balance or a vendor invoice. It does not work that way. Federal tax debt carries its own statutory category, its own payment rules inside a plan, and in some cases a personal liability that survives the corporate case entirely. This post explains how the Bankruptcy Code treats IRS debt in a Subchapter V case: which taxes get priority, what happens when the IRS has already filed a lien, and why the trust fund recovery penalty can follow an owner home even after the business reorganizes.

This matters most for a Central Florida business, a restaurant group in Orlando, a contractor in Lake Mary, a medical practice in Winter Park, that fell behind on payroll tax deposits during a cash crunch and now faces the IRS as one of its largest creditors.

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Section 507(a)(8): Which Taxes Get Priority Status

Not every dollar owed to the IRS is treated the same way. Section 507(a)(8) grants priority status to specific categories of tax debt: income taxes for tax years ending within three years before the petition date, property taxes assessed before the petition and last payable without penalty within one year of filing, and trust fund taxes, the income and employment taxes a business withheld from employee paychecks but never remitted. Older income tax debt can lose priority status and fall into the general unsecured class, though assessment history, extensions, and prior collection activity can extend the relevant look-back periods.

The classification matters because priority claims cannot be resolved by paying pennies on the dollar the way general unsecured debt often can. A business evaluating Subchapter V needs an accurate tax transcript analysis before filing, not an estimate, because the difference between priority and general unsecured status changes what the plan is legally required to pay.

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How Priority Tax Claims Get Paid in a Subchapter V Plan

Section 1129(a)(9)(C) sets the payment rule for priority tax claims, and it applies in Subchapter V whether the plan is confirmed consensually under § 1191(a) or through cramdown under § 1191(b). The plan must pay the IRS the full allowed amount of the priority claim, in regular installments, over a period not to exceed five years measured from the date of the order for relief, generally the petition date, with a present value equal to the allowed amount as of the plan's effective date. Interest accrues on the unpaid balance at a rate the plan must specify, and the five-year clock starts running from filing, not from confirmation, which shortens the real payment window on cases that take months to reach a confirmed plan.

Unlike general unsecured creditors, the IRS, as a priority claimant, does not vote on whether it wants full payment; the statute requires it regardless of the class's vote. What Subchapter V changes, relative to negotiating with IRS collections outside of bankruptcy, is a fixed five-year runway and an automatic stay that halts levies and lien enforcement while the plan is negotiated and confirmed.

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Secured Tax Claims: What an IRS Lien Attaches To

Priority status is a separate question from secured status. If the IRS filed a Notice of Federal Tax Lien before the petition, that lien attaches to all of the debtor's property and rights to property, and under § 506(a) the claim is secured only to the extent of the value of the property it reaches. A tax lien filed against a business with modest equipment and no real estate may secure only a fraction of the underlying liability, with the remainder falling back into the priority or general unsecured categories depending on the type of tax and the applicable look-back period.

A secured tax claim generally must be paid in full, with interest, to retain the lien's priority position, and the lien does not disappear simply because a plan is confirmed. Where collateral value is genuinely lower than the recorded lien amount, a Subchapter V debtor can sometimes value the IRS's secured claim down under § 506(a) and treat the deficiency separately, but this requires a defensible valuation record, since the IRS routinely contests undervaluation in tax lien disputes.

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The Trust Fund Recovery Penalty: Personal Exposure That Survives the Business Case

The most consequential issue for many owners is not what happens to the business's tax debt but what happens to them personally. Under 26 U.S.C. § 6672, any person responsible for collecting, accounting for, and paying over payroll withholding taxes who willfully fails to do so can be assessed a penalty equal to 100 percent of the unpaid trust fund portion. This is the trust fund recovery penalty, commonly called the TFRP, and the IRS can assess it against owners, officers, or anyone else with actual authority over which creditors got paid during the period the withholding taxes went unremitted.

The TFRP is a separate, individual liability. Confirming a Subchapter V plan that pays the business's trust fund tax priority claim does not automatically resolve a responsible person's personal TFRP exposure, and a corporate or LLC debtor's discharge does not reach an individual's separate assessment. An owner who decided which bills got paid during a period of payroll tax delinquency should expect the IRS to evaluate TFRP liability separately from, and often alongside, the business's bankruptcy case. Paying the underlying trust fund tax debt through the corporate plan reduces total exposure but does not by itself remove an individual from the target list.

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Dischargeability: What Survives After Confirmation

For a consensual plan confirmed under § 1191(a), discharge occurs at confirmation and operates like an ordinary § 1141 discharge, releasing the business from prepetition tax debt provided for in the plan. A nonconsensual, cramdown plan under § 1191(b) works differently: discharge does not enter until the debtor completes plan payments, and § 1192 withholds discharge for any debt "of a kind specified in section 523(a)," the same exceptions that apply to individual debtors in ordinary cases, including debts from a fraudulent tax return or a willful attempt to evade a tax.

Whether that § 523(a) carve-out reaches a corporate or LLC debtor, not just an individual, has divided the circuit courts, and the split runs directly through the Middle District of Florida's own circuit. In BenShot, LLC v. 2 Monkey Trading, LLC, No. 23-12342 (11th Cir. July 9, 2025), the Eleventh Circuit held that corporate debtors in a nonconsensual Subchapter V plan cannot discharge § 523(a) debts, joining the Fourth and Fifth Circuits and deepening a split with the Ninth Circuit's Bankruptcy Appellate Panel. Because that rule binds the Middle District of Florida, a business confirming a nonconsensual plan here should assume a tax liability tied to a fraudulent return or willful evasion, business or individual, can survive confirmation.

The practical takeaway: a Subchapter V filing resolves the business's tax exposure according to the plan's terms and confirmation track, but it does not automatically release every tax problem tied to the enterprise, particularly on a cramdown path. Distinguishing which taxes the plan discharges from which liabilities, including TFRP assessments and any debt carrying a fraud or willful-evasion tag, survive the case is a threshold analysis that has to happen before the petition is filed, not after a post-confirmation IRS notice arrives.

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What This Means for Central Florida Business Owners

For a business in Winter Park, Maitland, Orlando, Lake Mary, Oviedo, Kissimmee, or Clermont carrying meaningful IRS debt, the tax analysis should happen alongside, not after, the Subchapter V eligibility review. Pulling account transcripts for every tax period, sorting balances into priority, secured, and general unsecured, and identifying which owners face independent TFRP exposure gives a business and its counsel an accurate picture of what a plan needs to fund and what personal risk remains outside the corporate case.

Melissa Youngman, PA represents businesses in Chapter 11 and Subchapter V cases throughout the Middle District of Florida. For more on Subchapter V eligibility and the overall process, see our cornerstone guide, What Is Subchapter V.

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