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Client funds totaling $27.8 million held in a payroll processing company's accounts for remittance to the Internal Revenue Service were the property of the clients and not the firm.
Payroll and other taxes owed by the clients, which are to be held in the processor's accounts and subsequently sent to the IRS, were trust funds and not the property of the processor, which was sued in federal bankruptcy court. Thus, clients for whom the processor sent payment to the IRS were not liable for amounts it sent to the IRS.
The processor carried out a fraudulent scheme that transferred some of its clients' funds from its tax account to an operating account for its own business expenses and another account used by executives for personal expenses. The fraud was discovered after the death of one of the executives. Creditors then filed an involuntary Chapter 7 bankruptcy petition against the processor.
The bankruptcy trustee sought a turnover of $27.8 million that the processor remitted to the IRS on behalf of its clients within the 90 days preceding the bankruptcy filing.
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