Federal Priority Statute: Fiduciary Liability and Payment Order

The Federal Priority Statute, codified at 31 U.S.C. § 3713, requires that debts owed to the United States government be paid before most other creditors when an insolvent person’s or deceased person’s assets are being distributed outside of bankruptcy.¹ For executors, estate administrators, and corporate officers winding down a business, the stakes are personal: pay other creditors first, and you can be on the hook for the misdirected money out of your own pocket.

When the Statute Applies

The priority rule doesn’t switch on every time someone owes the government money. It activates only in specific insolvency scenarios. The statute lists four triggers, each requiring that the debtor be insolvent or that the estate lack enough assets to cover all debts.¹

A voluntary assignment of property by an insolvent debtor to another party.
The attachment of an absent debtor’s property through legal process.
An act of bankruptcy. The statute still uses this phrase, which originally referred to conduct defined under the Bankruptcy Act of 1898. That Act was repealed when the modern Bankruptcy Code took effect in 1978, so the practical scope of this trigger is narrow and somewhat unsettled.
An insolvent deceased estate in the hands of an executor or administrator.

The last one is the situation most people run into. If you’re administering a relative’s estate and the debts exceed the assets, § 3713 applies to you. Insolvency is determined by comparing what the estate owns against what it owes. If there’s a shortfall, federal claims come before other creditors.

Why Bankruptcy Cases Are Different

The Federal Priority Statute does not apply in bankruptcy. The text of § 3713 expressly carves out “a case under title 11,” and bankruptcy trustees are exempt from the personal liability provisions that reach other representatives.²

Once a debtor files Chapter 7, 11, or 13, the priority of government claims runs through 11 U.S.C. § 507 instead. That statute has its own hierarchy, and while the government still gets preferential treatment for things like income and employment taxes, it doesn’t get the blanket “paid first” position that § 3713 provides.³ The Federal Priority Statute fills the gap for insolvency situations that happen outside formal bankruptcy proceedings, which is where executors and business officers usually find themselves.

What Counts as a Federal Claim

Courts read “claim of the United States Government” broadly. The Department of Justice has stated that the priority statute applies to government claims “of all types,” and “claim” includes any right to payment, whether or not reduced to a judgment.²

The most common federal claims against insolvent estates involve unpaid income taxes, payroll taxes, and penalties. The reach goes further: government-backed loans, overpayments from federal benefit programs, regulatory fines, environmental penalties, contractual debts, and even criminal fines and restitution owed to the United States all qualify.²

The claim doesn’t have to be finalized. Contingent, disputed, and unliquidated debts all count. So an estate representative can’t safely distribute assets just because a federal claim is still being assessed or contested.

Where the Government Sits in the Payment Order

“Paid first” doesn’t mean literally the first dollar out. Courts have long recognized a practical hierarchy that lets certain essential expenses come off the top before the federal claim.

Administrative Expenses

Reasonable costs of administering the estate generally come first. Attorney fees, accounting costs, and expenses for preserving estate assets fall in this category, because without them the estate can’t function and no one gets paid. The word doing the work is “reasonable.” If the government believes administrative charges have been inflated to leave less for federal claims, it can challenge them in court.

Funeral Costs and Family Allowances

Most state probate codes place reasonable funeral and burial expenses ahead of federal claims, and courts have generally honored that ordering. Some states also prioritize family allowances and homestead exemptions.

Secured Creditors and the Choateness Test

Whether a secured creditor beats the government depends on how completely that creditor locked down their interest before the federal priority attached. The Supreme Court applies a “choateness” test with a demanding standard. A lien is choate only when three things are established: the identity of the creditor, the specific property subject to the lien, and the exact amount owed.⁴

Even that may not be enough. In United States v. Vermont, the Supreme Court held that under § 3713 a creditor’s lien must be “attached to certain property by reducing it to possession” to override the government’s priority. A general lien against the debtor’s property, even one properly filed and recorded, may not survive.² The bar is higher than many secured creditors expect. A mortgage recorded at the county recorder’s office, for example, doesn’t necessarily clear it unless the mortgagee has taken actual title or possession.

Personal Liability If You Distribute in the Wrong Order

Under § 3713(b), anyone acting as a representative of an insolvent person or estate who pays other debts before satisfying the government becomes personally liable for the amount improperly distributed.¹ The representative doesn’t need to have benefited personally. Simply paying a lower-priority creditor while a federal claim is outstanding is enough. Liability is capped at the amount of the improper payments, not the total government debt, but that money comes from the representative’s own accounts.

Who Counts as a Representative

The statute covers executors and estate administrators. It also reaches corporate officers and directors who distribute the assets of an insolvent company before satisfying federal debts.¹ This comes up when a business is winding down informally rather than through bankruptcy. An officer who pays vendors, employees, or shareholders while federal taxes remain unpaid has created personal exposure. The one clear safe harbor is that bankruptcy trustees acting under Title 11 are explicitly exempt.

The Knowledge Requirement

Liability isn’t automatic. The government must show that the representative knew about the federal debt, or had enough information that a reasonable person would have investigated further. Formal IRS notice isn’t required. Constructive knowledge counts. If the decedent had a history of tax problems, or if the estate’s records showed outstanding federal obligations, that’s typically enough. Corporate officers get even less benefit of the doubt, particularly for payroll taxes the company was responsible for withholding.

How Long the Government Has to Come After You

Under 28 U.S.C. § 2415, the United States generally must bring contract-based claims for money damages within six years of when the right of action accrues.⁵ For claims against representatives under § 3713(b), the clock starts when the improper distribution is made. Tort-based government claims have a shorter three-year window.

Partial payments or written acknowledgments of the debt can restart the limitations period. For tax debts specifically, the IRS operates under its own assessment timelines in the Internal Revenue Code, which may run on a different track than the general six-year rule.

What to Do Before You Distribute Anything

If you’re administering an estate that might be insolvent, treat the Federal Priority Statute as active until you’re sure it isn’t.

Start with solvency. Add up the fair market value of all assets and compare that to total debts. If there’s any chance the estate can’t cover everything, don’t pay non-priority debts until federal claims are resolved.

Investigate whether the decedent owed anything to the federal government. Check for unfiled tax returns, outstanding IRS balances, SBA loans, overpayments from federal benefit programs, and any other government obligations. Request a transcript from the IRS to verify the decedent’s tax account status. If the estate includes a business, look hard for unpaid employment taxes, which are among the most common federal claims against estates.

Consider filing IRS Form 4810 to request a prompt assessment of the decedent’s income tax liability. Under 26 U.S.C. § 6501(d), this request shortens the period for the IRS to assess taxes from the normal three years down to 18 months after the request is filed.⁶ The shortened period applies to income taxes, not estate taxes. It gives you a clearer timeline for when final distributions can be made without worrying about a late-arriving assessment.

Pay administrative expenses first, then funeral costs and any family allowances your state’s probate code prioritizes. After that, satisfy federal claims. Only then should you turn to state and local government debts, and finally private creditors. When the order isn’t obvious, consult a probate attorney before you distribute. Legal advice is itself an administrative expense of the estate, and it costs far less than personal liability.

1
Office of the Law Revision Counsel. 31 USC 3713 – Priority of Government Claims
2
U.S. Department of Justice. Civil Resource Manual 206 – Priority for the Payment of Claims Due the Government
3
Office of the Law Revision Counsel. 11 USC 507 – Priorities
4
Internal Revenue Service. IRM 5.17.2 – Federal Tax Liens
5
Office of the Law Revision Counsel. 28 USC 2415 – Time for Commencing Actions Brought by the United States
6
Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection