Corporations are formed for a reason. One of the most important reasons is to limit liability and taxes to the corporation. Business owners, partners and investors want to be shielded from having to pay creditors should the business fail. Forming a corporate entity enables that. It is generally rare when the IRS will try to hold business owners, partners and / or shareholders personally liable for corporate taxes.
Rare but not unheard of. If a business owner, partner or shareholder uses the corporate bank account as if it was his or her own personal checkbook, there can problems. When the shareholder writes checks from the corporate bank account for personal expenses or comingles funds with his personal account, the IRS has an opportunity to argue that a valid corporation does not exist and that the taxes due from the corporation are, in reality, due personally.
Who Is At Risk?
Taxpayers who use personal assets for corporate use, or corporate assets for personal use, also risk piercing the corporate veil, meaning they could face a situation where the IRS, via the courts, puts aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts. An individual who has trucks or cars in the corporate name, paid for with corporate funds, and insured by the corporation, for example, risks problems if he or she then uses them for personal business.
Corporate officers and shareholders can also be held personally liable when payroll taxes are not remitted in full. Payroll taxes mostly belong to employees because they are withheld from their pay. Officers and shareholders therefore have a fiduciary duty to remit those taxes in a timely manner. If they don’t, the IRS can hold them liable for repayment along with substantial penalties. In this case, the IRS can argue that the funds were used by the officer personally, thus again, piercing the corporate veil.
What Can You Do To Protect Yourself?
The taxpayer can always appeal the IRS’s determination or they can litigate the issue. In reality though, most taxpayers don’t have the funds to take it to court. In most cases the IRS is judge and jury.
When you hire a CPA, he or she can work with you to establish accounting and internal control systems that reduce the chance that you’ll do things that could be interpreted as using corporate funds inappropriately. Prevention is the best cure when it comes to avoiding run-ins with the IRS. If you know what’s likely to trigger an inquiry, you can install barriers, safeguards and reminders so you don’t unintentionally “cross the line”.
Accountants can help you set up your business so the chances of accidental or intentional misuse or comingling of funds does not occur. Hiring an accountant will help you minimize the chance you’ll get flagged or penalized by the IRS and increase your chances of long-term corporate survival.
Let us know if you have questions. Give us a call or contact us if you want to set up an initial consult to talk about your options. We’d be happy to help.