If you ever hear of people in the news who get into legal trouble for using a company’s funds for personal use, that person may have been deemed an alter-ego of the company. This can also happen when someone creates an entity to try and avoid paying taxes.
An alter ego determination allows tax agencies to collect the tax liabilities of one party (individual or business) from the income and assets of another party (individual or business).
Keep reading to learn more about how the tax agencies and courts determine alter ego liability, and what you need to know about these determinations.
How Do Courts Determine Alter Ego Liability?
1. Key Factors for Assessing Alter-Ego Relationships
When the courts determine alter ego liability, some of the key factors they consider are:
- Commingling of income, expenses, and assets.
- Payment of personal expenses.
- Failure to follow corporate formalities.
In the state of California, the two qualifications for alter-ego relationships are “unity of interests” where an individual and a company appear to be one in the same, and an “inequitable result” where a creditor, such as the IRS, is prevented from collecting taxes owed.
2. Common Situations in Alter-Ego Determination
An alter ego determination may be made by the IRS in a situation where:
- The owner of a corporation or other entity uses corporate revenues to pay significant personal expenses.
- The corporation has no assets and uses the assets of the owner.
- The corporation is under-capitalized.
- The corporation does not maintain adequate business records.
As a result, the IRS can treat the owner and the corporation as one-and-the-same, and collect the tax liabilities of the corporation from the owner or vice versa. This process is also called “piercing the corporate veil.”
3. Burden of Proof in Alter-Ego Cases
The burden of proof is the standard that a party is required to meet, in order to have a fact legally established. For alter-ego cases, the taxing agency always has the burden of proof in court to show that one party is the alter ego of another party.
Once the alter ego is determined, it is incredibly difficult to refute. Fighting an alter-ego determination requires a plethora of documentation, including bank records, financial statements and general ledger, property records, corporate filings, and tax returns.
4. Tax Lawyers and Alter-Ego Cases
When a tax agency determines alter ego liability, it’s critical for that party to work with a tax lawyer. Experienced tax litigation attorneys know the governing state and federal law. They can gather the information and records needed to dispute an alter ego determination and are well-versed in the administrative and judicial procedures available to taxpayers in such situations.
Handling this issue on your own is ill-advised; the high level of documentation and legal understanding makes it nearly impossible for a layperson to represent themselves. A tax controversy attorney is needed to guide taxpayers through the process to a successful outcome.
Talk to An Experienced Tax Controversy Attorney
For any alter-ego case, you’ll need assistance from an attorney who has handled almost every type of tax controversy or tax litigation issue, someone like Southern California-based tax lawyer, Mindy Meigs. She’s handled over 500 cases before the U.S. Tax Court, representing both individuals and businesses.
If you’re worried about alter-ego liability or if a tax agency is investigating it, you don’t have to face it alone. Give Mindy Meigs a call today.