Tax season is often a daunting annual recurrence for business owners. For most businesses, this is because there’s a personal side of taxes too. As a business owner, there’s a high level of personal liability entangled in taxes.
Taxes are a necessary evil, and understanding how they work is too. Depending on the nature of your business, you could be held personally responsible for Sales and Use taxes, withholding employee income taxes, or corporate income taxes.
Fortunately, there are ways to protect yourself and your assets. Whether the IRS can come after a business personally, is determined by how the business is structured and the nature of the offense.
LLCs are disregarded when it comes in regards to federal tax purposes. This means that they do not hold their tax responsibilities or consideration for federal income tax purposes. The way that an LLC is taxed instead depends on the way the founder chooses for it to be taxed.
For example, a single-member LLC can be taxed either as a corporation or a partnership. If neither is chosen by the founder, it will default to be taxed as a sole proprietorship.
Since LLCs are officially disregarded in terms of federal income tax, they are taxed based on regulation alone. Because this is this case, however, it raises the question of whether or not IRS can seize the assets of an LLC to account for owed federal taxes of the business owner.
In the simplest sense, IRS tends to argue that if they’re dealing with a single-member LLC and the single owner owes federal back taxes, they can seize the assets of the LLC because it’s a disregarded entity and there’s only one owner. In other words, they ignore the LLC entirely and treats the assets as if they’re owned directly by the business owner.
This assumption by the IRS is wrong. However, an LLC’s status is only disregarded in determining the entity’s tax status, not necessarily that of the business owner. As a result, IRS must look to state law to determine the issue of ownership.
State law can help determine whether a person has ownership of a particular asset. If state law cannot prove that the person that owes taxes has ownership of a specific asset, they cannot seize it.
State ownership varies depending on the state in question. That being said, for the most part, states declare a separation of ownership between the entity itself and its members. That in itself is the very foundation upon which LLCs are often built.
If you are a business owner and are concerned about IRS’s ability to seize your company assets, our team of experts at Milikowsky Tax Law may be able to support you. Our team has experience successfully defending over ____ cases against IRS and EDD and is prepared to help you do the same. For more information or to get started, contact our team today.