Piercing the Corporate Veil: When the IRS Can Seize Personal Assets to Cover Business Tax Liabilities

February 21, 2017
Robert V. Boeshaar

Small business owners often put their blood, sweat, and tears into making sure their company remains operational and successful. Sometimes it isn’t enough, and the company has to close. When this happens, owners might be under the impression that they aren’t responsible for their unpaid business debts, but that’s not always true. Having a business isn’t a free pass to acquire debt and then not pay it off or experience any consequences. Let’s examine what it looks like when the IRS might be able to make you personally liable for business debts.

How You Can Be Susceptible to Liability

When companies are classified as corporations or LLCs, they get the benefit of something called limited liability and the corporate veil. This principle allows for the separation of personal and business transactions, and gives the owners an element of protection from their corporate creditors.

However, under certain circumstances you can be liable for the business’ debts.  One is in the case of employment taxes.  Another circumstance is when the IRS can disregard your business structure. Certain missteps can create an opportunity for a creditor, like the IRS, to pierce the corporate veil, meaning that your protection is no longer in place. Here’s how that might happen:

  • Mingling assets – If you pay personal bills from your business bank account, or just flat out don’t have a separate account at all, the court can claim that your business isn’t really a business.
  • Avoiding a corporate structure – Even if a business is owned by only one or two people, it should still be treated professionally, with meetings and bylaws in place. Any major decision should be recorded in the company’s minutes, and an annual shareholder meeting should be held.
  • Fraudulent behavior – It goes without saying that any attempt to take advantage of creditors by making knowingly poor decisions or financial promises they couldn’t keep will be a cause for piercing the corporate veil.
  • Not communicating that you’re a company – When signing business documents or generating invoices, it’s crucial that you include your company name with either LLC or Inc at the end. This will let creditors know that you are a legitimate business.

What Can the IRS Do?

If you’ve been found to be guilty of any of the above, the IRS will have legal ground to file a claim in court to pierce your corporate veil and disregard your business structure. If the judge grants this request, there will be nothing protecting your assets. The IRS will be allowed to seize your home, cars, or other assets in order to satisfy your corporation’s debt.

Is the IRS threatening to pierce your corporate veil and seize your property to settle an outstanding tax liability? If so, contact The Law Office of Robert Boeshaar today. We help individuals and small businesses resolve their disputes with the IRS.

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