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Can the IRS go after a business to satisfy a personal liability?

There are a lot of taxpayers in Minneapolis that have ties to a business, whether it is a somewhat detached investment interest or a hands-on management role. Can these businesses be reached to satisfy a personal tax liability? The answer, like so many others is "it depends."

Much of the argument rests around not only how a company is structured, but how close the individual's ties are to that company. Is there management control? What was the ownership interest? How much access does the taxpayer have to the company's assets? These are all questions that matter in the determination. Take Dionne Warwick's current situation as an example.

Warwick recently found herself in need of bankruptcy protection, and during the process, this exact "ownership" issue presented itself when the IRS sought satisfaction of Warwick's personal tax debt instead of allowing the bankruptcy court to discharge the $7 million liability. 

In Warwick's case, the IRS argued that the $7 million debt could be satisfied by two companies with which Warwick had ties to. These ties, the IRS said were so close that the companies could be considered the singer's "alter egos." 

Warwick presented a very different picture. First off, the IRS never mentioned these companies in an initial motion over the tax liability. Further than that, Warwick was paid a salary by the companies but did not have an ownership interest nor did she act as a director with management power. This, her representative said was an attempt to "collect on prepetition levies against the debtor from property in which the debtor has no interest."

What will the court rule? We cannot say in this case. However, this situation presents the type of argument that is often made when tax liability is involved whether in bankruptcy or not. Whether a business or an individual taxpayer, when tax liability arises in this type of situation there is no doubt that a consultation with a Minneapolis tax attorney is a must. 

Source: The Wall Street Journal, "Dionne Warwick Takes on the IRS," Jacqueline Palank, June 10, 2013

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