Many taxpayers or business people incorporate or set up an LLC to provide limited liability for their personal assets from their business activities. When a taxpayer owes back taxes, he or she will often pay their personal expenses out of their corporation or LLC because the TP is afraid to use his or her personal bank account…the personal account is at risk for levy.
When a taxpayer pays personal expenses out of a corporation or LLC, this is known as commingling. This provides grounds for a creditor to pierce the corporate veil and the creditor to make an alter ego assessment.
A private creditor must go through due process and get a court order to meet the alter ego exception to the limited liability of a corporation or LLC. The IRS and state taxing authorities have much broader collection power. An IRS Revenue Officer can administratively go to IRS District Counsel and get approval for issuance of a nominee lien for alter ego assessment. A court order is not needed; the door is open to levy the business account like the taxpayer’s personal account.
It is vital that a taxpayer make a FOIA request on his collection file. If the IRS is making a nominee lien for an alter ego assessment, the taxpayer may then challenge the assessment in District Court.
Taxpayers should never commingle personal and corporate or LLC financial activities. It is not enough to just obtain corporate articles or articles or organization for an LLC from the Secretary of State and pay franchise tax and Statement of Officer’s fees. Corporate formalities should be followed: Stock should be issued for consideration and annual minutes maintained.