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“An engineer faces charges for aggravated illegal appropriation, fraud and tax evasion after allegedly using two corporate cards for his own benefit, police said.”

 

El Nuevo Dia November 13, 2019

Intermingling FundsTax 

One of the most dangerous financial mistakes a business owner can make is to intermingle funds, such as paying personal expenses from the business checking account or credit or paying business expenses from the owner’s personal account or credit card.

This can be done with the best of intentions making adjustments in the books to separate the business and personal transactions. Still, the behavior can leave openings for the IRS or courts to question the integrity of the business entity or the transactions.

Separation of funds can be a key in preserving the liability protection of the corporate veil. Courts can pierce the corporate veil by finding that the corporation is an “alter ego” of the shareholder, essentially stating that the corporation is not separate and distinct from the individual, as evidenced by the intermingling of finances.

Also, a shareholder who deposits personal funds or pays personal expenses from the corporate checking account or credit card is intermingling funds. Courts can cite this as evidence that the corporation is not a separate and distinct entity from the individual.

Court Case: The taxpayer’s frequently used the corporation checking account and credit cards to intermingle funds. The IRS audited the taxpayer, and taxes were assessed on unreported income.

The taxpayer argued she was not individually liable for the taxes. Instead, her corporation, Real Services, Inc., should be responsible because the corporation received the funds in question. The court decision determined the corporation was a sham and stated that the corporation had the characteristics of an alter ego. (Zabetti Pappas, T.C. Memo 2002-127)