If I’m in a partnership and my business partner is being personally audited for back taxes and possible charges for tax evasion, what are the consequences for our businesses?

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If I’m in a partnership and my business partner is being personally audited for back taxes and possible charges for tax evasion, what are the consequences for our businesses?

How can I avoid being affected by this?

Asked on April 30, 2015 under Business Law, Illinois

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 6 years ago | Contributor

You write that your business is a partnership. That means that the business is not a separate legal entity, the way it would have been had it been an LLC or corporation. That means that its assets are owned by the two partners, not by a separate legal person. That in turn means that if your partner has any assets liened, seized, frozen, etc. as a result of the IRS finding unpaid taxes, inaccurate filings, etc., business assets are risk, since business assets are, at least in part, his assets. It also means that if he used the business to falsify filings or evade taxes, the business's assets could be the tools used to evade the law or the fruit of illegal activity, and be subject to seizure for that reason. (Unlikely, but possible.) Less drastically, the IRS may look into business records, etc. as part of the investigation, which at a minimum may be distracting and disruptive.

It is unclear what you can do to protect your business at this stage, if the IRS is already auditing the partner: structural changes made now (such as re-structuring the business as an LLC and moving assets to it) may be seen as an attempt to evade the law or debts and be disallowed. You should speak with a tax attorney to better understand what could happen, the possible consequences, and if there is any way to shield your business.

 


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