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Potential tax traps facing limited liability companies

Readers may be familiar with or even use tax preparation software. Such programs may guide users through the process of filing various federal and state income tax returns. Many of those programs advertise both business and personal tax return assistance. However, is this advisable? 

For starters, it is important to remember the role that intention can plan in a tax controversy. Many criminal tax charges, such as tax fraud or tax evasion, require a showing of the taxpayer’s intent to defraud the government or underpay taxes. A simple mistake in accounting or tax forms is usually insufficient to establish criminal intent.

Even if not subject to criminal repercussions, simple mistakes may nevertheless land a taxpayer into a serious controversy with the Internal Revenue Service or state tax authorities. Small businesses, in particular, may be more at risk because of their more complicated filing requirements.

Specifically, filing requirements vary according to the business designation. Choices include partnership, corporate or sole proprietor tax rules, with limited liability companies often able to choose one of those designations. A consultation with a tax attorney may help to reduce your risk of a tax audit or intimidating correspondence from the IRS regarding these designations. Our law firm has extensive experience in these and other tax matters. 

The rules can indeed be confusing because each entity has its own federal tax form. Partnerships file an IRS Form 1065 for informational background only, as each partner/owner must individually report all income, deductions and credits. LLCs opting for partnership treatment would report each owner’s share on a Schedule K-1. Corporations file a separate Form 1120 and are deemed a separate tax entity from its owners. Finally, an LLC that makes a sole proprietor tax election results in personal liability for all taxes and filings done via Schedule C on an IRS Form 1040.

Source: FindLaw, “Tax Evasion,” copyright 2015, Thomson Reuters 

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