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 

No Comments

Leave a comment
Comment Information
  • ABA | American Bar Association
  • AV Preeminent | Peer Rated for Highest level of Professional Excellence | 2018
  • Virginia State Bar | 1938
  • Super lawyer | 2018
  • DC Bar
  • American Bar Academy of Attorney - CPAs | The power of the dual view
Email Our Team

Contact Us to Get Started Today

Located in the Washington, D.C area, we serve clients in the District of Columbia, Maryland and Northern Virginia, as well as across the country and overseas. For a free initial consultation, call 202-381-1261 or complete our brief online form.

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy

Six Convenient Office Locations in and around the DC Metropolitan Area

Washington, D.C.
1629 K Street NW, Suite 300
Washington, D.C. 20006

Phone: 202-618-1873
Fax: 888-235-8405
Map & Directions

Columbia Office
10440 Little Patuxent Parkway, Suite 300
Columbia, MD 21044

Phone: 410-497-5947
Fax: 888-235-8405
Map & Directions

Annapolis Office
888 Bestgate Road
Suite 400
Annapolis, MD 21401

Phone: 410-497-5947
Fax: 888-235-8405
Map & Directions

Fairfax Office
8280 Willow Oaks Corporate Drive
Suite 600
Fairfax, VA 22031

Phone: 703-621-7169
Fax: 888-235-8405
Map & Directions

Rockville Office
199 E. Montgomery Avenue
Suite 100
Rockville, MD 20850

Phone: 240-599-5009
Fax: 888-235-8405
Map & Directions

Baltimore Office
400 East Pratt Street
8th Floor
Baltimore, MD 21202

Phone: 443-743-3381
Fax: 888-235-8405
Map & Directions