Business Owner Tax Evasion

Business Owner Tax Evasion – When Corporate Protection Disappears and You Face Personal Liability

Here’s a truth that destroys business owners every year: that LLC or corporation you formed to protect your personal assets? It doesn’t protect you from tax crimes. The corporate structure that shields your house from business lawsuits does absolutely nothing when the IRS comes for criminal prosecution. You cant put a corporation in prison. Only the individual goes.

Business owners operate for years believing the corporate form protects them. They sign tax returns in the company’s name. They make decisions through the entity. They keep everything “in the business.” Then the IRS pierces the corporate veil, applies alter ego doctrine, or simply prosecutes them as the responsible person – and suddenly everything they thought was protected becomes exposed.

Welcome to Spodek Law Group. Our goal is to explain exactly how business owners lose their personal liability protection in tax cases, what triggers IRS collection against personal assets, and what criminal exposure you actually face. Todd Spodek has represented business owners who discovered too late that their corporate structure provided no protection. Understanding these rules before you need them is the only way to avoid that outcome.

If you own a business with tax problems – or if the IRS is already investigating – call us at 212-300-5196 immediately. The corporate veil you think protects you may already be pierced.

The LLC and Corporation Protection Myth

When you formed your LLC or corporation, someone probably told you it would protect your personal assets from business liabilities. That’s partially true. If your business gets sued for a contract dispute or personal injury claim, the corporate structure can prevent creditors from reaching your house, your savings, your personal accounts.

But here’s the paradox that catches business owners: that protection only works for civil liability. For criminal tax violations, there IS no protection.

A corporation can be fined. It can be penalized. It can be forced to pay restitution. But a corporation cannot go to prison. Only human beings go to prison. And when the IRS decides to prosecute tax crimes, they prosecute the individuals who made the decisions.

The Tax Division of the Department of Justice has stated explicitly: they have a “strong preference for prosecuting responsible individuals, rather than entities, for corporate tax offenses.” The corporation might get civil penalties. You get criminal charges.

This means the business structure you carefully created to protect yourself becomes irrelevant the moment the conduct crosses into criminal territory. The IRS doesnt need to pierce the veil or prove alter ego. For criminal prosecution, they simply charge the person who committed the crime.

The “Just a Manager” Myth

Heres something that terrifies employees who think they’re protected by not being owners. The responsible person doctrine doesnt care about ownership. It cares about control.

A CFO with no equity stake in the company can face the same criminal liability as a CEO who owns 100%. A bookkeeper with check-signing authority can be personally liable for unpaid trust fund taxes. A controller who made decisions about which bills to pay can face prosecution.

If you had the authority to ensure taxes were paid – and you exercised that authority to pay other creditors instead – your employee status provides no protection. The IRS will pursue you as a responsible person, and “I was just an employee” is not a defense.

How the IRS Pierces the Corporate Veil

Even for civil tax collection – where corporate structure should matter – the IRS has powerful tools to reach your personal assets. The process is called “piercing the corporate veil,” and it happens more often then most business owners realize.

Studies show that approximately 50% of corporate veil piercing cases succeed. Half the time someone claims corporate protection, they lose it. And the number one reason courts pierce the veil is the same thing business owners do every day: mixing personal and business finances.

The Commingling Trap

Small business owners constantly mix personal and business funds because its easier. Pay for dinner with the business card. Deposit a personal check into the business account. Use business funds to pay a personal credit card. Write yourself a “loan” that never gets documented.

Every time you do this, your creating evidence that will destroy your corporate protection.

The irony is devastating. Business owners skip corporate formalities because they seem like bureaucratic nonsense. No minutes. No separate accounts. No board resolutions. No formal meetings. Its just you running your business – why bother with paperwork?

Then those skipped formalities become the evidence that destroys corporate protection. The IRS points to the lack of separation and argues that you and the corporation are the same person. The corporate form was never real – it was just a fiction you used for convenience.

Factors That Lead to Piercing

Courts look at several factors when deciding wheather to pierce the corporate veil:

• Commingling of funds between personal and business accounts
• Failure to maintain corporate records (minutes, resolutions, annual meetings)
• Undercapitalization – not putting enough money into the business
• Using business funds for personal expenses
• Using personal funds to pay business debts
• Failure to issue stock or maintain ownership records
• No arm’s-length transactions with owners
• Business used primarily to shield owner from liability

When the IRS sees multiple factors, they make the argument. When courts agree, your personal assets become available for tax collection.

The Alter Ego Doctrine – When YOU Are the Corporation

The IRS has its own specific theory for reaching personal assets: the alter ego doctrine. Under this theory, the IRS can treat the corporation’s assets as the owner’s – and more importantly, treat the owner’s assets as available for corporate debts.

The alter ego doctrine has two requirements. First, the unity of interest and ownership must be such that the separate personalities of the corporation and individual no longer exist. Second, respecting the corporate form would result in fraud or inequity.

When both elements are met, the IRS can issue levies against your personal bank accounts, your house, your retirement accounts – all to collect a corporate tax debt.

What the IRS Looks For

The IRS examines specific factors when building an alter ego case:

• Are you in a position of control or authority over the entity?
• Do you control the entity to shield yourself from personal liability?
• Do you use the business entity for your own financial benefit?
• Do you use business funds to pay personal debts?
• Do you use personal funds to pay business debts?
• Are there proper corporate records and minutes?
• Are the records of separate entities confused or intermingled?
• Was the corporation adequately capitalized?
• Are there arm’s-length transactions between you and the company?

The more “yes” answers, the stronger the IRS case for alter ego liability. And heres the uncomfortable reality: most small business owners would answer “yes” to multiple items on that list.

The IRS doesn’t need to prove ALL factors. They need to show enough factors to establish that the corporate form was not respected. Courts give significant weight to commingling of funds – if money flows freely between personal and business accounts, thats often enough on its own.

The Lothringer Case

Heres a real example of how this works. Arthur Dale Lothringer owned a used car business called Pick-Ups, Inc. The business owed $1.8 million in unpaid taxes. Lothringer argued he wasnt personally liable because the debt belonged to the corporation.

The court disagreed. The evidence showed that Lothringer was the sole shareholder, sole officer, and sole director. He exercised complete control over the business. Pick-Ups failed to observe corporate formalities. And critically – the corporate bank account was used to pay Lothringer’s personal loans.

That last factor was decisive. When your using the business account to pay personal expenses, the IRS can argue there is no real separation. The corporation is just an extension of you. The $1.8 million became Lothringer’s personal debt.

Dissolution Doesnt Help

Business owners sometimes think dissolving the corporation makes the problem go away. Close the business, file the dissolution paperwork, empty the accounts, walk away.

Alter ego liability survives dissolution. The IRS can pursue you years after the business closes. The corporate form you dissolved was already pierced – dissolving it doesn’t reverse that. You cant escape by shutting down. The debt follows YOU, not the entity.

The Responsible Person Trap

For employment taxes specifically, the IRS has an even more direct route to personal liability: the Trust Fund Recovery Penalty under 26 USC 6672.

When your business withholds taxes from employee paychecks – income tax, Social Security, Medicare – those funds are held “in trust” for the government. If the business fails to pay them over, the IRS can assess a penalty equal to 100% of the unpaid taxes against any “responsible person” who willfully failed to ensure payment.

Who Is a Responsible Person?

The definition is terrifyingly broad. A responsible person is anyone who had the duty and power to collect, account for, and pay trust fund taxes. This includes:

• Business owners (obviously)
• Corporate officers
• Directors
• Shareholders with financial control
• Employees with check-signing authority
• Bookkeepers who control disbursements
• CFOs, controllers, and accountants
• Outside consultants with authority over funds

The key factors are: Did you have check-signing authority? Did you make decisions about which bills to pay? Did you have authority to hire and fire? Did you control the disbursement of funds?

If yes to any of these, your potentially a responsible person. And the more control you had, the more likely you are to face personal liability.

Multiple Responsible Persons

Heres something that makes this even more dangerous. When multiple people qualify as responsible persons, the IRS can assess the FULL penalty against EACH of them. They dont split the bill.

You and your partner both had check-signing authority? The IRS can pursue you for 100% of the unpaid taxes. They can pursue your partner for 100%. They might collect from both of you. They might collect everything from whoever has assets.

This isnt really a “penalty” in the traditional sense. Its the IRS making sure they collect what theyre owed by pursuing everyone who had the authority to pay.

The Criminal Consequences

When tax violations cross into criminal territory, business owners face devastating personal consequences:

Criminal Statutes:

• 26 USC 7201 (Tax Evasion): Up to $100,000 fine, 5 years prison
• 26 USC 7202 (Failure to Pay Over Trust Fund): Up to 5 years prison per quarter
• 26 USC 7206 (False Returns/Statements): Up to $100,000 fine, 3 years prison
• 26 USC 7207 (Fraudulent Returns): Up to $10,000 fine, 1 year prison

The “per quarter” penalty for trust fund violations is particularly dangerous. If you failed to pay over employment taxes for 8 quarters, thats potentially 8 counts. Each count carries up to 5 years. The theoretical maximum is 40 years in prison.

Recent Cases

In May 2024, a Virginia businessman was sentenced to 78 months in federal prison for evading approximately $200,000 in employment taxes. He filed false returns and obstructed the IRS. After his ambulance business failed to pay employment taxes, the IRS assessed the trust fund recovery penalty. He tried to evade collection. He went to prison for over six years.

In June 2024, a Virginia businesswoman was sentenced to one year and three months in prison and ordered to pay $950,000 in restitution for not paying employment taxes.

These arent unusual cases. The IRS Criminal Investigation division has a conviction rate above 90%. When they bring charges, they usually win.

The Dual Prosecution System

The IRS can pursue BOTH the corporation AND the individual simultaneously. This creates a two-front war you cant win.

The corporation gets civil penalties, interest, and collection actions. The individual gets criminal prosecution. Same underlying conduct, two targets, two sets of consequences.

Business owners sometimes think they can hide behind the entity – let the corporation take the hit while they stay protected. But the IRS understands this thinking. Thats exactly why they prosecute the individual separately. The corporation might pay fines. The owner goes to prison.

Even worse, information gathered during the civil case against the corporation can be used in the criminal case against you. Records you produced during audit. Statements you made to revenue agents. Documents showing who made decisions. All of it becomes evidence in your personal prosecution.

Why Common Defenses Dont Work

Business owners facing personal liability often try defenses that sound reasonable but fail in court.

“I Trusted My Accountant”

You delegated payroll tax responsibilities to a bookkeeper or accountant. They didn’t pay the taxes. You didn’t know.

The IRS doesnt care. If you had the authority to ensure taxes were paid, your responsible. Delegation is not a defense. The fact that you COULD have checked on tax payments – even if you didnt – makes you a responsible person.

“I Didnt Know”

You claim you were unaware of the unpaid taxes. The IRS response: you should have known. If you had check-signing authority, you could have seen where the money was going. If you received IRS notices (even if you ignored them), you were informed. Willfulness includes “reckless disregard” – deliberately not looking at something you should have examined.

“The Business Is Separate”

You maintained perfect corporate formalities. Separate accounts. Regular meetings. Proper documentation.

For civil collection, this might protect you. For criminal prosecution, it doesn’t matter. Corporations cant go to prison. If you made the decisions that resulted in tax crimes, your liable regardless of corporate form.

“I’ll Declare Bankruptcy”

Personal tax liability from alter ego or responsible person doctrine generally survives bankruptcy. You cant discharge it. Chapter 7 wont make it go away. Chapter 13 might spread out payments, but you’ll still owe. There is no escape through bankruptcy court.

Business owners discover this the hard way. They close the business, file personal bankruptcy, think theyve escaped. Then the IRS appears with alter ego liability or Trust Fund Recovery Penalty assessments that survive the bankruptcy discharge. The debt that was supposed to disappear follows them for the rest of their lives.

The Cascade Effect

Heres how personal liability typically unfolds:

1. Business fails to pay employment taxes
2. IRS assesses penalties against the corporation
3. Corporation cant pay (its already struggling)
4. IRS identifies responsible persons
5. Trust Fund Recovery Penalty assessed against you personally
6. IRS levies your bank accounts
7. IRS files tax liens against your property
8. IRS garnishes your wages
9. If still owed money – criminal referral
10. Prosecution for willful failure to pay over
11. Prison PLUS lifetime debt

The cascade happens faster then people expect. From initial assessment to criminal referral can be a matter of months. By the time business owners realize whats happening, their personal assets are already frozen and prosecutors are reviewing their file.

Protecting Yourself Before Its Too Late

If you own a business and want to maintain actual protection, heres what matters:

Maintain strict separation. Separate bank accounts. Never pay personal expenses from business funds. Never deposit personal funds into business accounts. Keep the line clear.

Follow corporate formalities. Hold annual meetings even if your the only attendee. Document major decisions. Keep minutes. Issue stock properly. File annual reports.

Pay trust fund taxes first. When cash is tight, employment taxes come before everything else. Before rent. Before suppliers. Before anything. The IRS considers itself the first creditor.

Monitor compliance personally. Even if you delegate tax responsibilities, verify that deposits are being made. Review IRS notices. Dont assume everything is handled.

Get legal advice early. If you already have tax problems, the time to involve an attorney is now – before criminal referral, before IRS collection, before your options narrow.

Spodek Law Group is located in the Woolworth Building at 233 Broadway in Manhattan. We handle business owner tax defense matters nationwide. If your business has unpaid taxes, if the IRS is pursuing you personally for corporate obligations, or if you have any reason to believe criminal investigation is possible – call us at 212-300-5196.

Todd Spodek has represented business owners at every stage of IRS enforcement. Some clients came to us with viable defenses to personal liability. Some needed to negotiate civil resolutions before criminal exposure materialized. Some required criminal defense. The earlier you act, the more options you have.

The corporate structure you created was supposed to protect you. For tax crimes, it doesnt. The sooner you understand that reality, the sooner you can take action that actually protects your freedom.