A businessman in another state recently pled guilty to federal charges alleging that he engaged in a rather elaborate scheme to avoid paying taxes. The man was involved in supplying building materials as well as other businesses, some of which he operated with his family.
According to the IRS, the man used his business account to pay the real estate taxes on his vacation home. While this would qualify as an in-kind benefit, and thus, reportable business income, he did not report this on his individual 1040 tax return.
Likewise, he also used business funds to pay for his kids' education at various schools, some of which are tier-one private schools.
The man admitted to filing a false personal tax return in federal court and has already paid back $1.8 million in back taxes and penalties to the IRS. He may receive up to 3 years in federal prison. If, moreover, he receives 21 months or less, he will not be allowed to appeal his sentence.
The reminder to residents of the Chicago area is that it is very important, both for tax and other purposes, to keep one's business accounts and personal accounts separate, especially when one has an interest in a corporation, partnership or LLC.
As this case illustrates, unreported draws from business accounts to pay personal bills can cause serious civil or even criminal penalties with the IRS, including allegations of tax evasion.
However, the IRS does not always get it right when it comes to investigating business owners. Sometimes, what may look like a scheme to evade taxes is really nothing more than simple carelessness or, at best, a perfectly legitimate use of business accounts.
An Illinois resident accused of using his or her business to dodge taxes should strongly consider speaking with an experienced tax attorney.