Why Closing and Starting New Corporations Every Few Years to Avoid IRS Audits Isn't a Wise Strategy
When considering strategies to avoid IRS audits on past corporations, the notion of closing and starting new businesses every few years might seem appealing. However, in reality, this approach is likely to have the opposite effect and increase your risk of audit, especially if you are a business owner involved in the liquidated entities. Let's explore why this strategy is not advisable and discuss what you should do instead to remain compliant with tax laws and avoid unnecessary legal complications.
Understanding the Risks of Continuously Closing Corporations
Continuously dissolving and forming new corporations to evade IRS audits is not only risky but also counterproductive. The Internal Revenue Service (IRS) closely tracks business entities, responsible individuals, and their activities. If you close a corporation and then start a new one, you are essentially creating a paper trail that can be scrutinized by the IRS. This activity can make you look suspicious and increase the likelihood of an audit.
The Importance of Successor Liability
The doctrine of successor liability is a legal concept that plays a crucial role in understanding why continuously dissolving and starting new corporations is not a wise strategy. Successor liability refers to the situation where a successor entity assumes the liabilities and obligations of a dissolved entity.
To illustrate this concept further, consider the following scenario:
Corporation 1: Established with certain liabilities and obligations. Corporation 2: Continues the business operations that were previously carried out by Corporation 1.Without the doctrine of successor liability, the new entity (Corporation 2) could easily escape from these liabilities, potentially leaving counterparties and creditors without recourse. However, successor liability ensures that responsible parties do not evade their responsibilities, thereby maintaining market integrity and preventing individuals from acting opportunistically.
Risk of IRS Audits
Despite the misconception that IRS audits are commonplace, the reality is that audits are relatively rare. The IRS typically conducts audits on a small percentage of taxpayers, and most of these audits are correspondent audits, where the IRS focuses on a specific aspect of a tax return or a specific transaction. Therefore, unless you are a large corporation, the chances of an IRS audit are extremely low.
Common Misconceptions and SEO Considerations
Some individuals mistakenly think that continually closing and starting new corporations can draw less attention from the IRS. In fact, this approach can draw more attention, as it may be seen as a red flag indicating suspicious behavior. Therefore, it is important to avoid such practices and ensure you are operating in compliance with tax laws.
Conclusion and Professional Advice
In conclusion, continuously closing and starting new corporations with the intention of evading IRS audits is not only legally hazardous but can also lead to increased scrutiny from the IRS. The concept of successor liability makes it clear that any new entity that carries on the operations of the dissolved entity is liable for its debts and obligations.
If you are looking for advice on how to navigate complex tax and legal issues, it is essential to consult with a licensed attorney. This advice can help you avoid potential liabilities and ensure that your business operations remain compliant with all relevant laws and regulations.
Disclaimer: This response is for informational purposes only and does not constitute legal advice. If you have specific legal questions, seek guidance from a professional attorney in your jurisdiction. Alleging representation (or not) is not the point here—simply offer guidance based on your expertise.
For more information on legal matters, consider exploring the following topics on Google:
Successor Liability: Understand the legal implications and responsibilities associated with continuation and succession in business entities. IRS Audits: Learn about the process, common triggers, and how to prepare for audits. Tax Obligations: Explore detailed guides on tax compliance and best practices to ensure you remain in good standing with the IRS.