The Alter Ego Doctrine And Taxes

The Alter Ego Doctrine And Taxes

What is an “alter ego?”  The phrase is Latin, translating to “second I,” “another I,” or “other self.”  In the federal tax context, the alter ego doctrine comes into play where the IRS believes that one person or entity should be considered “one and the same” as the taxpayer in the eyes of the law, allowing the IRS to collect the tax liability from either the taxpayer or the taxpayer’s alter ego.

What Is The Alter Ego Doctrine?

Under the alter ego doctrine, the IRS may seize property that is held in the name of a third party if the third party holds the property as the taxpayer’s alter ego. That is, the law may allow the IRS to levy on property or rights to property held by a taxpayer’s alter ego entity (e.g., a trust, corporation, or LLC) to collect the taxpayer’s tax liability.

Simply put, for tax-collection purposes, a taxpayer and his/her alter ego are considered one and the same — and its assets are available to the IRS to collect the taxpayer’s tax liability.

The theory behind the doctrine is largely based on the premise that the taxpayer and the alter ego are so intermixed that their financial affairs cannot, or should not, be separated.  As such, its application focuses on the relationship between the taxpayer and the would-be alter ego.

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