Partners Be Warned: The IRS May Not View You Equally

Partners Be Warned: The IRS May Not View You Equally

What’s Your IRS Payment Responsibility for Joint Income?

People who are in receipt of money—whether by gift or for business purposes—often erroneously assume that if it’s split among other recipients, then the tax liability is on the final figure not the original dollar amount. Not so in some cases, says the IRS. You could be taxed on the entire amount if you were originally in receipt of the whole dollar payment and you cannot prove a partnership or “community” property relationship. It doesn’t necessarily matter who ended up with the money. This sticky fact is often a source of contention among unmarried partners, spouses and business partners according to a recent article in Forbes Magazine titled, Dear IRS: That Income? It’s Not Mine.

The article written by Robert W. Wood, references a very interesting case where the litigant lost in Tax Court because of this sometimes over-looked nuance:

Mr. Azimzadeh operated Stevens Creek Auto Center. Mr. Barghi was also involved in the business and had a separate auto business. Azimzadeh reported all of Stevens Creek’s income and expenses on his own tax return. But on audit, Azimzadeh claimed Stevens Creek was really a partnership with Barghi. That reduced the taxes and penalties he owed, Azimzadeh argued…the IRS said the whole “partnership” argument was a belated convenience. The Tax Court agreed with the IRS. See Azimzadeh and Ehsan v. Commissioner

Don’t Wait for the IRS to Rule Against You — PLAN! 

Wood writes that the court in fact, looked at several factors including the following list of eight, before making the judgment that this was not a partnership:

        • Partnership Agreement and Conduct as Partners
        • Each Partner’s Contribution
        • Access and Control Over Monies ( Were They Equal signatories on Bank Accounts)
        • Shared Interests on Profits and Losses
        • Was business conducted in both names
        • Did the Two File Partnership Tax Returns
        • Did They Keep Separate Books
        • Did Have Mutual Control and Mutual Duties

Unfortunately for Mr. Azimzadeh, he couldn’t prove a partnership with the appropriate paperwork. But he’s not alone. Many partners have made this same mistake. If you are forming a partnership that involves shared income, withdrawals and tax accountability, it’s best to consult with a Certified Public Accountant who will ensure that all of the joint partnership paperwork is in order and up to date with the IRS in accordance with the most recent tax laws.

Why Consult with a Certified Public Accountant?

Simply stated, error leads to monies owed when it comes to dealing with The Internal Revenue Service. Although Azimzadeh’s case was relatively black and white, it isn’t always as clear-cut in all instances. It’s better to pay a dedicated CPA upfront rather than to pay the IRS later when you may be panicked and blindsided. Fortunately, Mr. Azimzadeh’s bad fortune is a lesson learned. Always consult a trusted professional.

Today, make the smart decision for you and your business. For all of your tax needs or for a consultation, call trusted Certified Public Accountant, Joel Lewinson in the Woodland Hills office at 818-593-6777.