IRS Alter Ego and Successor Liability

The IRS may file a lien or levy against a business or individual based upon a tax liability of a different entity via the alter ego or successor liability theories. If the IRS has threatened to assert a tax liability against your business based on alter ego or successor liability theories, we can offer expert guidance to protect your peace of mind and livelihood.

Alter Ego

The IRS may attempt to collect a tax liability from the taxpayer’s “alter ego”. In an alter ego situation, there can be such a unity of ownership and interest between the taxpayer and a different entity such that the entity is not considered a genuine, separate entity. An alter ego is an entity that is legally distinct from the taxpayer, but is so intermixed with the taxpayer that their affairs (and assets) are not readily separable. As a result, the IRS can seek to assert that the new entity should be considered the same as the old entity or taxpayer for collection purposes. The IRS could attempt to consider all of the assets owned by the alter ego as a source from which to collect the taxpayer’s tax liability. The IRS is generally required to seek Area Counsel approval before instituting administrative collection actions against the alter ego.

Successor Liability

Generally, a corporation that acquires the assets of another corporation is not liable for the debts of the transferor corporation. However, this general rule is subject to certain exceptions. When the surviving corporation is the result of a formal merger or consolidation of two corporations, many state corporate merger and consolidation statutes state that a surviving corporation is liable for the debts of a predecessor corporation. In these cases, the surviving corporation can be held liable for the tax debts of the predecessor corporation as a successor in interest. Successor liability may apply in the following circumstances:

• when the successor expressly assumes the liabilities;
• when the transaction amounts to a de facto merger;
• when the successor is a mere continuation of the seller corporation; and
• when the transaction is entered into fraudulently to escape liability.

Under the successor liability theory, a taxpayer’s liability may be collected from the successor in interest via lien and levy or installment agreement using administrative collection procedures. The IRS might also request that the successor establish an installment agreement to make monthly payments toward the prior entity’s tax liability. The successor corporation steps into the shoes of the transferor corporation and has all of the rights and remedies that the transferor corporation held. A new notice of federal tax lien against the successor naming the successor corporation might be filed by the IRS to preserve its priority over other creditors. In these circumstances the taxpayer can request an appeal to prevent the successor theory.

The ten-year statute of limitations for collection under IRC § 6502 for the original corporation’s tax liability applies to the successor corporation. If it appears that successor liability may apply, the IRS must consult Area Counsel for approval before taking any collection action against the alleged successor corporation. It is important to contact a tax attorney to discuss your appeal options if you disagree with the liability.