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November 3, 2020


Avoid incurring a constructive dividend and other penalties

Serving as a corporate officer comes with numerous responsibilities, but also comes with some perks. Unfortunately, someone serving in this capacity needs to be cautious not to inadvertently cross any lines that could draw the attention of the IRS. For instance, a corporate officer here in Texas or anywhere else across the country could incur a constructive dividend and possibly other penalties as well.

The IRS assesses a constructive dividend when a corporate officer uses company funds to pay personal expenses. Corporate funds are often used to reimburse officers for expenses incurred during the course of business activities. However, if the IRS believes those expenses were personal and not related to corporate duties, problems arise.

If the expenses are deducted on the company’s tax returns, the IRS may determine whether they are truly business or are personal. If they are reclassified as personal expenses, then the corporate officer becomes responsible for taxes on the total amount, which is construed as a constructive dividend from the company. If the IRS proves its contention, the best-case scenario is civil penalties, interest, and taxes. On the other hand, the agency may view the activity as criminal and pursue prosecution.

The best way to avoid such a scenario is not to use business funds to pay for personal expenses, or even for questionable expenses. However, people make mistakes or do not always understand they may be walking a fine line when it comes to this issue. In order to help avoid incurring a constructive dividend – or help in defending against civil and/or criminal allegations – it would be wise to consult with a Texas tax attorney for assistance

IRS Tax Collection