When a corporate officer uses corporate funds in such a way that do not constitute business expenses, but rather expenses to enrich his or her personal life, the officer may face a tax issue with the IRS. If those expenses are deducted on the corporate business tax return, the IRS may reclassify the expenses as personal to the shareholder and therefore a constructive dividend. A constructive dividend is taxable to the individual.
An example of a constructive dividend is personal expenses that a person runs up on a credit card and then pays for using a business check. In these cases, the IRS could reclassify the personal expenses as a constructive dividend. Depending on the case, the IRS may view overlapping of business and personal expenses as a civil matter and simply adjust the amount of individual taxes due. However, if the corporate officer is seen as looting the company for his or her personal gain, there is a good chance the IRS will seek a criminal prosecution. Brown, PC frequently represents clients faced with constructive dividend issues. We challenge any attempt to reclassify them as personal expenses, or negotiate with the IRS to avoid criminal charges or penalties.