Featured:
Allergies
Grilling Guide
eHow Now Blog

Can the IRS Garnish S-Corp Dividends?

One of the major benefits of an S corporation is that it minimizes the taxes that are applied to shareholders. Unlike C corporations, S corporations are not subject to double taxation. Also, because individuals pay taxes on business income as it is earned, most dividends are not taxed when paid to investors. However, these normal protections do not apply to tax liens and levies. With one narrow exception, any S-Corp dividend can be garnished.

  1. S Corporation Basics

    • S corporations are “flow-through” tax entities. Every year, the S corporation divides up the business’s income and deductions based on each shareholder’s percentage of ownership in the company, as defined by stock ownership. The stockholders then include their share of income and dividends in their personal returns. Because the stockholder pays taxes on this income, if the S corporation does not make a dividend during that year, the stockholder’s after-tax basis in her stock increases. A stockholder’s basis in S corporation stock is the cost of acquisition plus the cumulative share of the S corporation’s gains during the time she owned the stock, minus any distributions made by the S corporation and the stockolder’s share of any of business losses over the years.

    IRS Garnishment

    • When a taxpayer is delinquent on his taxes, the IRS applies a lien, and then, if necessary, a levy. A lien is an order filed by the court that is not actionable in itself, but establishes an interest in the taxpayer’s property for future recovery actions. A levy is also a court order, but this allows the IRS to immediately take property from the taxpayer to satisfy what is owed. A levy can be applied to almost anything, including revenue streams like wages. It is important to note that a levy is only used by the IRS as a last resort.

    Liens, Levies, and S Corporations

    • Distributions from S corporations are often at least partially exempt for income tax, since any distribution is paid out of a stockholder’s basis which has already been taxed. However, the IRS is authorized to levy any property that the taxpayer owns, subject to certain conditions, regardless of whether it is normally exempted from tax. Some property is exempt from levies, to ensure that taxpayers have sufficient resources to provide for themselves. One exemption in particular applies to an S corporation’s distributions. If the S corporation’s distributions are your primary source of income, then a portion of that income will be exempt. The amount that is annually exempt is the sum of the standard deduction for the given tax year and the personal exemptions the person can claim for the year.

    Considerations

    • Consult with a certified public accountant or attorney if you are faced with an impending levy or lien. If you have financial concerns that make hiring a CPA or attorney difficult, low-income taxpayer clinics and the Taxpayer Advocate Service are organizations that help taxpayers under duress. Contact the IRS to find an LITC or TAS representative near you. Every effort has been made to ensure this article’s accuracy but it is not intended to be legal advice.

Related Searches:

References

Comments

Related Ads

thumbnail
Featured