Never co-mingle bank accounts

If you have a business then that business needs its own bank account. Often times, when I meet a new business owner, I have to explain the importance of having a separate bank account. Not only does it make your bookkeeping easier, it creates a legal distinction between you and the operations of the business. Once you have separate accounts you need to insure that they are never co-mingled. What belongs to the business stays in the business and only legal distributions and wages end up in your personal account. If you have your own corporation, which is an individual person in the eyes of the law, don’t you thing that person would want their own bank account?

In a recent tax court memo an S corporation with one owner was skewered by the IRS because they co-mingled business income with personal funds by making deposits of gross receipts into their corporate account as well as their two personal bank accounts. That is called co-mingling and is not allowed. The IRS takes a very dim view of co-mingling because it is a tactic used by people who are trying to hide nefarious activities.   

To make things worse, the owner substantially omitted greater than 25% of his corporate gross earnings from his business return. This omission gave the IRS the legal authority to use the six year look-back period for audits instead of the usual three years. Normally the IRS has three years after a tax return has been filed to open up the books for an audit, but if you break certain rules, they can go back an additional three, which is what they did in this case.

The owner gave three separate sets of bank statements to their accountant; the corporate account and two personal accounts. The owner had deposited business income to all three accounts effectively co-mingling gross receipts. The accountant only reported the gross receipts from the business bank account in their bookkeeping calculations. One might deduce that willful blindness played a part but the IRS tends to focus on facts it can prove; that the business owner failed to report the correct amount of gross income to his corporation. Chasing a charge of fraud is difficult because proving intent is an uphill battle. So the IRS appears to have taken the bird in the hand and ignored what may have been lurking in the bush.

Keep your business activities separate from your personal dealings and never co-mingle the two. A first step for any new businesses is to get a separate bank account. If you do not fully understand these concepts then seek out a consultation from your friendly licensed tax practitioner. Using a licensed practitioner is important as it is unlawful for an unlicensed tax preparer to advise in any matter that is not directly connected to the tax returns they work on.