The Alter Ego Doctrine Explained, IRS Tax Liabilities & Penalty

The Alter Ego Doctrine Explained, IRS Tax Liabilities & Penalty

The Alter Ego Doctrine Explained, IRS Tax Liability Danger

Oftentimes, a US Person may create a separate entity for the purpose of shielding or hiding certain income or assets that they have in order to keep it out of arms reach of the US government. But, just because a person has created a separate entity does not mean that the Internal Revenue Service or other government organization is estopped from going after that separate entity to collect a debt on behalf of the individual who created the entity if they believe the entry is the alter ego of the individual –– or the alter ego of a different company or entity. The concept of alter ego is the idea that there is such a unity between the taxpayer and the entity so that while technically there are two separate and distinct persons — for tax and other liability they are considered to be the same person. The Internal Revenue Service can go after the alter ego when it believes the alter ego is so entwined with the person who has the liability — that they should be able to recover assets taxes and penalties from the alter ego.

IRM (Alter Ego Theory)

The IRM refers to the Internal Revenue Manual –which reflects the procedures typically used by Agents or Examiners and other IRS personnel on different matters impacting taxpayers.  The Internal Revenue Manual provides the following on the alter ego theory.

IRM (09-25-2020)

Alter Ego Theory

      • The alter ego theory allows collection from all the property of a Taxpayer’s alter ego. This theory is based on the premise that the taxpayer and the alter ego are so intermixed that their affairs are not readily separable. Thus, the alter ego theory focuses on the relationship between the taxpayer and the alter ego.

        • See IRM, Alter Ego NFTL, and IRM, Nominee and Alter Ego Theory Elements.


  1. Alter Ego: A tax liability may also be collected from the taxpayer’s alter ego. Elements to consider include:
        • The alter ego theory focuses on the relationship between the taxpayer and alleged alter ego entity. See IRM for factors used to show the presence of an alter ego.

        • The taxpayer usually establishes an entity (often a corporation) and transfers assets to it, but there is such unity of ownership and interest between the taxpayer and the entity that the entity is not considered a genuine separate entity.

        • An alter ego entity should be considered the same as the taxpayer for collection purposes. All of the assets owned by the alter ego may be used as a source from which to collect the taxpayer’s tax liability.

        • If it is determined that an alter ego may exist, consult Area Counsel before instituting administrative collection against the alter ego. See IRM et seq., Special Condition NFTL (Nominee, Alter Ego, Transferee, Successor-in-Interest). Alter Ego Notice of Federal Tax Lien (NFTL)

Alter Ego NFTL

      1. The “‘alter ego’” (second self) doctrine has been summarized as follows: The obligations of a corporation will be recognized as those of another person, and vice versa, where it appears that the corporation is not only influenced and governed by that person, but there is such a unity of interest and ownership that the individuality or separateness, of the person and the corporation has ceased. Also the facts are such that adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote an injustice. The alter ego question does not concern property rights and should not focus on whether the taxpayer had a state-law enforceable property right in property. Rather, a proper alter ego analysis focuses on which entities are liable for the debt and whether two entities that are formally separate should be regarded as one.

Note: It is generally more difficult to establish alter ego relationships than a nominee situation.

  1. There are two elements to the alter ego doctrine:
        • Unity of ownership and interest, and

        • Fraud or inequity would result from the failure to disregard the corporate entity.

  2. Some factors pertinent to a determination to disregard the corporate entity are whether the individual:
        • is in a position of control or authority over the entity;

        • controls the entity to shield himself from personal liability;

        • uses the business entity for his or her own financial benefit;

        • uses the business entity to assume personal debts, or debts of another, or

        • uses personal funds to pay the business entity’s debts.

  1. Some facts establishing the factors in (3) above are:
    • commingling of funds and other assets,

    • failure to segregate funds of the separate entities,

    • an unauthorized diversion of corporate funds or assets to other than corporate uses,

    • treatment by an individual of the assets of the corporation as his own,

    • failure to obtain authority to issue stock or to subscribe to or issue the same,

    • holding out by an individual that he or she is personally liable for the debts of the corporation,

    • failure to maintain minutes or adequate corporate records, and the confusion of records of separate entities,

    • the identical equitable ownership in two entities,

    • the failure to adequately capitalize a corporation, the total absence of corporate assets, and under capitalization,

  1. Explore the possibility of using the processes of jeopardy, transferee assessment, nominee NFTL, emergency lien foreclosure action, or emergency transferee or fraudulent conveyance suit before filing an NFTL in the name of an alter ego.
  2. Do not file an NFTL in the name of an alter ego without legal review, advice, and written direction from Area Counsel as to:
      • the need for a supplemental assessment,

      • a new notice and demand, and

      • the language to be incorporated in the NFTL.

  1. Refer to the Legal Reference Guide for Revenue Officers, IRM 5.17.2, Federal Tax Liens, for additional information.

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