Owners of pass-through businesses must report income received on their individual tax returns, where it’s taxed as ordinary income. One married couple who had complex legal and financial issues was audited by the IRS. Evidence showed they received consulting fees of $1.2 million from an LLC they owned. That company deducted the fees as an expense, but the couple didn’t report them in their gross income, arguing that the money wasn’t taxable income but money to repay loans made to the LLC. The IRS found no proof to support that argument. The U.S. Tax Court agreed that the amount was taxable income and the couple owed tax, underpayment penalties and late-filing penalties. (TC Memo 2024-88)
