TAX LAW: A tax risk of the sole proprietorship.

It is a common practice for the owners of sole proprietorships to use personal bank accounts to carry out commerce. This habit, although at first glance it seems harmless, is one of the most harmful in business activity, due to the tax risk it implies, since there is no adequate financial practice that allows the assets of the sole proprietorship to be adequately separated from the of the owner.

Why is it a harmful practice?

Because the National Tax Service, when it opens an inspection of the owner of the sole proprietorship, carries out an exhaustive analysis of the bank statements to detect undeclared tax obligations. Under the criteria of the treasury, the payments made to the personal account of the taxpayer that do not correspond to the declared sales, demonstrate the existence of undeclared income and, therefore, the origin of the taxable event. In other words, the Tax Administration only needs a mismatch between the declared sales and the deposits in the taxpayer's bank account to determine the declared income.

Faced with this arbitrary and illegal observation of the Tax Administration, the Supreme Court of Justice and the Tax Challenge Authority, have generated a series of precedents that established, on the one hand, that bank deposits are not sufficient elements to demonstrate the existence of undeclared income and, on the other, that the National Tax Service must generate other elements of evidence to demonstrate that the payments to the taxpayer's bank accounts correspond to undeclared income. A similar criterion is used in cases of bank deposits in personal accounts of the legal representative of a commercial company.

In this context, it is crucial to highlight that the owners of sole proprietorships must be fully informed about their ability to defend themselves against possible inspections by the Tax Administration. In these audits, there is the possibility that the existence of undeclared income will be determined, especially if bank deposits considerably exceed declared sales.

On the other hand, it is important to highlight that, in certain cases, the Taxpayer must assume a proactive attitude instead of a passive posture, actively providing evidence that can distort and refute the observations of the National Tax Service.

Finally, it is recommended: 

1. Create a bank account that is exclusively for the sole proprietorship or, where applicable, is intended for carrying out a commercial activity.

2. Implement financial practices that allow the assets of the company and the owner to be separated.

3. If an account is to be used for personal and commercial activities, each deposit must have its corresponding backup.

4. Establish a Commercial Company to adequately protect personal assets.

Víctor Manuel Vásquez Alfaro
Litigation and Corporate Lawyer