What makes the IRS automatically suspect that a loan may not be a true loan?

Answer: The loan is suspect when you make that loan to your wholly owned corporation or to your brother, mother, or grandfather.

If the loan is not a true loan because you improperly documented it, executed it, or otherwise failed to prove loan status, then it is a fake loan for tax purposes.

Fake Loan to Your Corporation

The problem with a fake loan to a corporation or other business entity that you own is that the dollar amount of the fake loan becomes a capital contribution.

Fake Loan to Your Mom

If you make the fake loan to your brother or mother, it becomes a gift for tax purposes.

Big Difference

When you make a valid loan that does not get repaid, you deduct your loss in full as a bad debt.

When a ... Log in to view full article.