January 1, 2011, I purchased 50% of an S-Corporation; thereby creating a two owner S-Corp. I recently discovered that my business partner failed to separate personal expenses from the previous year’s tax returns (nonemployee children on business cell phone plan and on business fuel cards) , and allowed one employee's family (family not employed with Corporation) to obtain cell phones through the Corporation; yet claimed the entire year-to-date cost of the cell phone bill as a business expense. Please advise as to what the repercussions of his actions can bring.

“ I recently discovered that my business partner failed to separate personal expenses from the previous year’s tax returns (nonemployee children on business cell phone plan and on business fuel cards) , and allowed one employee's family (family not employed with Corporation) to obtain cell phones through the Corporation; yet claimed the entire year-to-date cost of the cell phone bill as a business expense.”---->One of the top 10 items that the IRS eyes S corp oversight is commingling business and personal assets. All business assets must be titled in the business name, especially if you are depreciating them. This also includes the s-corporation paying personal bills or expenditures of the owners. The IRS's position is when the s-corporation pays the personal expenses of the owner the owner is taking compensation and not taking a distribution. The difference is self-employment taxes (Social Security and Medicare) are added to compensation. Commingling personal and corporate assets might not be a good idea if you want the legal protection of your corporation too. Commingling assets makes tracing and proving deductions difficult, which makes it easier for the IRS to win audit positions. Therefore, be certain to have business bank and credit card accounts solely for business transactions and have personal bank and credit card accounts for personal transactions. Your partner would include the money in his personal expenses and he would not write the amounts off as expenses of the S corp. Only business related expenses can be deducted from his business income. The limited liability protection of an S corporation will not protect a shareholder from personal liability arising from his own misdeeds. But the corporate status will protect other shareholders from sharing the liability so long as there is no evidence of a fraud sanctioned through the corporate entity. The fact that it is a corporation generally leads to protection of the corporation and its assets from any personal liability of the shareholders and vice versa. If the corporation has been properly operated as a legal business entity completely separate and apart from its owners (the shareholders) personal affairs, with its own bank account, accounting and business records and the like, and if the shareholders have not used it for personal purposes, intermixed business and personal financial dealings through the entity, or to use a common expression, used the business as their personal piggy bank (using corporate funds to pay personal expenses, for example), then the protection described above should prevail in the event of bankruptcy of a shareholder.
“Please advise as to what the repercussions of his actions can bring.”---> As said above.