QUESTION
Will the IRS compromise under these circumstances?
Asked on Nov 20th, 2011 on Taxation - New York
More details to this question:
In 2004 I had a local attorney set up an S Corporation for an investment property. Within a day or two I realized it should have been an LLC (which I set up). When I asked him what to do about the S Corp he said "don't worry about it, they will dissolve it on you when there are no returns filed- it will just go away". I think he just didn't want to charge me again to undo something he just did and was probably embarrassed that he didn't suggest an LLC in the first place. I have been getting notices for the last two years or so for taxes and penalties. My accountant (ex-IRS) said they cannot collect from me personally and it would be crazy to pay this money. He filed a final return for 2005.I paid one for 2005 around $1800.00 thinking it would be settled, but now they say this entity owes for periods ending 5/06,5/07,5/08,5/09,5/10,and 5/11 (seems to be about $1800 for each year).I don't like this hanging over my head until it becomes a huge number and they have impetus to change the laws/rules and come after me personally. One section of their response states " The original bill explained that the tax was estimated and that the assessment would be cancelled when the return was filed. the estimated tax is $1000.00 and is intended to encourage filing compliance. This estimated tax assessment,with accrued penalty and interest, will be eliminated when the required return is filed." I don't recall this. Elsewhere it states "Since the corporation did not take proper action to voluntarily dissolve, franchise tax returns are required to be filed and taxes paid" So I received bad advice from an attorney and now bad advice from a tax professional who should have said dissolve it right away instead of "they can't collect personally on an entity like that" I can't believe this kind of money is owed for business that did not take place.
5 ANSWERS
Trust Attorney serving Cincinnati, OH
at
Paul A. Nidich Attorney at Law
Update Your Profile
1) The federal government has nothing to do with franchise taxes. Are you mixing up IRS and Ohio? 2) If the S corporation didn't do any business, how was a return prepared, filed, and a tax of $1800 paid? 3) Did you get a tax ID number for the S corp but used it for the LLC? I imagine an offer and compromise might be possible, but you need to get all of the filings done correctly, first. *Disclaimer: Please note that this answer does not constitute legal advice, and should not be relied on, since each state has different laws, each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship.
Answered on Nov 28th, 2011 at 10:47 PM
Tax Law Attorney serving Birmingham, AL
at
Meadows & Howell, LLC
Update Your Profile
First, you have to consider that converting to an LLC may result in significant tax liability to the shareholders of the former S-Corp. Although you may not have intended to operate (and in fact, didn't operate) the business as an S-Corp., I assume that your attorney had already filed Form 2553, and thus in the I.R.S.'s eyes, you should have been treated as an S.-Corp. until the day that you notified them of your change to an LLC. The I.R.S. will treat any conversion as a liquidation of the S-Corp. for federal income tax purposes. So, if the assets of the S-Corp. have increased in value during your time in business, the increase will be taxable to the shareholders - most likely as capital gains. With that being said, the I.R.S. has apparently assessed your business; whether they assessed the income as earnings from an S-Corp., C-Corp., or LLC will depend upon whether Form 2553 was filed, as well as how your returns were filed. As far as the I.R.S. not being able to come after you personally, your accountant was wrong. Both the Department of Revenue for Alabama and the Internal Revenue Service have what's known as a "Trust Fund Recovery Act." Essentially, this allows them to collect from the individual owner of the business who is responsible for remitting tax payments on behalf of the business. So even if you close down the businesses and never pay the debt that has been assessed on behalf of the business entity, they can still assess you personally as the owner of the business. If you have any questions regarding how you should move forward to resolve this debt, all of our initial consultations are free.
Answered on Nov 28th, 2011 at 10:42 PM
Donald B. Lawrence
You give a great amount of detail but do not indicate the critical information. Did you report the income tax incidents received from the investment property on your 1040, Schedule C (if the LLC was a single member) or on a 1065 issued pursuant to a partnership return? Was the investment property titled in the name of the LLC or of the S Corp or in your name during the periods covered by the returns? You acknowledge that the assessments are estimated but what about the "final" return for 2005? It is not clear that your filed return was for zero dollars of income and tax. There are many corporations that cease to do business without dissolution, and, in Michigan, it is possible to dissolve a corporation prior to its operation by form. There are just too many issues here that are not clearly defined. However, you paid $1800.00 in 2005 which will only encourage the IRS unless you get this situation corrected. You will definitely need the assistance of counsel and with the way things are going for you, you need to pay for assistance to take care of the problem. The tax liability assessed is estimated, but there may be penalties for failure to file a return or for late filing. Generally though if no tax is due, there is no liability. If no tax is due, you may be able to file for a refund (but it depends on when the money was paid). It is possible generally to compromise these types of liabilities or to eliminate them, although there may be considerable expense involved in getting from where you are to where you want to be.
Answered on Nov 28th, 2011 at 10:05 PM
Tax Attorney serving Portland, OR
at
Bullivant Houser Bailey PC
Update Your Profile
If the business did not conduct any business in later years, it does not owe taxes for them. I would send a response to the IRS saying no business was conducted after the 2005 tax year and the business had no employees during those years; as a result, the entity had no taxable income or filing obligation. That should take care of it. If that doesn't work, you could file tax returns for those years showing no income or expenses. Note: some states (California in particular) have a minimum annual tax that applies each year until you file the proper form with the state notifying them that the business has been dissolved.
Answered on Nov 28th, 2011 at 9:47 PM
1 Award
This is an easy one. Just file a final zero return for the first year. Your payment before works against you.
Answered on Nov 28th, 2011 at 4:04 PM