USA New Business Incorrect Classification as 1065


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I have a potential new client who started an LLC in 2019. He is a SMLLC but was incorrectly classified as a 1065 partnership by the IRS with his EIN letter. He can go through the process of reclassifying to a sole prop, but in the meantime what should he do? He can't wait to do his taxes since they will be due before this is sorted out. He does have an extension on the 1065 now, but he still has to file his 1040 in April. I'm thinking he should file a 1065 for 2019 with BOTH the initial return and the final return boxes checked, then start as a sole prop for 2020. Does anyone agree or have a correction to this thinking? Thank you!
 
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Werner Reisacher

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The default tax classification of a single-member LLC is the Sole Proprietorship. According to you, the IRS made a mistake by classifying your client as a partnership.
If it was my client - and considering that you missed the 1065 deadline - I would include the business activities on Schedule C to Form 1040 for 2019. I would however not file electronically but send Form 1040 by mail together with a cover letter for the IRS explaining the situation.
Whichever way you decide to proceed, make sure, that your potential customer will pay his "estimated taxes" as accurately as possible by the deadline. In my experience, it is much easier to negotiate a technical settlement with the IRS if penalties and interest charges are not an issue.
 
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Thank you. The client filed an extension for the 1065 so my concern was not filing one at all. So that was my worry, but that can be explained away as a mistake. I like your idea better. Why file a 1065 at all if it isn't required? Thank you for your response!
 

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