USA S-Corp Late Filing Penalties ($2,340/year)

[DTA93433]

I truly welcome any suggestions! I have a client:

1. Submitted the 2553 (March 2005). Filed Form 1120S for tax year 2005. Has not filed since (not even personal returns).

2. Client has never kept any Board meeting minutes (ever!). Corporation has only one shareholder (one class of stock)

3. Secretary of State filings have been kept up. Filed as a corporation.

4. Since 2009 most/if not all of the income has been reported via 1099-MISC on his SSN# - and not the corp. EIN#.

5. Client has run all income/expenses thru corporate bank account (since 2005).

6. I see no evidence of any inadvertent/involuntary S-corp termination activities by the corporation since 2005.

7. (Obviously) no S-corp termination letter was ever sent.

Someone has suggested amending the 2005 return and marking it as "final". Not sure of this strategy. Any way around the $2,340/yearly penalty?

I was thinking of filing 2006 - 2008 as an S-corp. Since the corporate income was reported starting in 2009 - thinking of filing Sch C going forward.

Comments/suggestions welcomed! Thanks!

 

[Drmdcpa]

I would get at least a down payment of my fees up front.

There is some relief from the penalties. I have had success getting them abated with writing a request letter. There is actually a code section that provides relief. I did not know about it until one time the IRS referred to it in their response initially denying the relief.

There is also a form and formal process to get the penalties abated. I have never had to actually use that process. Each time simply corresponding with the IRS making the request and giving good cause was enough to get them abated.

I agree with you amending the 2005 does not seem appropriate. If income reporting documents like 1099s were issued to the EIN even though corporations are not required to recieve them, they represent activity.

Also the corporate bank account was used. That documents corporate financial transactions.

The fact that the SOS file was maintained does not help. It demonstrates intent just like using the corporate bank account.

The only thing missing would be other operational documents like invoices, contracts, advertising and business cards to support corporate existence.

The lack of documented board minutes and activities is not sufficient to state the corporation did not operate.

If you switch in 2009 to Schedule C you are still taking a risk given the reasons stated above that support corporate existence and activity. But I would probably consider taking that risk as well.

 

[DTA93433]

Unfortunately, I see no way around the fact that the client has been (and still is) running his business as a corp. Other than stating in a reasonable cause letter that all the income has been reported on his SSN# and not his corp. EIN# - I'm not sure if that would be sufficient; but it's definitely worth trying. If the earlier years were to produce an NOL, I believe there would still be a 1120S filing requirement.

 

[Drmdcpa]

Yes there is still 1120S filing requirements. NOLs are 1120 and 1040 issues not 1120S issues. If there are substantial losses in 1120S, they may be suspended due to lack of basis, and one has to ponder where the cash came from.