urgent ...pls help..tax issue


R

ritagoldman101

urgent ...pls help..tax issue

My brother and his wife run a small business. They have been filing a
1065 for years. Never seemed to have an issue with the IRS

However, now they have received a letter from the IRS asking them to
fill Schedules L, M-1, M-2 of form 1065 etc.
They have never filed these forms before...so they are concerned.

They are worried ..why / what do they have to do here to fill these
forms ? and does it have serious consequences ?

Can anyone highlight the importance of Schedules L, M-1, M-2 of form
1065 ? and what the info supplied on these forms are supposed to
reveal to the IRS ?

Thanks in advance for any input.

Rita
 
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P

Paul Thomas, CPA

urgent ...pls help..tax issue

My brother and his wife run a small business. They
have been filing a 1065 for years. Never seemed
to have an issue with the IRS

However, now they have received a letter from the
IRS asking them to fill Schedules L, M-1, M-2 of
form 1065 etc. They have never filed these forms
before...so they are concerned.



They shouldn't be. Schedule L is just a balance sheet of the business.
Small partnerships are generally exempt if sales revenues are under $250,000
and assets are under $600,000, and the K-1 is given to the partners by the
extended due date of the return.

Maybe they didn't check the boxes (Schedule B, Line 5), or the IRS is just
curious after all these years.

M-1 and M-2 tie down the differences between book income and expenses and
that reported on the return, and reconcile the partners capital account
respectively.





They are worried ..why / what do they have to do here to fill these
forms ? and does it have serious consequences ?


Prepare and file the schedules as requested. There shouldn't be any reason
that the profits should change, as nothing form those Schedules flows back
to the return.





Can anyone highlight the importance of Schedules L, M-1,
M-2 of form 1065 ? and what the info supplied on these
forms are supposed to reveal to the IRS ?


See above for the first part. For the later part, the comparative balance
sheet reveals changes in assets, liabilities and equity. What those changes
are, and if they impact taxes in any manner would be determined based on the
item(s) that change from year to year.


Schedule M-2, they would be looking at negative basis maybe, although the L
and M-2 would only reveal inside basis, it's a good clue of problems if you
have negative basis and are still taking losses.




If they prepare their own returns, they might should take several years to a
local CPA or EA familiar with partnerships and see if there is a problem
that needs to be addressed. That local CPA or EA can also prepare the
Schedules requested. If they've been using a tax professional, have them
generate the schedules.






FYI: Even if not required to be prepared and filed, that information should
be maintained to help assure the returns are accurate as compared to the
actual books of record.

I force the software to generate those schedules on every return.
 
R

ritagoldman101

Thank you very much for your detailed response.

Yes their sales for 2005 were over $250,000.
So they correctly answered No to question 5 in Sch B of 1065
And have to file Schedules L, M-1, M-2 of form 1065 etc.

It is a small business...and there is very little info to give on the
above schedules that the IRS is asking to be filled.

They are concerned - if this is a situation that warrants serious
worrying - or is it very harmless info the IRS is asking.

Thanks for any input.

Rita
 
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Shyster1040

Unless your brother and his wife are using the partnership as a tax-shelter
(very unlikely if what they do is merely run a small business), then it's
not particularly worrisome. The IRS is just asking for basic financial
information that should already be in the partnership's books (in fact, at
this point, it's not even a real person that's asking, it's more likely
just an automatic message from a return-processing computer that flagged
the fact that the required schedules were not attached to the return).

The reason the IRS wants to have the information is to verify the
partnership's income as reported on the Form 1065 to make sure that the
tax return reasonably correlates with economic reality. However, the mere
fact that the information has to be provided does not mean that there is
any suspicion that your brother and his wife are engaged in tax evasion or
anything else illegal. If the partnership has a decent set of books and
if they've been filing the partnership returns properly and not trying to
play any tax games (like claiming extra deductions that they don't have
proof of), then they should have nothing to worry about.
 

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