Q-1:

Subject: Information Requested

Dear Kerry,

 

We have started a corporation in June 2004 in state of Arizona, When we started the company we did not go to any CPA, and we filed 2004 taxes as S Corporation before we get 2553 S corp selection approval from IRS, in some time 2005 September IRS sent us a rejection letter stating that our company not eligible for S corporation because we have not properly filed form 2553, then we contacted CPA she suggested us to sent a latter with some documentation so we did that, and we haven't heard any thing back from IRS yet.

 

But later we found that we are not eligible for S Corporation status, so my question is since we filed 2004 taxes as S Corp, can we file this year taxes as C Corp? and what we need to do resolve the situation 2) If IRA approves our 2553 form are we become a S Corp and still we can reject ourself as S Corporation status and file taxes as C Corp?

 

Thank you

A-1:

You have given a perfect example of why it is crazy to try to set up a corporation without proper professional guidance.

If IRS has not accepted your corp's S election or it is not technically eligible to be an S corp, that means you still haven't filed a proper 2004 tax return, assuming you have elected a tax year ending 12/31/04.  Even if you sent in an 1120S for 2004, you still need to send in the proper form, an 1120.

Since an S corp's income and expense flow through to the shareholders' 1040s, this means all of you shareholders will have to file amended 1040s to remove the S corp info from them.

If IRS accidentally approves your S election for 2005 or 2006 based on erroneous information that you provided on the 2553, you will need to have your professional tax advisor notify IRS of this fact and that any perjury you may have committed by signing the 2553 under false pretenses was unintentional and due to your insanity in trying to tackle this on your own without competent professional representation.

Good luck.

Kerry Kerstetter

Q-2:

Hi Kerry,

 

I really appreciate and thank you very much for your time and valuable suggestions.

My final question, with help any CPA if we file correction of our 2004 taxes, IRS would not charge any penalty on us or any other problems we may have to face like jury etc?

 

Thank you

A-2:

The effects of the amended 1040s will depend on the direction of the net change.

If you erroneously deducted S corp losses on your 1040s, you will have to increase your taxable income and pay additional tax plus interest.  Normally IRS doesn't asses penalties when you voluntarily asses your own increased taxes.  They will hit you with penalties if you don't file 1040Xs and they catch your mistake from their end.

If you erroneously included positive net S corp income on your original 1040s, the amended returns will have lower taxable income, which will probably result in a tax overpayment.  As I have been explaining over the past year or so, IRS has been initiating full blown audits on many 1040Xs that request refunds.  The odds of this seem to be different in the various IRS jurisdictions around the country.  You should seriously consult with your tax pro to see if the coast is clear in your area.  If it isn't safe, you may want to skip filing amended returns for the refunds.  That's what many people have been doing, rather than risk the cost and hassle of an IRS audit.  Intentionally overpaying your taxes won't get you into trouble with IRS because they love it when people pay more than they are legally required to.

You should definitely not try doing any of this on your own.  You have already screwed things up bad enough by failing to use the services of a tax pro from the beginning.  You could very easily make things even worse if you don't get the help of someone who knows what s/he is doing.

Good luck.

Kerry Kerstetter  

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/23/2005 06:52:00 PM Send this post: