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This is what I'd do. Reversing this will take forever, generate a huge bill for your services and end up at almost the exact same situation most likely. Tell the client that what they did was wrong and if the IRS requests information, THEN we'll fix it. It's not like they are shorting the IRS.

From an AICPA source which did not give a cite: "This administrative penalty waiver allows a first-time noncompliant taxpayer to request abatement of certain penalties for a single tax period—one tax year for individual and business income taxes and one quarter for payroll taxes." There is also this possibility: Internal Revenue Manual Section 20.1.1.3.2.2.6 (11-25-2011) Ignorance of the Law 1. In some instances taxpayers may not be aware of specific obligations to file and/or pay taxes. The ordinary business care and prudence standard requires that taxpayers make reasonable efforts to determine their tax obligations. See IRM 20.1.1.3.2.2, Ordinary Business Care and Prudence. 2. Reasonable cause may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances. For example, consider the following: A. The taxpayer’s education. B. If the taxpayer has previously been subject to the tax. C. If the taxpayer has been penalized before. D. If there were recent changes in the tax forms or law which a taxpayer could not reasonably be expected to know. E. The level of complexity of a tax or compliance issue. 3. Reasonable cause should never be presumed, even in cases where ignorance of the law is claimed. 4. The taxpayer may have reasonable cause for noncompliance due to ignorance of the law if the following are true: A. A reasonable and good faith effort was made to comply with the law, or B. The taxpayer was unaware of a requirement and could not reasonably be expected to know of the requirement.

Fix it now with a form 8832 and a 1120-S. Very little extra effort or cost to client than filing an inaccurate 1065.

Ignore it and file as is. The taxes are almost exactly the same either way.

Abatement for ignorance of the law does not apply to inaccurate return by preparer. Late Sub S election and 1120 S covers all the bases with very little extra effort or cost.

I didn't use to have an engagement letter either but I have always had a tax organizer, which some clients filled out and other clients made a half hearted attempt. Lesson learned, now I insist that every client sign the engagement letter and complete the tax organizer. This year I handed back two client's tax organizer and all their tax documents and told them to come back when their tax organizer was complete. Last year I filed MFJ for a divorcing couple who were longtime business clients for 30 years. Big mistake, in the future I will always file MFS in this situation!

That is correct. form 8832 was from Bulldog's post. A state issue, minor detail.

Form 2553, if you're going that way. But now you have the dissolution of a corporation for 2022, also.

I agree with DANRVAN.

I believe so for S-Corp, as I recall from something I have either read or learned from CPE. There is also abatement for reasonable cause due to "ignorance of the law" which might be a possibility in this case.

A lot of the stories are biased one way or another, so I am not going to post a link. But you can google the story. It is all over the web. IRS Consultant illegally downloaded decades of tax returns of the nations wealthiest taxpayers, including a "public official" widely believed to be former President Trump, and leaked the information to news outlets, most notably the New York Times. He faces up to five years in prison if convicted. ***warning - rant coming*** I HOPE THEY CONVICT THE JERK AND MAKE HIM SERVE THE WHOLE 5 YEARS WITHOUT A CHANCE OF PAROLE. I wish Congress would pass a law that says anyone who distributes taxpayer information without written (not click through T&Cs on a website) agreement of the taxpayer should face the same 5 years. ***rant over*** Tom Longview, TX

I don't know, Tom. I thought that had to be done on a timely filed return which this is not. It should have been filed by September 15. Also, I thought that the automatic forgiveness was if the return was filed in time for the partners to file on time. Neither partner got an extension because they both filed based on their W2 rather than after the partnership return. I did point out that if they ever start another business, they might was to talk to a tax advisor before they begin instead of after they mess it up.

Wages