Revoking 1120S Election

[Crank]

I have a client that went to another preparer last year. It wasnt a pleasant experience and had extensions filed on all their returns. The returns were filed at the last minute and communication was minimal according to the client. They returned to me this year. I charged 50% of what the other preparer charged them.

According to them the other preparer, without their knowlege or consent (they say), elected 1120s treatment for their single member LLC which since inception remained a "disregarded entity" reported on their 1040.

So to return the 1120S election to a "disregared entity" I read that a letter must be sent to the IRS before 3/15 for it to be effective this year (i.e. 2012 tax year).

The problem is that Pennsylvania will not allow the switch until 5 years have passed.

So do we wait the 5 years and continue to file as an 1120S or change the federal back and file as an 1120S type for Pa. for the remain time period.

Having a tax different treatment for federal and state doesnt seem the best and it would appear to be very confusing.

Comments are appreciated.

[Lee B]

First, since the election requires their signature, a little detective work is in order.

If they didn't sign an election, then they are not a valid S corporation, which would require

amending last years return. If inquiry shows that last years return was valid, review those

those actions that automatically invalidate an S election and choose the easiest one to execute.

[Crank]

Thank you cbslee.

I will look into it. Im sure they signed the required docs though. They are the type that doesnt want to know any thing about the returns other than refund or payment and would have probably signed almost anything thinking it was just to file the return.

I know the other preparer and he passes the majority of the client contact (and data input) off to his staff who aren't certified as he is. He mostly reviews returns and signs off.

[CathysTaxes]

Thank you cbslee.

I will look into it. Im sure they signed the required docs though. They are the type that doesnt want to know any thing about the returns other than refund or payment and would have probably signed almost anything thinking it was just to file the return.

I know the other preparer and he passes the majority of the client contact (and data input) off to his staff who aren't certified as he is. He mostly reviews returns and signs off.

Then I would suggest they close the current company and reopen a new one. I have a client who was a 1120S client a few years back (he went out of business). He was ready to start up another business but for some some lame reason he wanted to go with a Delaware Corporation (we're in IL). I told him not to and that he should discuss this with the attorney he had used for the 1120S. Well, he didn't listen. He created a single member LLC, registered in Delaware, USING HIS MOTHER'S SSN!.

I made him shut everything down and redo it in Illinois (I told him he'd have to register as a foreign corp in IL and still have to pay an annual fee and pay taxes).

[Crank]

Thanks Cathy, that could be a possible option.