partnership mess to un-do

[Catherine]

Client and a friend created a small group and decided that they wanted to be a non-profit but weren't ready to apply for 501c3.  Got an EIN but with no entity type chosen.  Worked with a "fiscal sponsor" and some local agencies  who all use fiscal years, so the two of them decided to be a "partnership" and use a fiscal year.  Then they filed a fy p'ship return (on their own, done wrong, whatever) and NEVER (of course!) talked to us about it.  Big boo-boo.  Fiscal year dis-allowed, mega penalties for "late" return.  They called and got the penalties reversed.  THEN they called us.

In looking over the mess, what they actually have is a sole prop with a consultant (the buddy).  I now have a POA for the whole mess.  My thought is to re-file (amend) the p'ship return as calendar year, all zeros, marked "initial" and "final" and amend the personal return to include the Sch C.  Explanatory statements for both to be attached.

Does this sound like it will work?  It makes the most sense out of all the possibilities.  The IRS would get the right tax, the mess would get extricated and fixed, and when/if they go for 501c3 they'll need a new EIN regardless of current filing method.  Have I missed something blatant?

[Margaret CPA in OH]

Just-wow!  Don't you wonder why so many folks think they know how to do these things because, well, because? 

I have no great insight but admire you for this untangling and immediately don't see the traps.  Likely others will. Does the original p'ship return actually have zeroes?  Or are you thinking it should because it really is a sole prop?  What I don't quite get is why the friend becomes a consultant and what happened to the 'small group' created? And if this is really expected to be a non-profit at some time, you might want to educate those involved on the costs to apply and education needed to comply.

And you need this in late February, don't you?  Hope you get paid appropriately! 

[Terry D EA]

>>>>>>In looking over the mess, what they actually have is a sole prop with a consultant (the buddy).  I now have a POA for the whole mess.  My thought is to re-file (amend) the p'ship return as calendar year, all zeros, marked "initial" and "final" and amend the personal return to include the Sch C.  Explanatory statements for both to be attached. <<<<<<

Catherine, this was my initial take that this should have been a disregarded entity and I see you caught that.  It sounds like your method will work and hope the explanations are actually read and understood by someone in the IRS. As Margaret said, I hope you get paid well on this one especially at this time of year. 

[Catherine]

The original partnership fiscal-year return was NOT all zeros; it had fiscal-year figures.  I propose to amend that return TO all zeros and calendar year (as the IRS demanded of them) and mark it both initial and final.  Plus the explanatory letter - copies of the IRS letters telling them this wasn't allowed and to fix it should help.

Then amend 2018 personal to include Sch C.  The "consultant" is cuz instead of doing K-1s to partners they skipped that and sent 1099-MISCs to both individuals.  The Sch C "partner" 1099-MISC does a circle:  out as expense and back in as income; no net change.  The other "partner" gets her 1099-MISC and reports on her own return.  Amended 1040 also gets explanatory letters.

2019 we do it all right, from the start.

Oh good; I was hoping this sounded reasonable to more than just me and my business partner.

[Margaret CPA in OH]

So the 1099's were sent using the 'partner's' SSN?  And, if so, that gets negated?  I'm glad you are handling this but agree it's on the right, and probably only, track to correct, then for the clients to 'go and sin no more.' 

Just be sure to be compensated.  I kinda harp on this having been really burned several years ago.  The client was just arrested last week for fraud and other charges.  I coulda shoulda taken her to small claims court back then but it's unlikely I would have realized real money.  I moved on but it didn't and will never happen again.

[DANRVAN]

9 hours ago, Catherine said:

The Sch C "partner" 1099-MISC does a circle:  out as expense and back in as income; no net change.  The other "partner" gets her 1099-MISC and reports on her own return.

I am not following you Catherine.  Were both of these individuals involved in the business?

[Catherine]

On 3/1/2020 at 5:29 PM, Margaret CPA in OH said:

So the 1099's were sent using the 'partner's' SSN?

Sent using the entity's EIN - but there was NO tax structure chosen at the time the EIN was assigned.  So it was like a Sch C sending out 1099s.

And yes, I got a retainer and did nothing until the check cleared.  Although these are good clients I generally would not worry about.  They got really bad advice from people who *claimed* to be specialists in non-profit law *and* taxation.

[Catherine]

21 hours ago, DANRVAN said:

I am not following you Catherine.  Were both of these individuals involved in the business?

The idea was thunked up by both of them, but one was the primary person active and the other was consulting.  So yes, both were involved.  One will claim the whole operation as her Sch C, and the other will claim her portion of the income on her own Sch C as a consultant to the first one.  Eventually (assuming it all works out the way they'd like) they will form a corporation and go on payroll.  At that time, they'll need a new EIN anyhow, along with payroll processing and state reporting and all the rest.  This is really for a couple of years until they decide it will make them enough money to be worth the effort to incorporate and apply for 501c3 status (you can't go from partnership to corporate 501c3 without a new EIN, so either way they're stuck with that).