Stinking S-Corp Mess

[TaxmannEA]

I'm trying to advise an S-Corp with a long term problem. The corp was acquired in 2011 by the current owner. Returns were filed for 2011 and 2012 electronically and were accepted.  In 2014, the E-file system rejected the return with an error code that indicated the wrong status for the corporation. We called IRS and they told us that this was indeed listed as an S-Corp and to mail in the return, which we did for several years. No notices were received after that until 2020. The return was mailed back to the client due to the company using a fiscal year instead of a calendar year. We have finally discovered that the first 2 years which had been accepted and processed were "un-Filed" by the IRS. 

Bear in mind that the client had not received any notices about the fiscal year issue or that the returns were not being processed until 2021 after the first contact years earlier. Client had called IRS and was told that he has to re-do his books and file all of the back returns on a calendar year basis. The owner has reported all K-1 info and paid taxes on his own return. 

I would like to get the corp. on the fiscal year if possible, or make a short- year adjustment in the current periods. Re-doing 10 years of returns and the matching 1040s seems to be unduly extreme as there would be no significant differences in the long term. I also think that there should be some consideration to the fact that IRS didn't notify the client of the real problem for 10 years. Any advice?

[schirallicpa]

Is there an officer assigned to this.  Try to get someone assigned to it on the IRS end, and maybe you can talk sense.  Otherwise, you may consider the advocates office.  I agree with your not wanting to re-do what will ultimately result in the same end.

[jklcpa]

1) When the corp was "acquired" in 2011:

• Was this a stock purchase or addition of the new shareholders so that the original corp continued?
• Did it file as an S corp prior to acquisition by the new owners?
• Did bringing in new shareholders create an inadvertent termination of the S election?
• Prior to acquisition, did it file on a fiscal year basis with valid sec 444 election and timely payment of the deposit?

2) Or, was it acquired via asset purchase and a new corporation started?

• Was a 2553 filed?
• Was a valid sec 444 election made for the fiscal year, and were timely deposits made each year?

3) What type of activity?  Did inadvertent termination occur because passive income exceeded passive income limitation? 

Sorry, more questions than any answers.