Partner's Issued themselves W2s

[Gail in Virginia]

A couple of kids formed an LLC (all on their own, with no legal or tax advice except from their buddies) to do hardscaping in 2022.  By the end of 2022 they had decided their wasn't enough profit in this to continue.  I agreed to do the tax return for the partnership because they could not find anyone to do it.  Once I got the information from them, i found out that they had issued themselves W2s, filed the payroll taxes and filed their own tax returns based on the w2 they got.  

I know this is wrong.  if they had asked me before they did it, they would not have done it because they were the only employees and would not have needed to file withholding forms at all.  But they did not ask, until well after the fact.  Do I really need to do amended w2s to show 0 wages, do amended 941's to get the payroll taxes refunded and then correctly complete the K-1s or can I ignore it since the end result should be the same amount of taxes?  I know they have to amend their personal returns once I get K1s prepared, but since this is the initial and final return I really don't want to get into any more amendments than I absolutely have to.  Opinions please?  

[Abby Normal]

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

[Lee B]

Did they obtain an EIN?

[Abby Normal]

16 minutes ago, cbslee said:

Did they obtain an EIN?

Can you file payroll taxes without an EIN?

[Lee B]

36 minutes ago, Abby Normal said:

Can you file payroll taxes without an EIN?

If they obtained an EIN, won't the IRS be expecting a Form 1065?

[Gail in Virginia]

4 minutes ago, cbslee said:

If they obtained an EIN, won't the IRS be expecting a Form 1065?

I plan to file the 1065 - I just questioned whether I would need to correct the mess they made by filing w2s on themselves first.  

[Lee B]

How would you report the W 2 wages on the 1065?

[kathyc2]

1 hour ago, Gail in Virginia said:

I plan to file the 1065 - I just questioned whether I would need to correct the mess they made by filing w2s on themselves first. 

As long as you have verified that no difference in tax, I wouldn't.

I haven't kept up with the late S election criteria, but since they were treating the business as a S, I wonder if that may be a possibility?

 

[Abby Normal]

1 hour ago, cbslee said:

How would you report the W 2 wages on the 1065?

Wages

[Abby Normal]

1 hour ago, cbslee said:

If they obtained an EIN, won't the IRS be expecting a Form 1065?

Depends on how the questions were answered. They could have just gotten an EIN for banking purposes, but yes, if they answered the questions correctly, it would default to a 1065.

Now I'm wondering if an extension was filed. Even then, the 1065 would be late, but it's an automatic penalty removal, even without first time forgiveness.

[BulldogTom]

Can they file a late 8832 to claim the Corp status and then make a late S election?   Normally an automatic approval from the IRS from what I understand.  And since the IRS does not have a 1065 on file, since this is the first year filing, they should be good to go if the 8832 is included with the 1120S.

Just a thought.

Tom
Longview, TX

[Gail in Virginia]

17 hours ago, BulldogTom said:

Can they file a late 8832 to claim the Corp status and then make a late S election?   Normally an automatic approval from the IRS from what I understand.  And since the IRS does not have a 1065 on file, since this is the first year filing, they should be good to go if the 8832 is included with the 1120S.

Just a thought.

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.  

[BulldogTom]

28 minutes ago, Gail in Virginia said:

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.  

@Gail in VirginiaTake a look at Rev Proc 2013-30 for the late filing of the 8832 and the late S election.   I think you have 3 years to file this...but check it out yourself, I only skimmed it.  It may be your "magic bullet" to pull dumb and dumber out of this mess.

There will most likely be a late filing penalty, and I don't think you can get them out of that (and frankly, I wouldn't try, they need to pay the price for their actions)

Tom
Longview, TX

 

[mcb39]

After just reading about the millionaire non-filers, I would just leave it alone.  W2 withholding and SE Tax end up about the same.  Apparently the IRS just doesn't know their butt from their elbow and are going after the little guys.  I doubt that this would ever be questioned.  Just because they might have an EIN doesn't mean that they conducted any business.

A little humor here as I had two young fellows approach me this summer to set up their Partnership.  They came in together and I told them explicitly what the steps were going to be and they both assured me that they understood.  They both promised to bring me the Partnership return as well as their separate personal returns.  I never like to prepare a 1065 if I don't also get to prepare the returns of the Partners.  So far, that has always been the case.  The Primary Partner here already was a client of mine as a Sch C filer.  We can do good things and issue great guidance if they only learn to ask. 

[DANRVAN]

I see issues with compliance and professional standards regardless of the dollar amounts involved and whether the net result is  basically the same.

RR  69-184 clearly states that a partner cannot be treated as an employee.

Sec. 6664 prohibits taking a position on tax returns unless there is substantial authority for the tax treatment of an item.

AICPA SSTS#1 requires members to adhere to the above statements.

On 9/28/2023 at 12:47 PM, BulldogTom said:

Can they file a late 8832 to claim the Corp status and then make a late S election?

Looks to me like they can and that is probably how I would handle this situation.   Most likely the simplest way to straighten it out.

 

On 9/29/2023 at 6:44 AM, BulldogTom said:

a late filing penalty, and I don't think you can get them out of that (and frankly, I wouldn't try, they need to pay the price for their actions)

I thing an abatement is possible and they should be informed of that.

[Lion EA]

So, the business dissolved at the end of 2022? Or, ceased any further business activity? First & last return?

[BulldogTom]

3 hours ago, DANRVAN said:

I thing an abatement is possible and they should be informed of that.

@DANRVANIs first time abatement possible for Corps?   For some reason I thought it was for 1040 returns only.   Don't know why that is stuck in my brain that way.   Something about businesses being held to a higher standard....

Tom 
Longview, TX

[DANRVAN]

On 9/30/2023 at 12:43 PM, BulldogTom said:

DANRVANIs first time abatement possible for Corps? 

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.   

[mcbreck]

On 9/28/2023 at 11:31 AM, Abby Normal said:

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

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.

[Lee B]

On 9/30/2023 at 9:09 AM, DANRVAN said:

I see issues with compliance and professional standards regardless of the dollar amounts involved and whether the net result is  basically the same.

RR  69-184 clearly states that a partner cannot be treated as an employee.

Sec. 6664 prohibits taking a position on tax returns unless there is substantial authority for the tax treatment of an item.

Looks to me like they can and that is probably how I would handle this situation.   Most likely the simplest way to straighten it out.

 

I thing an abatement is possible and they should be informed of that.

I agree with DANRVAN. 

[DANRVAN]

3 hours ago, mcbreck said:

if the IRS requests information, THEN we'll fix it. It's not like they are shorting the IRS.

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

[Lion EA]

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

[DANRVAN]

5 minutes ago, Lion EA said:

Form 2553,

That is correct. form 8832 was from Bulldog's post.

 

9 minutes ago, Lion EA said:

you have the dissolution of a corporation

A state issue, minor detail.

[DANRVAN]

On 9/30/2023 at 12:43 PM, BulldogTom said:

@DANRVANIs first time abatement possible for Corps? 

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.

[mcbreck]

4 hours ago, DANRVAN said:

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,

They paid all their taxes via W2 withholding versus reporting it on their tax return. While it wasn't correct, they made a good faith effort to comply and I'm guessing came VERY close to the same end result.