New S-Corp Late Filing Penalties

[JohnH]

Over on the TMI board, we are discussing the new penalty provisions for late-filing of S-Corp returns contained in H.R. 3997. The way I read it, the new significantly higher penalty applies to returns required to be filed after the bill is enacted, so that means the first year it would apply to would be 2007 Forms 1120S. However, one poster has stated that it applies to any 1102S filed after 12/31/07 (regardless of year). Has anyone run across this in a seminar (or read the bill) and can shed some light on the question?

[JohnH]

To partially answer my own question, the answer is "maybe yes" or "maybe no". Since the legislations hasn't been passed yet, it's possible that the wording could be changed before final passage. So the timing of how the penalty applies, and whether it applies to prior years, is anybody's guess as of today, Dec 2.

Whatever the case, it's a whopper of a change if it passes in its present form. The proposed penalty for a late-filed S-corp return (which is presently zero) will jump to $100 per month per shareholder, up to a maximum of 12 months.

[TAXBILLY]

This is why I don't get into proposed legislation details but just make note of the general way it's presented.

taxbilly

[OldJack]

>>$100 per month per shareholder<<

I say its a good penalty to have. 1120S forms should be filed the same as C-corp forms. Tax preparers should not procrastinate getting the job done so shareholders can file their 1040s early if they like.

[JohnH]

Old Jack: No argument there.

taxbilly:

Generally I take the same approach with respect to pending legislation. However, in this case forewarned might be forearmed. (I've had one inquiry about this already).

If the legislation applies to future returns, then anyone currently having unfiled returns would just need to get in compliance going forward and could get up to date as they can get to it. However, if the penalty is retroactive to all unfiled years, then there would be a short window of opportunity to get in compliance IF it doesn't take effect until 1/1/08. The filer is facing a $1,200 per year per shareholder penalty - wonder what they'd be willing to pay in preparation fees to avoid that fate.

[TAXBILLY]

I have nervous clients now that are worried that the AMT problem won't be patched for 2007.

taxbilly

[joanmcq]

Could be a way of 'getting' some of those folks that formed S-corps to get out of paying payroll taxes...

[JohnH]

Not sure that is their reason, but it may be a foreshadow of things to come in the penaty area. In this bill, the penalties are proposed as a means of "paying for" a specific set of tax reductions for military and volunteer firefighters.

As far as I know, it is rare for penalties to be proposed for a specific purpose of this type. Shouldn't the purpose of penalties be to punish wrongdoing and encourage compliance? It makes me wonder if IRS will come under (or is already under) political pressure to take a harder line on penalty forgiveness because some in Washington as beginning to regard them as a source of expected revenue - a sort of "back door" system of taxation operating in parallel to the existing system.

BTW, it's in its 2nd reading in the Senate as of Monday.