Partnership Returns Never Filed - How far back to go?

[gfizer]

Back in 2001 our office (I work for an attorney) handled the estate of a local farmer who left her farm to her 5 children. We closed the estate in 2002 and the kids decided to take over the operation of the farm as a farm partnership. We did all the necessary paperwork and wished them well. Fast forward to December 2009.....one of the children of the deceased lady drops off a spiral bound notebook and leaves a message with a secretary to tell me that "we need to file taxes for mom." Turns out they have not filed the first partnership return. The daughter says she knows she should have been but she just never got around to getting it done and now she just wants to get everything straightened up. I've warned her about possible penalties and advised her that all the partners will need to file amended returns for all open past years to include the partnership income/loss.

My question is this...do I file partnership returns for every year beginning with 2003 even though some of the years are now closed years? Is there anything else I should be aware of in this situation that you all can think of that I am overlooking?

[Catherine]

Ummm -- SOL clock doesn't start until the returns are filed?

[cred65]

Since the partners returns from 2002 thru 2005 are beyond the SOL what is the procedure for amending those? Also ummm.

[Terry D EA]

The SOL if the tax payers owe money is (7) years and (3) years to collect a refund and I do beleive that Catherine is correct the SOL clock begins when the returns are filed. Good luck with this mess and charge accordingly with a little extra aggrevation fee.

[OldJack]

>> Is there anything else I should be aware of in this situation <<

Partnership tax returns may not be necessary to file or penalty waved if each partner has reported their share of the income/loss each year. See exceptions under Reg.1.761-2 as summarized in the 2009 small business quickfinder handbook, page B4.

[mcb39]

MANY years ago, when my husband first started his business and I had to learn how to do a Partnership return, I struggled through the self-taught course and managed to file the returns (with many errors, I am sure). However, I was unaware for several years that I was also supposed to be filing a Partnership for WI. When the fact finally hit me, I was sick to my stomach.. However, I started to file WI and never fessed up and was never chastised in any way. Just seemed like nobody cared, if they did catch it. However, as Old Jack says, I always reported the income or loss on the Partners' personal returns, which, in reality is what matters. Whether you pay the tax or not. In hindsight, it is amazing all of the things that we might have missed or did miss and never got caught. And, "ignorance is no excuse". Kind of scary when you think about it.

[kcjenkins]

As mentioned, the majory question is whether the partners have reported their share of the income and expenses? Not knowing that, I don't dare give any advice until I hear the answer to that.

[gfizer]

As mentioned, the majory question is whether the partners have reported their share of the income and expenses? Not knowing that, I don't dare give any advice until I hear the answer to that.

The answer to that question is a resounding NO. The income has never been reported by any of the partners. So far I've done the returns for 2003 and 2004 and they both had small losses. I shudder to think what the penalties could be on this deal.

[jklcpa]

Before 2008 it was $50 per month per partner. Believe that was capped at 12 mos. For returns due after 12/20/07, raised to $85 per month per partner, max 12 mos. Tax yrs beginning in 2009, it goes to $89, but you should be OK for that year. For returns beginning in 2010, it becomes even more severe @ $195 per partner per month, 12 mo cap. Yikes! don't let them be late again.

Without interest, that's $3,000 for each year from 2003 - 2007 and $5,100 for 2008. It's for a month or part of a month, so there's not even a little break for 2008 even if you could get it done by 3/31/10 because we're already in the 12th month overdue from 4/15/09. Late filing penalties will total $20,100 if my math is correct. Interest is calculated on the penalties using the quarterly rates in effect at the time.

They could also be charged with failure to furnish K-1s timely. Sorry don't have fresh #s for these handy without looking them up. IIRC, it used to be $50 per K-1. If intentional disregard, that bumped up to the greater of 10% of aaggregate items or $100 with no cap.

[Catherine]

Before 2008 it was $50 per month per partner. Believe that was capped at 12 mos. For returns due after 12/20/07, raised to $85 per month per partner, max 12 mos. Tax yrs beginning in 2009, it goes to $89, but you should be OK for that year. For returns beginning in 2010, it becomes even more severe @ $195 per partner per month, 12 mo cap. Yikes! don't let them be late again.

Without interest, that's $3,000 for each year from 2003 - 2007 and $5,100 for 2008. It's for a month or part of a month, so there's not even a little break for 2008 even if you could get it done by 3/31/10 because we're already in the 12th month overdue from 4/15/09. Late filing penalties will total $20,100 if my math is correct. Interest is calculated on the penalties using the quarterly rates in effect at the time.

They could also be charged with failure to furnish K-1s timely. Sorry don't have fresh #s for these handy without looking them up. IIRC, it used to be $50 per K-1. If intentional disregard, that bumped up to the greater of 10% of aaggregate items or $100 with no cap.

OUCH!!!!

gfizer, get YOUR fee first!!!!!

[jainen]

>>now she just wants to get everything straightened up<<

This is a major engagement, so in my opinion you should start with a comprehensive engagement letter. Who is the client, the one daughter, the partnership, other partners? Why now--has something happened? Is there any suggestion that your office might in some way be blamed for the non-filing? I don't mean that you should be, just that you could be. Let the attorney address the issue of statute of limitations, which may be far more complicated that you expect. The lawyer should also consider whether criminal charges could be filed, inasmuch as the partners knew they were not reporting income. Don't be casual about this. There is a LOT at stake, including perhaps tens of thousands of dollars in fees.

[Catherine]

You may want to sit down for this comment.

I agree with everything jainen says here, and you should take his advice seriously. Plus I'll add that in addition to thousands of dollars in fees, your professional reputation and ability to work in the future could be at stake. Get a really -good- engagement letter, and talk with the lawyer before you agree to take this on.

[gfizer]

>>now she just wants to get everything straightened up<<

This is a major engagement, so in my opinion you should start with a comprehensive engagement letter. Who is the client, the one daughter, the partnership, other partners? Why now--has something happened? Is there any suggestion that your office might in some way be blamed for the non-filing? I don't mean that you should be, just that you could be. Let the attorney address the issue of statute of limitations, which may be far more complicated that you expect. The lawyer should also consider whether criminal charges could be filed, inasmuch as the partners knew they were not reporting income. Don't be casual about this. There is a LOT at stake, including perhaps tens of thousands of dollars in fees.

I did the returns for the decedent prior to her death and also returns for the estate until the time it was closed. I do not do, and never have done, the individual returns for any of the 5 partners. When they didn't contact us to do the partnership return in the 1st year after settling the estate we assumed that one of their preparers was doing the returns. According to the daughter who dropped off the info there is no reason behind her sudden decision to file the returns other than the desire to get everything straight.

Next question. I'm thinking that this is something I may not even want to become involved in. My practice is very small and it's simply not worth the headache to me (and I already know they won't be willing to adequately compensate me since she asked if I thought I could do everything for under $1,000). I can't advise them to pick up with the current year and pretend the previous years didn't exist or to simply begin reporting their share of the income/loss on their own individual returns. How do I extricate myself from this situation and cover my rear end? And do I have any responsibility to report the non-filing, etc.?

[cred65]

(and I already know they won't be willing to adequately compensate me since she asked if I thought I could do everything for under $1,000).

You had better add a "0" to that fee. 7 years of F 1065's and possible 35 amended 1040's, plus all of the cockroaches under the rock. Don't bury yourself.

[jainen]

>>I can't advise them to pick up with the current year and pretend the previous years didn't exist or to simply begin reporting their share of the income/loss on their own individual returns.<<

Yes you can. In my opinion, based on Circular 230, you are only obligated to advise her of the need to file prior years and the potential penalties for non-compliance. That need not prevent you from helping her properly file her 2009 return.

>>do I have any responsibility to report the non-filing<<

No. In my opinion reporting her would be an ethical violation.

[Margaret CPA in OH]

I agree with you, Jainen, regarding the need to "properly file her 2009 return". I think it will be a real challenge to get the proper figures without having the prior year figures carried forward for balance sheet purposes, at least.

[kcjenkins]

I'd pass on this one myself, given the limitations on my time. It's a huge job, so unless you feel able to carry it through, don't even start. You have ZERO obligation, AT THIS POINT. But once you start, you have an obligation to every one of the partners. And since these partners have already shown a lot of careless disregard for their own obligations, the odds are fairly high that at some point at least one of the 5 is going to "blame the messenger".

Plus, in my experience, those people who procrastinate for 5 years tend to be the ones who then get in a real hurry to 'get it over with'. And this is not going to be an easy one to get done, since they have not kept a good set of books, etc.