Tax Law (Questions About Taxes)/Corp returns & Schd C

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Question
Hello Richard,

A new client came to me which I had originally thought filed his business a Sole Prop.  Turns out he had opened up a corp in April 2012 but never filed corp returns.  He had a friend file his 2012 personal returns, but the business activity was filed as a Schedule C.

At this point, he has corp returns open for 2012 and 2013, C Corp. He hasn't filed his 2013 personal returns.

What is the best way to handle this to mitigate his taxes and late filing penalties and interest?

My thought was to do one of the following:

1. File 2012 and 2013 corp returns, they will be late and he'll have penalties and interest.  Can these fees be waived or reduced in any way, I can't think of just cause?  If so, I'll have to amend his 2012 personal returns.

2. File 0 corp returns for 2012 and 2013 and then start over with a new corp.  I'll assume he'll have to file a part year 2014 should I go this route?

Thank you in advance.

Answer
For the Business: It would make sense to start again nice and fresh. At least any problems from the 2012 and 2013 wouldn't directly affect the business.

For him: There is no crystal ball. From your explanation I am unclear. Was all the business attributed to him on his schedule C?  If so he paid a lot more in taxes than he would have doing business as a corporation. Trying to redo that is fraught with problems and may not be worth even considering. But that is a measure of the clients tenacity and risk tolerance.

If the business was not accounted for on the Schedule C, then . . . It could be overlooked by the IRS and never brought up again. But then it is always hanging, since the 3 year window doesn't start until the tax return is filed. 10 years from now, the IRS might have too many employees and need make work projects. They could go back to all entities that have ever filed for a TIN and determine if business was done and not taxed. In the shorter term there could be a related event that would put the IRS on notice of unreported income.

I'm not a fear monger, I'm a realist. There is a risk that the business income would arise and then back taxes, penalties and interest might be assessed. But then comes collection and negotiations, and settlements, etc. As a straight money decision, it could be about a wash or less. On the headache scale. Guaranteed minor headache now by redoing all the tax returns, which could raise an audit. Or do nothing now: Possible bigger, long term headache later, or no headache at all.

But the potential will continue to reduce if the old corporation is put to bed and a new untarnished corporation is started going forward.

The client needs to make an informed decision for himself. Not have others make his decisions for him.  

Tax Law (Questions About Taxes)

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Richard Fritzler

Expertise

Specializing in Business and Corporate taxation. Comparing the advantages and requirements of different business entities, such as Sub-S Corporations, LLC`s, Partnerships (Both Limited and General), Doing Business as a Sole Proprietor, or Using a C-Corporation. Issues regarding K-1 distributions, 1040, schedule C, 1120, 1120s. Are you considering domiciling a Corporation in a low tax state? I can review the benefits and misinformation that exists.

Experience

I have been in the business of assisting business owners in reducing their taxes and liability since 1986.

Organizations
National Small Business Owners Association.
Publications
Contributing author to "The Corporate Standard Newsletter".


Publications
Contributing author to "The Corporate Standard Newsletter".
Ezinearticles.com articlesbase.com

Education/Credentials
I have been in the business of assisting business owners in reducing their taxes and liability since 1986.

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