AboutRichard 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 for over 17 years. The company is Owelesstax, incorporated, at www.owelesstax.com
Organizations National Small Business Owners Association.
Nevada Association of Listed Resident Agents.
Citizens Legal Association
Publications Contributing author to "The Corporate Standard Newsletter".
Question QUESTION: A 100% owner of an S-corp failed to file his state Property tax returns (for three years) and the state forfeited his corporate charter. Once the returns are filed and fees paid the state will normally retroactively reinstate the corporate charter. From the standpoint of the IRS, does this invalidate the S-corp status, or can the Owner/shareholder continue to file as an S-corp?
ANSWER: You have given the IRS an opening to disallow your business status. They often use any opening available. In fact the IRS has used non-compliance of keeping records as justification to disallow corporate status.
However, if the IRS was not intending to review your tax returns for those periods, they would not normally become aware of your misstep.
What would cause the audit?
Well, about .75% of all Sub-S tax returns are audited each year, while 3.3% or greater schedule C on the personal tax returns are audited each year. So based just on random selection you have about a 1 in 25 chance for each of those years.
If the State Property Tax Department noticed the state income tax department, you might be audited, if the either department notified the IRS, you might be audited.
Now let me get up on the soap box:
Since you are doing business as a Sub-S, you got very little tax relief anyway so if the IRS disallowed your tax status, you only be subject to additional payroll taxes and penalties on that.
If you had done business as a Real Corporation you would have saved a lot more money since Real Corporations pay much lower tax rates, no payroll or self employment tax on its income, and gets far better deductions.
While you may have saved 1.45% to 7.65% as a sub-S (and that would be a best case scenario under very specific income levels) if you are disallowed your only be obligated to repay those savings and possible penalties and interest.
On the other hand, if you were a Real Corporation your savings would have at least double and all the way up to no taxes due.
Having to repay that amount would have hurt far more.
So the moral of the this story is a Real Corporation can be a very powerful tool. And with all power tools care must be taken to understand and use them correctly. The Sub-S is not so powerful, more of a toy, although it might do some task, it will not do it as well as a real corporation. If it used incorrectly or not correctly maintained it can still hurt you.
Richard Fritzler
www.owelesstax.com
phone 800 590-6612
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QUESTION: If I read you correctly then, as long as the IRS hasn't notified the taxpayer that they are being audited for the years of state non-compliance I should continue to file 1120s returns and get in compliance with the state as soon as possible. Is that correct?
Answer The IRS has a 3 year look back window in which to start an audit. Every year one of those windows closes. That is 3 years from the LAST FILING. If you amend a tax return the 3 year clock starts all over.
So keep your nose clean, file timely, pay the taxes that are owed, and someday, this nightmare will be distant memory that never got out of the closet.
