Entity Non-Filer – back to 2007 or 2008

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    Starla Smith
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    I have a “what would you do” question. I apologize for the length, but feel that the back-story is necessary in order to get good advice on how to proceed.

    Taxpayer came to me because the AL DOL has selected his return for a “records review”.

    1. Taxpayer indicates he has not filed a tax return for the business in many years (possibly back to 2008), and can’t tell me for sure if he has ever filed one.

    2. Taxpayer has himself and his wife on payroll, along with a couple of employees. When I questioned him as to what type of entity, he says SMLLC and does not mention S-Corp.

    3. State auditor tells me that he registered for an AL unemployment account in 2008, and that the account was registered as a corporation.

    4. The LLC was not registered with the AL SOS until 2012 when a new LLC was formed. He indicates the AL entity is a SMLLC, and stated that the LLC was registered under the same name in TX previous to being registered in AL

    5. On TX SOS website I found an LLC formed in 2007 and a registration tax forfeiture in 2009. It appears the LLC was not registered anywhere between late 2009 and Jan 2012. The TX registration indicates he and his wife as members (both of whom are on payroll for the years the QBO set of books covers).

    6. Taxpayer and wife have filed 1040 tax returns each year using the W-2’s from the business, but no returns or schedule C’s reporting the business income and expenses (at least no returns in recent history or that he can recall).

    6. Taxpayer indicates he does not know if an S-election was made. Given that the TX formation documents list 2 members, I would think would either have had to be taxed as either a H/W joint venture, a partnership, or a corporation.

    7. When I attempt to verify the EIN and business name via THS, I get an indicator that the name and tax ID do not match. Yet I have copies of W-2’s and quarterly tax filings for 2017 with the entity name and the EIN.

    I feel my next step is to start filing tax returns for the entity. It is apparent that there are profits and distributions on top of the salaries paid because the taxpayer paid for a boat, marina fees, and other personal items out of the business account (the business is trailer park management, with the trailer parks being in AL). He “thought” that because the boat was owned by the LLC, the expenses would be deductible to the business. I informed him that I didn’t see how those expenses were ordinary and necessary for managing trailer parks, so no deduction unless he could meet that burden of proof.

    He does not want me to contact the IRS to confirm S-Corp status because he is afraid it will open a can of worms.

    He has acted like an S-Corp by paying himself and his wife via payroll.

    Questions:

    – Would you file 1120-S’s or insist on contacting the IRS to verify the entity type before filing any returns. I know the late filing penalties are going to be steep.

    – Do entities have the same 6 year period as individuals for being in compliance?

    – Any other suggestions to on how to get the entity into compliance without raising too much attention? At the moment the taxpayer is afraid due to the state audit and wants to get into compliance.

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