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Irwin Law
Irwin Law, Attorney
Category: Business Law
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Experience:  30+ yrs. representing small business, real estate, probate
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If there is any notice of penalty from the IRS, do all the

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If there is any notice of penalty from the IRS, do all the members of LLC be responsible for paying the penalty?
I was the TMP for tax returns for 2011 and 2012. There were errors in the returns which we found out later and amended them.
IRS has sent us a notice to pay a huge amount since the errors were large.
My partner is saying that I should pay the penalty since I was the one who signed the return. Is he correct or can I insist that he too needs to share the penalty?
Submitted: 1 year ago.
Category: Business Law
Expert:  Irwin Law replied 1 year ago.

Hello. I'll try to provide you with this information. To whom is the IRS notice addressed? The LLC or the members by name? Are you the Managing Member designated by the Operating Agreement. What does the Operating agreement say, if anything about Member liability?

Customer: replied 1 year ago.

I haven't seen the notice yet. i guess it's for the LLC. My partner hasn't provided me a copy of the notice. The notice was sent to his address.


Our relationship has strained and so is not co operating with me.


 

Expert:  Irwin Law replied 1 year ago.
Generally, there is no personal liability of a LLC Member to the other members, except for a breach of a fiduciary duty. Signing a tax return where errors occurred would not be such a breach without facts indicating a fraudulent intent. Also, you operating agreement must be reviewed. The LLC's Articles of Organization LLC or Operating Agreement can create, eliminate, expand, or restrict any members duties and liabilities to the LLC and/or other members. Most Operating Agreements that I have seen eliminate such liability between Members or to the LLC.

I hope this Answer is helpful and that you will give it a positive rating. If not, then do not enter a rating at this time and send back a Reply for more information or clarification. You should consult a local attorney to verify that this information is accurate for your state. Thank you for using Pearl.com- Just Answer. We appreciate your business.
Customer: replied 1 year ago.

The operating agreement has an indemnification clause that indemnifies the TMP but only if the majority of the votes support.


In our scenario our LLC is deadlocked (50% each).


 


My partner is saying I committed a breach of fiduciary duty since I didn't inform him about the tax return before signing.


Since the error is huge ($40K in 2011 and $160K in 2012), would IRS assess a fradulent/negligent penalty even though we amended our tax returns voluntarily?


Our original CPA had made several errors - for eg deducted expenses even though the business hasn't opened yet.


 


Isn't it the fiduciary duty of my partner to share IRS notices? Will the IRS come after me (as TMP) or the LLC if we don't pay the penalty before the deadline?


 

Expert:  Irwin Law replied 1 year ago.
My partner is saying I committed a breach of fiduciary duty since I didn't inform him about the tax return before signing.

Here is a fairly standard definition of Fiduciary Duty
A legal obligation of one party to act in the best interest of another. The obligated party is typically a fiduciary, that is, someone entrusted with the care of money or property. Also called fiduciary obligation.
Read more: http://www.businessdictionary.com/definition/fiduciary-duty.html#ixzz2gae5foUXy
This generally does not apply to business partners for the routine aspects of doing business. It would, if one is the treasurer and absconds with partnership funds. But if the partner does something that just doesn't work out well. There is no liability to the other partners.
You might be covered and actually absolved by the Operating Agreement for something like the tax issue. Whether a court would find that pre-approval of the tax return was required by the fiduciary duty, I have my doubts.
I hope this Answer is helpful and that you will give it a positive rating. If not, then do not enter a rating at this time and send back a Reply for more information or clarification. You should consult a local attorney to verify that this information is accurate for your state. Thank you for using our service. We appreciate your business.
Customer: replied 1 year ago.

Thanks for the fiduciary duty link.


Regarding my earlier question:


 


>Isn't it the fiduciary duty of my partner to share IRS notices? Will the IRS come after me (as TMP) or the LLC if we don't pay the penalty before the deadline?


 


I am concerned if I will be in trouble if we don't pay the penalty before the deadline. If the IRS assess penalties, would all the members of the LLC be responsible or just the TMP (I was the TMP for the original returns)?

Expert:  Irwin Law replied 1 year ago.
That's not a fiduciary duty. The fiduciary duty isn't just that you have to be a nice guy to someone, or do your best to help someone. Fiduciary duty means that you have placed special trust an confidence in an individual to act on your behalf in some financial capacity. The law requires the highest standards of conduct by a fiduciary. But this doesn't apply to people who are in business together and mistakes are made. Being a 50-50 member of an LLC doesn't rise to that level of relationship. Being TMP only designates you as the person IRS deals with in tax matters. It doesn't create any higher degree of responsibility or liability on that Partner. Otherwise, who would ever agree to serve as such? http://www.kpmginstitutes.com/taxwatch/insights/2011/wnit-092611-tax-matters-partner.aspx
Also, I'm not 100% certain that a TMP applies to a two member LLC to begin with. With the kind of penalties that you face, your next step should be to retain a good CPA as soon as possible - like today. There may be provisions for waiver of penalties that apply to your LLC.

I hope this Answer is helpful and that you will give it a positive rating. If not, then do not enter a rating at this time and send back a Reply for more information or clarification. You should consult a local attorney to verify that this information is accurate for your state. Thank you for using our service. We appreciate your business.
Customer: replied 1 year ago.

Actually our LLC has 4 members = 2 couples.


My partner is blaming me for the incorrect tax returns and I am afraid he may file a lawsuit against me regarding this. In the eyes of IRS aren't all members of the LLC liable?


 


The CPA who we hired for amending tax returns is a close friend of my partner. Isn't the duty of this CPA to defend the LLC?


I am concerned if my partner and the CPA (who amended tax returns) would join together and get me into trouble with the IRS. Is this possible? If so, what actions should I take? Do I need to hire an attorney?

Expert:  Irwin Law replied 1 year ago.
Hello again. Your question is if you should hire an attorney/CPA (CPA added by me) at this point. Answer: Yes. At least go for a paid consultation to go over what has happened and what you have learned here.
It is the LLC that is liable for the back taxes, IMO. But since the LLC is taxed like a partnership, and individual partners are liable for partnership debts, I can't say for certain that each of you is or is not liable personally. If one of you is, then so is the other. This is why you need the Lawyer/CPA conference before doing anything further.
This is as far as I can go at this time. Please rate this answer and if there are more questions, I will be available. I will be away from my computer a lot starting tomorrow thru next Tues, so don't worry if I don't respond right away.
I hope this Answer is helpful and that you will give it a positive rating. If not, then do not enter a rating at this time and send back a Reply for more information or clarification. You should consult a local attorney to verify that this information is accurate for your state. Thank you for using our service. We appreciate your business.
Customer: replied 1 year ago.

One final question/clarification.


I have already amended my personal tax returns and paid all taxes, interest and penalty.


 


So, at the LLC level, since there's no taxes, can IRS assess penalty on the original tax return (that was already amended)?


We amended all our tax returns (both LLC and personal) voluntarily and never received any notice or audit from the IRS/

Expert:  Irwin Law replied 1 year ago.
You say that the returns were amended and the correct tax was paid before any fraud or negligence penalty was assessed. I believe that in that case, all you would owe is interest on any tax that is paid late.
Customer: replied 1 year ago.

Sorry for not being clear.


What I am referring to is the penalty at the LLC level.


Can they assess penalty on the original partnership return that was already amended? Since IRS knows there were errors in the original partnership return, why should they review the original return and assess penalties?

Expert:  Irwin Law replied 1 year ago.
I wouldn't think IRS would do that, but I'm not an expert on penalty procedures. You also say that you haven't actually seen a penalty notice. Until your partner or his lawyer shows you what he received from the IRS, you have no obligation to respond to him. You might take a look at this and other on-line information about tax penalties, but I still recommend a lawyer/CPA. A few hundred dollars for a consultation might relieve a lot of stress. http://www.irs.gov/irm/part20/irm_20-001-001r.html
I hope this Answer is helpful and that you will give it a positive rating. If not, then do not enter a rating at this time and send back a Reply for more information or clarification. You should consult a local attorney to verify that this information is accurate for your state. Thank you for using our service. We appreciate your business.
Irwin Law, Attorney
Category: Business Law
Satisfied Customers: 4876
Experience: 30+ yrs. representing small business, real estate, probate
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