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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4046
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Would IRS audit original returns that were already amended?

Resolved Question:

Would IRS audit original returns that were already amended? Our original LLC tax returns had large margin errors. However we amended them before IRS audited or sent any notices.
Since the original returns had massive errors will IRS investigate further?
Submitted: 11 months ago.
Category: Tax
Expert:  Stephen G. replied 11 months ago.

Stephen G. :

Hello, my name isXXXXX & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.

Stephen G. :

Anything can trigger an examination. If the LLC were to be audited, both the original and amended returns would be examined as well as the personal returns of the members. If one of the members personal returns was audited, it is likely that the LLC and the other members returns would be audited also, particularly if the LLC activity is a significant part of the personal returns.

Stephen G. :

Somehow, you need to either make peace with your partner or suggest that you should withdraw from the partnership; you are in an impossible situation and this must be having a negative affect on you, your family, & everyone's health. Perhaps the best this to do at this point is to engage an attorney, explain your story, and have him write a letter to your partner suggesting that he buy you out as he has created a situation that is not conducive to a acceptable business relationship.

Stephen G. :

This will either shake him up enough to want to make peace with you, or perhaps move off of these ridicuous

Stephen G. :

actions and allegations and move on unto something constructive.

Stephen G. :

Questions?

Stephen G. :

If you need to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Thanks again for using us for your tax and financial questions. You may get a short survey from the site; if it isn't too much trouble I would appreciate it if you would answer it; the survey results are used to rate our performance;

Customer:

In case our original LLC returns are audited, would a penalty be assessed at the LLC level, even though we amended the LLC returns (and personal returns)?

Stephen G. :

Usually only if the return was filed late.

Customer:

No. the returns were filed before the due date.

Stephen G. :

There could be other penalties, but normally they would fall on the Preparer based upon the nature of the adjustments you described previously.

Customer:

What I am concerned is that my partner may go after me and since the original CPA was fired, he may also blame the errors on me. For eg it seems that I said that the business is already running, which is a lie. I explained to the CPA that it's a ground up construction and would take over 2 years to complete and open the business. In this scenario would IRS treat this as a fraud and assess fradulent penalties?

Stephen G. :

They have better things to do than to chase people that make honest mistakes. It doesn't matter what the CPA says; as I said before, it should have been obvious to the CPA that the business wasn't operating; construction was continuing and there was no revenue. You are worrying about something that isn't going to happen. You are playing right into your "partner's" hand. Just concentrate on the future. You haven't committed fraud, so don't be concerned about it or what someone else may assert or not assert.

Customer:

I cant' come out of the partnership as I will loose heavily. They don't want to sell the property and also are delaying opening the business. Also I can't find a buyer for buying out my share since non one wants to partner with strangers. So I am stuck.

Customer:

How many weeks does IRS take to finally close the original LLC returns?

Stephen G. :

The returns are open for 3 years from the date you filed them. In some cases longer, but in your case it would be 3 years from when you filed the Amended returns.

Customer:

No. I am referring to the original returns. I am fine with the amended returns as the second CPA took a conservative approach and didnt deduct any expenses.

Stephen G. :

The original returns are now part of the Amended returns. By filing amended returns you in effect extend the period of the original returns.

Customer:

So, does this mean that they won't look at the errors made in the original returns?

Stephen G. :

No. They can look at whatever they want. They run a couple of years behind on audits; they may just be beginning to look at 2012 in a few months; They only look at a very small percentage of the returns that are filed;

Customer:

Does this apply to partnership returns as well, though partnerships are not taxed at the partnership level?

Stephen G. :

That doesn't matter; the partnership return leads to the personal returns.

Customer:

Does IRS process amended LLC tax returns and send a response that they have done so?

Stephen G. :

No.

Customer:

So, do we have to wait and see if they send a notice?

Stephen G. :

That's the idea. I wouldn't hold your breath. Chances are you won't hear at all, assuming your partner doesn't do something stupid; hopefully he'll let his CPA handle anything with the IRS.

Customer:

Do you mean my partner can complain to the IRS about me?

Stephen G. :

I suppose he could do any number of things, but that wouldn't be smart as he doesn't need them looking at his returns any more than anyone else does. One rule is generally the last thing you want to do with the IRS is draw attention to yourself.

Customer:

He did tell me a couple of times he would complain to the IRS about the errors and that I was involved. Even if he does, doesn't it mean that he is complaining against the LLC of which he is also a member?

Stephen G. :

How in the world did you ever get tangled up with this guy? There is no forum for complaining about you to the IRS without creating problems for himself. He's just a vindictive sort of guy and a big talker; just like the non-existent 50K penalty; how much time did you spend worrying about that?

Customer:

That's a good question! I regret for meeting this lunatic. His wife and my wife are good friends running family day care and wanted to come together for opening a preschool - but things turned sour over the last few months. I thought there's a whistleblower program that lets anyone complain to the IRS about anyone.

Stephen G. :

Look, the IRS doesn't pay much attention to husbands/wives turning each other in; same with partners; besides they look at the dollars involved and several hundred thousand dollars sometimes doesn't even get the attention it should; so, please don't worry about this; figure out how you are going to deal with your partners in the future; you need to get this resolved or it is going destroy you and everything around you.

Stephen G. :

Your health and sanity is worth far more than anything that you have to gain by staying involved with a so-called partner like you describe.

Stephen G. :

If you need to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Thanks again for using us for your tax and financial questions. You may get a short survey from the site; if it isn't too much trouble I would appreciate it if you would answer it; the survey results are used to rate our performance;

Expert:  Stephen G. replied 11 months ago.
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Customer: replied 11 months ago.

When I filed a request for abatement of penalties (when I amended my personal tax returns), the CPA (who amended by personal returns) mentioned the reason as "since I was relying on the expertise of a CPA for the LLC tax returns, the penalty be waived". Will this trigger IRS to look at the original LLC returns? The total penalty (for my personal tax returns) for 2 years was $10,000.

Expert:  Stephen G. replied 11 months ago.

Nobody knows exactly what triggers audits. However, in order to review your penalty assessment, it wouldn't be necessary to look at the LLC return. Your original return personal return is where the penalty arises, so that return, combined with the amended return, obviously reflects a substantial adjustment from the original return.

They may look at the original and amended LLC return to see what the nature of the adjustment is, but that doesn't mean they will audit it. In fact, you should want them to look at those returns so that they can see that the LLC has corrected the errors & has even switched CPAs; those are all positives and should work in your favor.

You shouldn't be concerned about the IRS "looking" at the LLC returns or even auditing the amended return. You now have a CPA on board who knows what he's doing and will be able to handle any inquires from the IRS, including any audit.

Do you know the breakdown of your penalties; in other words what penalties were included and how much was each penalty?
Customer: replied 11 months ago.

You mean the penalties included in my personal return (amended)?


The CPA who amended my personal return calculated the penalty as 20% of the underpayment of taxes (due to adjustment of the K1 which increased my taxable income on my personal returns).


 


The second CPA who amended our LLC tax returns is also very close to my partner. I have a feeling that he may blame me for the errors in the original partnership return. In one of the meetings he referred to my partner as "my client". I don't know what this means, as he amended the return for the LLC.

Expert:  Stephen G. replied 11 months ago.

I understand all that, but I wouldn't be concerned that he "may blame" you as nothing will be accomplished by doing that; you didn't prepare the return & I doubt that if you had reviewed the return you would have known enough to have questioned anything; the IRS doesn't expect you to know the tax law; that's why you hire experts in order to deal with these complex issues and prepare you returns; the CPA is the one who needs to be worried, not you, as I've told you previously.

You will definitely hear from the IRS to assess any penalties that you are going to be charged. Then, if there are any penalties actually assessed, and you want to request abatement, your CPA will need to write another letter requesting abatement of the penalties that have actually been assessed. By law, any interest charged may not be abated.

Finally, I wouldn't be concerned about the CPA using the words "My client"; if he prepared the LLC returns, then in that case the LLC is his client. That is a fact and not open to debate. He would be a complete fool to favor one member of the LLC over another. So, that's the situation and you shouldn't be concerned about that.
Customer: replied 11 months ago.

Actually I paid all the penalties. So, if my abatement request is accepted, I will probably get a refund.


 


The CPA (who amended our partnership tax returns) is not just a CPA but a tax attorney too. My concern is he may go against me. I am not sure what the role of a tax attorney is. Do they represent the client to deal with IRS or do they also deal with all civiil/criminal cases involving taxes.

Expert:  Stephen G. replied 11 months ago.
First the penalties have to be formally assessed, whether they have been estimated and paid or not. The amount you paid may be too high or too low, depending upon which penalties are assessed & how much interest is charged; then whether you owe anything additional or are due a refund will depend upon which penalties are abated & which ones may not be abated.

The tax attorney/CPA in this case is acting as the tax preparer for the LLC. I presume that as an attorney he's smart enough not to "go against" (as you put it) a member of his own client, ie. you as a member of the LLC. Besides, there's nothing to "go against" you about; so you didn't review the returns before you signed them but chose to rely on the CPA who prepared them; in reality, that happens every day; despite admonitions to the contrary, most clients do not review the tax returns in any detail; they simply don't know what it all means; that's why they hire us as experts; so again, don't worry about it, that's not going to happen.

As far as what role the attorney might play as a tax attorney depends upon what he is hired to do and what his experience is; most attorneys don't litigate; it depends upon the circumstances; as a minimum they would be able to represent clients with the IRS if engaged to do so; I really don't think there's much actual risk of any civil or criminal proceedings involving you under these circumstances. The only one that should be concerned is the CPA who prepared the original LLC returns.

Honestly, it's clear to me that your so-called partner doesn't understand, who is responsible for what when it comes to the LLC. For whatever reason, he evidently enjoys "cranking you up" & apparently he has done a pretty good job of it. It's too bad; there must be some other motive involved here and only you would be able to
determine what that may be.

You really need to go forward and figure out how you are going to re-establish a working relationship with your "partner" or I'm afraid that when your pre-school starts operating, you'll be in for one problem after another. If you determine that it will be impossible to work with this guy on a going forward basis, there are steps you can take to have the assets of the LLC liquidated and divided among the partners.

If that becomes a reality, you'll need to discuss your options with a local attorney & once you make your intentions known, your "partner" will find out that you have just as much control over things as he does and either he will straighten out, smoke a peace pipe with you, or subject himself to the ramifications of dissolution of the partnership or be forced to buy you out at the fair market value of your interest in the LLC & partnership.
Customer: replied 11 months ago.

Any idea how long would IRS take to complete processing the personal amended returns and the abatement of penalties request?


 


Since I live in CA, would the FTB also do their own investigation or do they pretty much let IRS deal with all this?

Expert:  Stephen G. replied 11 months ago.

If I had to make an educated guess, I would say that you should hear within a 3 month time frame from the time you filed your amended returns. Of course, the IRS isn't really working at full capacity due to the Government Shutdown, so you would have to add that time to the expected turnaround time.

If you filed amended CA returns also, they may take somewhat longer, but you can't be certain. They will do their own desk review of the CA returns and you should hear from them directly also.
Customer: replied 11 months ago.

This is for the personal returns right? For the LLC returns, IRS may never get back to us. Is this correct?


 


I am more concerned about the LLC returns and not the personal returns.

Expert:  Stephen G. replied 11 months ago.
Yes, you asked about the personal returns.

that's correct, you may not hear anything about the LLC returns. Generally, the only exception to that would be if the LLC returns were filed late and the IRS were to assess late filing penalties.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4046
Experience: Extensive Experience with Tax, Financial & Estate Issues
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