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Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 2686
Experience:  18+ years of experience in tax preparation; 25+ years of experience as a real estate/corporate paralegal.
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We have and S-corp that was not active for a couple of years

Customer Question

We have and S-corp that was not active for a couple of years therefore we did not file any federal tax documents, having said this, the S-corp had no revenues or expenses to report and as such there would have been a zero carried through to our personal return.
More recently we have made the S-Corp active and as such have filed all of the outstanding returns from several years ago as well as the 2016 return. Recently we got a notice in the mail stating that we owed them ~$10k for the unfiled years, we had our CPA write to the IRS explaining that there was no income or expenses during the non filed years and as such there would have been nothing to file and subsequently it would not have impacted our personal return.
Today we got a registered letter from the IRS saying that the claim was denied and that unless we paid the money they would put a lean on our home. While this is neither here nor there I am trying to understand is if the IRS can apply what appears a penalty for the non filing years or is there something that we are not understanding?
Submitted: 2 months ago.
Category: Tax
Expert:  JACUSTOMER-8nme36c9- replied 2 months ago.

Hello. It is possible they believe there is income. Request transcripts to find out if there is in fact income reported. It could be an error.

Expert:  JACUSTOMER-8nme36c9- replied 2 months ago.

They can apply a penalty. However that dollar amount is too high for a penalty.

Expert:  JACUSTOMER-8nme36c9- replied 2 months ago.

If your CPA has POA on file, he or she can view your transcripts online.

Expert:  Barbara replied 2 months ago.

Different expert here - my name is ***** ***** please allow me to provide you with additional information that you will find helpful.

S corporations must file a tax return (Form 1120S) whether or not there is income and expenses. What the IRS has assessed is a failure to file penalty which is $195 per month or part of any month per shareholder that the return is filed late for up to 12 months. S corporations are pass-through entities, so any profit/loss is passed through to the shareholder via K-1 issued to each shareholder. The shareholder will then include any profit/loss on their respective tax returns. An S corporation does not pay income tax.

Your CPA can request abatement of the penalties by using the First Time Abatement Penalty Waiver as well as a reasonable cause argument that you were not advised or aware that Form 1120S had to be filed for years the S corporation did not have income/expenses. Your CPA should have known that the IRS would deny the claim because of the reason he provided. Either you or your CPA can ask the IRS to reconsider your request for penalty abatement using the reasons I previously mentioned. If you need help with this, please let me know.

Thank you and best regards,