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I am in the process of disoving a LLC with a partner who was

a financial planner and kept...
I am in the process of disoving a LLC with a partner who was a financial planner and kept all the books for the LLC. The LLC was just to hold title to property. The other partner unknown to me was using the LLC as a tax write off for himself and took over 400,000 worth of write off over a 10 yr period. He changed the property value land v building ratio and put through management fees that did not exist and did loans to some of his other companies that he did pay back. There were over 100,000 dollars worth of errors in the accounting that is now being corrected. My question is, if he is correcting the quick books for the last ten years would the taxes have to be amended as well to fit them? Will the IRS have a problem with amending the past tax returns? I want to nail this guy for all the wrong he has done me over the years and I would love to do through the accounting and the IRS. What is the thing that upsets the IRS the most in incorrect accounting issues?
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Answered in 4 minutes by:
6/1/2011
Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1,408
Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
Verified

Jax Tax : Welcome to Just Answer. I am here to help.
Jax Tax :

You state that he was taking losses through the business. What percent ownership do you have in the business? What form 1120S or 1065 were the business returns filed on?

Customer:

1065, he put us down as 50/50 but he set up the accounting to show I was paying rent as my mortgage and his mortgage was considered a contribution, this was not correct but that is how he set it up so he could take extra shares

Jax Tax :

So. Let me get this right. There were two properties owned by the LLC. You rented one and he rented one.

Customer:

No, just one property. I owned it and he wanted to buy a unsubdivided small piece of it. He talked me into putting it into an LLC so we owned it together until he could subdivide his piece off. I lived on my parcel before and after I sold him his. Since he was a financial planner he said he would set it up so it would be to my advantage in the long run and I trusted hi. I know now the whole thing was a scam to take my entire property which he has tried to do but failed through the court

Jax Tax :

Well, I was going to try to assist you beyond your question, but this is quite complicated. So let's get back to your question.

Jax Tax :

In order for him to take losses, they would have been reported on the K-1. You being 50% owner, your K-1 should have been identical to his absent some statement otherwise in the membership agreement. Do you have a membership agreement?

Jax Tax :

What this means is that you also benefited from the same losses he did. The only way to "get him" is to amend the returns and k-1s which will also effect you.

Jax Tax :

I see you stepped out. I will be back in 5 minutes.

Customer:

I did not benifit since he took 100% of the losses on the k-1's, he never gave me the k-1's until I dicovered what he was doing and demanded all tax returns for the LLC thats when he gave me one. He controlled all the accounting and taxes. Again, I got zero and I am not sure I want the losses since I believe some are not ligitimate that he created and I don't want to get involved with them, I just don't want him to get away with what he did

Customer:

I will be back in an hour or two

Jax Tax : What you need to do is get a copy of the membership agreement and see what it says about the distribution of losses. If there is not one let me know. If there is one, let me know what it says about losses. You also stated that you and him were to pay rent. Were there rental agreements drawn. Outside the property itself, what other expenses did the business have? Where did the cash he loaned out come from?
Customer:

The agreements to the LLC say we are 50/50 partners but shares are based on contributions so he put his mortgage payments as contributions and mine rent so only his shares went up. He deleted my share the first year this way. This went to court and the Judge ruled the contract needed to be reformed because it was to one sided to enforce. We are now with a court ordered accountant to go through the accounting issues which are many.

Customer:

I am hoping the Judge rules on fraud but I know that is a high bar. He will not rule on myliability for IRS issues for how the partner did the taxes or the way he kept the books. He has corrected many of the quick books entries which were wrong 0ver 100,000 dollar of them so I wanted to know if past taxes have to be amended to conform to the changed entries in the quick books account he kept?

Jax Tax :

Great. If you qualify, you should amend your returns. You will be required to amend all affected personal returns. The K-1s will be amended in your favor and against him. This will achieve what you want.

Jax Tax :

You will need to amend your personal returns. I would work with a tax professional to ensure you do not reduced you basis below zero by using losses in years that you cannot claim additional refunds until you used those years first. You can them try to claim refunds older than 3 years stating the fraud and using form 843.

Jax Tax :

I am sure this is confusing, but the preparer will know.

Jax Tax :

In the end, the change in the K-1s will cause him significant tax debt and will increase your refunds.

Jax Tax :

So to answer your question, the IRS is most concerned with the losses passed on the K-1 used to offset his income and reduce his tax. Amending these returns should take care of that. I am glad to hear you have an accountant. This is a very complex situation.

Jax Tax :

I hope I answered your question, and wish you luck.

Customer:

There was a lease agreement showing I was leasing the property but the partner testified in a deposition in 2006 that its only purpose was for him to get a loan to pay me for my property and it was abandond just a few years after he drafted it. The LLC account was suppose to only carry each others mortgage payments but he put money that he was responsible for through it to increase his shares. He held this account also I did not know he was doing this.

Jax Tax :

The only thing I can say to that is it is very complex. Contributions typically increase basis not owner's percent ownership. If you own 50 % and he owns 50%, the only way to change this is for you to sell ownership to him and claim any capital gain or loss. By him changing the ownership percentage, he effectively took possession of your property which you stated he tried to do. Based on what you have told me, he is a thief. It takes two people to sell something. A buyer and a seller. Obviously this did not happen. The accountant will figure it out.

Customer:

Thank you, XXXXX XXXXX are right he is a thief, I just want to know if he changed deposits and with draws in the quick books from the previos yrs do you have to amend the taxes to match them

Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1,408
Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
Verified
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Jax Tax
Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1,408
1,408 Satisfied Customers
Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions

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