Have a Tax Question? Ask a Tax Expert
Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.
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I hate to be the bearer of bad news, but there are significant penalties for not filing an S Corp return
also, you would need the information from the S corp return to properly file your taxes. Furthermore, you mention that your husband does not take a salary from the company - well, the IRS will deem otherwise as S Corp owners are supposed to pay themself a "reasonable" salary...
If I were you, and I had not filed tax returns for 2010 through now, I would file as married filing separately, so that you are not held liable for your husband's back taxes.
The business does make much of a profit.
I mean does not.
Like probably less than $20K.
The problem isn't the tax that is due - the problem is that for every month it does not file a return, you are fined $195
for not filing
Oh, wow. Is there a cap on the total?
No, no cap. It's $195 per month, per shareholder and I'm assuming he's the only shareholder
Yes, that is right, he's the only one.
But, you can write the IRS and try to get the penalties abated or reduced, since you did not know about them. In this particular situation, with the failure to file S corp returns, I would seriously consider hiring a tax professional to handle your back tax returns
Why would the IRS reduce or abate the penalties? Are their specific requirements?
The IRS would for reasonable cause. There are other exceptions, but you wouldn't meet them because no returns were filed at all, not even your personal returns
I would seriously consider filing separate if I were you, so that you are not held liable for his S Corp taxes and penalties
We have a daughter, but we lose any child tax credits if I file separately, correct?
But it sounds like that would be the lesser of two evils.
Does it matter that the S Corp is an LLC?
You wouldn't lose it, but the income phaseout would start at $55,000 instead of $110,000
And you can't file your joint return correctly, if he has not filed his S corp returns
because you pay tax on the S Corp on your 1040
So, my husband still has a personal tax liability even though the business is an LLC?
Yes. If he elects to be taxed as an s corp he still pays tax on the entire profit of the company, but on the 1040
If he was not taxed as an S Corp, he would still have to pay tax, but it would be on schedule C and you would not have to worry about the S-corp filing penalty
The LLC does not pay tax itself, unless it elects to be taxed as a C Corp
I wonder why his accountant would elect for him to be taxed as an S Corp? Can that be changed at this point since we haven't filed?
No, it can't be changed retrospectively. The S Corp offers the advantage of paying yourself a salary, so that you don't have to pay employment taxes on 100% of the profit
So, it was a good election...it's just not good if taxes were not filed.
I understand. Boy, he's really put us in a pickle!
Yes, you have 8 years of returns he needs to file, plus three since you were married
My best advice to you would be to go the married filing separate route. Once he's situated then you can start filing joint
Okay, I really appreciate your time. I have another slightly related question so I am sure if you want to answer it. If we applied for a mortgage loan, we would have to have all the taxes filed, correct? His and mine?
Yes, you would need to have all your returns filed for that. They wouldn't care if you were filed separately, but you both would need to file unless you could qualify on your own without his income
Then, if you were the only one on the mortgage and he still didn't file, that would be fine. I just wouldn't put his name on the house, because if he got a tax lien it would go against the house. If you file separately, you are not responsible for his debt therefore your property could not be subject to a lien
Okay, thanks so much for your help! I really appreciate this. It sounds like we wouldn't have much of a case to request a reduction in penalties. I mean, I thought that he wouldn't owe because the business doesn't make hardly any money but I didn't realize about the penalties. Would you agree that it would be a long shot to get a reduction?
I would say it would be worth your money to pay a tax professional to draft a letter requesting the reduction on your behalf. If you do it yourself, I would say it would be a long shot. However, for some reason when professionals get involved things tend to get done better
Ah! I see. Thanks so much for your help. I am feeling very overwhelmed by all of this!
I'm so sorry. However, once you get it all situated you will feel MUCH better.
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I absolutely will. Thanks again!
You're welcome. Have a great day!