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Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 482
Experience:  Former IRS Revenue Agent
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A 2012 1120s for an s corp with 2 shareholders (only 1 at

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A 2012 1120s for an s corp with 2 shareholders (only 1 at year end) was filed today (original due date 9-15-13) and a 2013 and 2014 1120s for an s corp with 1 shareholder due dates of 9-15-14 and 9-15-15) was also filed today. What are the total estimated penalties and any thoughts on how to mitigate them.

Dear Customer,

Below is a long response for you to consider. There could be a way out. For a taxpayer who has not been filing tax returns timely especially for S Corporation, the taxpayer usually also did not upkeep the corporation registration requirement with the State. So, when the corporation is out of the good standing, the S corporation no longer exists. Then, instead of reinstating the S corporation, you may want to report everything as Schedule C income and expenses. The tax liability in comparison with the late filing penalty may be even lighter. For rest of the response, see below.

S corporation usually does not have income tax due. Therefore, there is seldom estimate tax penalty. Below is the quotation of the law resources and discussion. The second part will answer your question on how to mitigate them.

In short, the failure to file penalty is $195 per month, per shareholder, asserted for per month up to 12 months.

However, S Corporation has late filing penalties which is more common. That is 26 U.S. Code § 6699 - Failure to file S corporation return.

(a) General rule

In addition to the penalty imposed by section 7203 (relating to willful failure to file return, supply information, or pay tax), if any S corporation required to file a return under section 6037 for any taxable year—

(1)

fails to file such return at the time prescribed therefor (determined with regard to any extension of time for filing), or

(2)

files a return which fails to show the information required under section 6037,

such S corporation shall be liable for a penalty determined under subsection (b) for each month (or fraction thereof) during which such failure continues (but not to exceed 12 months), unless it is shown that such failure is due to reasonable cause.

This late filing (failure to file) penalty can be pretty sizeable. It is by per shareholder (K-1) and per month. Therefore, for the year of 2012, even if by the year end, there was only one shareholder, the penalty is likely to be issued for two shareholders.

The amount per shareholder, per month is as follows.

(b) Amount per month

For purposes of subsection (a), the amount determined under this subsection for any month is the product of—

(1)

$195, multiplied by

(2)

the number of persons who were shareholders in the S corporation during any part of the taxable year.

(c) Assessment of penalty

The penalty imposed by subsection (a) shall be assessed against the S corporation.

S Corp Failure-to-File Penalty

The penalty for failure to file a federal S corporation tax return on Form 1120S — or failure to provide complete information on the return — is $195 per shareholder per month. The penalty can be assessed for a maximum of 12 months.

For example, the monthly penalty for failing to file a calendar-year 2014 Form 1120S for an S corporation with three shareholders is $585 ($195 times 3). If the return remains unfiled for 12 months or more, the maximum penalty equals the monthly penalty multiplied by 12. So the maximum failure-to-file penalty for a three-owner S corporation would be $7,020 ($585 times 12).

How to mitigate them

1) File the 2015 tax return as soon as possible to reduce the penalty on 2015.

2) We cannot request for penalty abatement when the penalty has not been asserted. (The possible exception is when we are automatically matched and received proposed estimated changes.)

3) There are several reasonable causes the IRS does accept for penalty abatement request. They are like illness, relying on expert's advice, factors beyond one's control.

4) In the case listed for multiple years unreported, the issue goes beyond S Corp late, non-filing, you may have to show and discussed that the income/loss flow through has been reported on the shareholder's individual tax returns.

5) There is a patter of history and late- and non- filing. So, that ground is out.

6) But we still have to try to request for penalty abatement because the size of the penalty to be. The IRS does not look favorable for taxpayers who can continue a business activity but somehow failed to timely tax returns.

7) Sometimes, I find it more successful for the taxpayer to contact the IRS with hand written notes to request for penalty abatement than for a hired representative for reasons apparent. I had a client called and written in to the IRS for 195 penalty when it just started. She sent in requests by both methods for more than 4 times. Eventually, the IRS split the penalty with her and reduced her penalty to half.

8) Penalty abatement request also has an appeal procedure. So, when our request is turned down, we can continue to appeal with penalty coordinator, before we go to appeal inside the IRS, before we go to tax court and/or the district court. For penalty cases, it is hard to win in court. So, try to win in the lower levels. Appeal can settle case.

9) Not many people know that in a way penalty abatement has no time limitation generally. In my previous client case, she responded and tried many, many times.

Regards,

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

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