C-Corporation filing under a Schedule C

[kitnTX]

One of my clients asked me to "do his taxes right" for him because his past tax preparer has been filing a Schedule C instead of an 1120 -- he is worried that he will be hit with a penalty and interest on the past 16 years of incorrect tax return filings....but he has also paid SE taxes that were pretty huge.  I called his tax preparer and she said she HAS been filing 1120s but  I think she doesn't know the difference between Schedule C and an 1120.

My question:  Client is concerned that if he awakens a sleeping giant he won't be able to pay the penalties, and any corporate taxes due for the past 16 years -- even considering the SE taxes he paid.

My suggestion:  terminate the corporation and have a talk with the tax preparer that the wrong taxes were filed.  I'm kind of stumped that IRS hasn't contacted him that his Corporate Taxes have never been filed. 

[sjrcpa]

Has the client been operating the business under a corporate name or under his/sole proprietor name?

Do you have the corporate documents?

Did you ask prior preparer for copies of the corporate returns?

Might this "corporation" actually be a Single Member LLC?

[kitnTX]

Under his corporate name.  I asked for corporate returns and she did not have any.  ONLY sole proprietor forms.  I got all of his corporation documents proving he is a corporation.

He never started his business as an LLC.  So strange.

[sjrcpa]

That is strange.

[IRonMaN]

He didn’t take out any wages during all that time?

[kitnTX]

Not as a wage.  As I said, the tax preparer filed everything under a Schedule C, so no "wage" was taken out, only reported as all income under a sole proprietor when his name is a solid Corporation....It was not even IN his name, it was set up by the customer as a Corporation.  He asked the preparer if she was doing his taxes correctly and she didn't give him a clear answer.  Another friend of his kept pushing him to check it out because his self employment taxes were ridiculous.  That's when he was told to call me...but 16 years later?  I don't want to touch this mess.

[kitnTX]

As tax preparers, we are supposed to advise our clients of their best tax options and this is obvious to me that the tax preparer did not know what she was doing.  Does he report her?  Would that do anything FOR him or just awaken the sleeping giant he's concerned with.  Then does he simply dismantle the corporation and let it die a slow death, hoping IRS doesn't realize the errors in the filings?  Oh my.  I'm glad it's his issue and not mine...but he's asking for help.

Aloha no!

[IRonMaN]

I would let it die a natural death.  Since he never took out wages he operated it as a sole proprietorship.  Look at the whole thing as someone setup a shell of a corporation that never commenced operations.  If he wants to operate as a corporation tell him to set a new one up, transfer the assets and then operate as a corporation.

[PATAX]

I would not be so quick to judge the prior accountant. You are only hearing one side of the story.

[qbteachmt]

"It was not even IN his name, it was set up by the customer as a Corporation"

Was the Corporation EIN on the Sched C?

Who is this customer setting up his corporation (perhaps you meant the tax preparer), and of course it wouldn't be in someone's name; there would be shareholders, but it is independent of them.

[Taxes-by-Rocky]

Request a copy of the CP 575 notice for the EIN (or the 'reissue' letter CP No. 147 I think?? - forgot what they call it) and go from there.  File request for prior year returns under that EIN (or get POA and online transcripts) and see what happens.

It's not an uncommon problem any more (e.g., does the corp have a valid S election filed, is my LLC really a partnership, an S corp, or something else, who made my trust a tax-exempt entity, etc.).  Thankfully (or not), Form 8832 goes a long way.

[kitnTX]

Thank you for that.  The tax payer actually set up his own C-Corporation, not truly knowing the difference between an S-Corp and a C-Corp.  He has his EIN under the C-Corp and yes, that EIN  as well as the corporate name show on the Schedule C for his personal income taxes.  The tax preparer NEVER filed an 1120 for his corporation.

[kitnTX]

I don't think this is a judgment, more of an observation of a tax preparer.  She writes she is a bookkeeper not an accountant.  I just don't understand when there are acronyms "INC" after a company name where any misunderstanding would occur.  However, I've been in tax and other types of law for over 30 years and I still have questions on what I thought were obvious to most.   Thus the reason why I'm asking in this venue.

[kitnTX]

Yes the Corporation's EIN was on the Schedule C.  The taxpayer (my customer) set it up himself as a C-Corporation and there has never been a corporate return filed.  He has asked the tax preparer several times if she was preparing the correct form and her answer was never clear to him.