Change entity type from Partnership to S Corp for same year

[Mary Jo]

My client filed as a partnership for three years, and then found out that they were an S Corporation.  I need to amend three years of partnership returns and re-prepare them as S corporation returns.  Does anyone know if there's an easy way to take a partnership return and turn it into an S corporation return for the same year?

[IRonMaN]

There is no magical way to convert one to another in the software.  But as a side note, if the returns were e-filed and accepted as a 1065, they are a partnership in the eyes of the IRS.

[Mary Jo]

Unfortunately the IRS did not accept the partnership returns, but they didn't notify my client until three years of returns had been filed.  So now I have to amend three years of corporate and individual returns.  I was hoping that I didn't have to input everything for the corporate returns (and pay for the corporate returns).  I inherited this problem - the original tax preparer filed the first year as a partnership.  Thanks for the reply.

[Terry53029]

What about payroll, W2's, 940,941

[BobKamman]

The hard part isn't doing the returns.  The hard part is getting the penalties abated. 

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. 

[Just-Lisa-Now-]

"IRS did not accept the partnership returns, but they didn't notify my client until three years of returns had been filed"

This doesnt make any sense.    They would have been rejected electronically, or returned if sent in by mail if they hadnt been accepted.  

Im not sure youve got the full story.

But, no magic way to change a 1065 to a 1120S.  Be sure you get a large retainer for this, sounds pretty messy.

[BobKamman]

Makes sense to me.  Last week, one client received her 2020 refund (widow, joint return, she had forgotten she was expecting $5,000) and another client got a $55,000 bill for 2020 (first notice, payments were made but under spouse SSN).  

"Covid" and "Pandemic" may jog your memory.  

[PATAX]

In my opinion the original tax preparer is not responsible for the error. If the client does not know whether they are a partnership or an S corporation then they are obviously not descendants of Albert Einstein or Nikola Tesla.

[BobKamman]

Unless, of course, it was the original preparer who filled out and told them to sign and send in the Form 2553.  

[ljr]

I cannot believe how many clients say oh by the way I started a business or a corporation this year and when you ask them what type of business entity the go I don't know. and then the eyes glaze over or you get silence on the phone when you start the list of questions. (and this conversion is usually at their tax appointment)

[Mary Jo]

Believe it or not, the e-filed partnership returns were accepted by the IRS when they were filed.  It took them 3 years to reject them, and let my client know that S Corp returns needed to be filed.

Now I'm fighting the IRS over penalties for late filing of S Corp returns for the client (as someone mentioned, this was the next thing to happen).  It has not been a fun process.  I've pointed out to the IRS that they accepted the timely originally filed partnership returns, and that the client amended to S Corp returns as soon as they were notified.  I've gotten them to waive the penalty for one year, but they're persisting in assessing penalties for the other.  It's so stupid - the wrong returns were filed, but they accepted them, and they were filed on time.  So to charge late penalties on the corrections is ridiculous - if they had rejected the e-filed returns when they were filed, this would have been straightened out years ago.

Definitely a big mess.

[Brainstrom]

When I get a new client, I always ask to see a copy of the EIN paperwork from the IRS showing how the company was set up and how they need to file. Good luck with that one!!