Amending a 2018, 1120 Tax return

[Marya9]

A 2018 tax payer has a C-Corp but prepares his books as a sole proprietor because his contractors licenses is under his name.  He files a timely 2018, 1120 tax return with $0.00 income and minimal expenses.  He has not filed his 1040 to date.  Now in 2020 he would like to amend the 1120 return to show $400k in income and expenses of $340K.  Doing this will save him in self employment tax.

Question:  Is this allowable?  Is this within the IRS law?  Will this make his original 1120 tax return a "Frivolous" tax return?  Will he have late filing fees?  What kind of penalties and interest will he owe and what percent? 

[qbteachmt]

"Doing this will save him in self employment tax."

Not really. He is supposed to be an Employee of that Corporation. And there should be assets (equipment), insurance, etc, in the Company name, which should be the C Corp. Then, the Corporation pays the employer share of payroll tax. And the employee pays the employee share of payroll tax. And, a C Corp has its own Income tax. That's a reflection of Bad Guidance. Someone had him set up a C Corp, so there should have been a specific reason to do this. Otherwise, he would operate as Sole Prop or S Corp and not C Corp.

"Question: Is this allowable?"

Well, what's been done so far is Not Kosher. There is no C Corp operating, apparently. How can it have only expense, no income, and was there payroll?

"Is this within the IRS law? Will this make his original 1120 tax return a "Frivolous" tax return?"

It seems there needs to be more Legal guidance here.

"Will he have late filing fees?"

Well, what happened to 2019 tax filings? Which forms? You describe 2018, and are asking about 2020.

"Now in 2020 he would like to amend the 1120 return to show $400k in income and expenses of $340K."

Amending 2018?

"What kind of penalties and interest will he owe and what percent?"

No one can answer this until all facts are revealed, and all errors are identified and rectified.

Nothing about this makes sense. I recommend you either find a mentor or pass this person to someone with more experience than you have.

[dkh]

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@qbteachmt wrote:

Nothing about this makes sense. I recommend you either find a mentor or pass this person to someone with more experience than you have.

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And ask yourself, do you really what to take on this client ?     It's hard to turn a client away but it can be done. 

[Marya9 · Accepted solution]

Hello other tax preparers.  Your initial responses have validated what we thought as well.  We sent out our question to you all to help us confirm our feeling as well as to make sure we were not over looking something that could help this client.  Thank you for your input.

[Marya9]

Thank you, we agree with your thougths.  Thanks for sharing.

[abctax55]

An shining example of the superior design of this forum.

One can post a question, that no one really understands, than give yourself a *solve* (/S) for answering it.

[TaxGuyBill]

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@Marya9 wrote:

 Now in 2020 he would like to amend the 1120 return to show $400k in income and expenses of $340K.  Doing this will save him in self employment tax.

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What he "likes" to do does not matter.  The tax returns need to be filed according to what was actually happening.  

If the business was actually operating as a corporation, it goes on the corporate return.  If it was operating under a non-corporation, it goes on Schedule C.  The results for taxes or penalties do not change that.

However, the tricky part could be determining how it was operating, because some actions could be one way, while other actions could be the other way.  Although state laws vary, I suspect the business name on the invoices he gave to his clients is likely a large factor.  If the payments he received was to the corporate name, it seems likely it would be ruled as it was operating as a corporation.  The IRS does not care about local licensing, so the fact his license was under his name is likely a minor point.  The IRS would look at the business operated.

Again, the results on the tax return does not matter, regardless if there is more or less tax, or if there are penalties or not.  File the returns according to how the business operated.

So yes, there will be substantial penalties and interest.