filed taxes incorrectly on an entity

[Jane918]

We filed 2019 taxes on what was a C Corp in 2018.  They have since informed us that they converted their entity to a single person LLC, so they really just needed to file a Schedule C on their personal return.  The C Corp for 2019 has been filed and accepted.  The LLC was formed in 2019. Now what?  I'm trying to research this, but not coming up with a solid answer.

[TaxGuyBill · Accepted solution]

The best solution is to fire the client for not telling you that BEFORE you prepared the corporate return.  😁

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@Jane918 wrote:

The LLC was formed in 2019. 

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Was it formed January 1st?  If not, it seems likely that SOME of the business was done under the corporation.  The client would need to sort out all of the income and expenses between the corporation and the newly formed LLC.  You would then amend the 1120 to reflect the corporate income.

[Jane918]

Will do...thank you!

[sjrcpa]

Not only to reflect the 2019 corporate income but to show the liquidation of the corporation, which is taxable.

[abctax55]

"They have since informed us that they converted their entity to a single person LLC"

You don't just "convert" a Corporation (C or S) to anything.  The Corp is liquidated with the distribution of the assets effectively being sold at fair market value - which quite often creates a taxable gain.

And was the Corp dissolved with the appropriate state authorities.

I agree with Bill - this client should likely be fired.  And I suggest getting a LARGE retainer up front, as this will be complicated to unwind. There will likely be tax consequences, which will probably p.o. the client.  Clients that are p.o.'d are often reluctant to pay.

[Jane918]

Understood, thank you.  Yes, it was filed through the state authority. The status with the state reads "Conversion"

I may have worded that incorrectly.  Thank you!

[abctax55]

State 'verbiage' doesn't trump the IRC.

[IRonMaN]

"I agree with Bill - this client should likely be fired."

But if we start firing just for stupidity, I'm only going to have a couple of clients left 😟 

[abctax55]

Jeff... you say that like it would be a bad thing; I'm thinking this crisis is my chance to really thin the (my) herd.

[IRonMaN]

But I really wouldn't have a herd left.   I would be able to fit the remaining "herd" in the box of my truck. 😬

[Jane918]

I have a client for you! haha:)

[IRonMaN]

I have a whole herd for you.  I have been on the phone trying to hire enough cowboys to head up the cattle drive.  They have the wagons loaded and are waiting on the hand sanitizer order to arrive before they can head out.

[qbteachmt]

Did they keep doing payroll? Because that right there is a pretty significant difference.

[Jane918]

He did not have payroll, thank goodness.  He should not have even formed a C Corp in the first place.

[qbteachmt]

"He did not have payroll, thank goodness"

Which means the 1120 was a problem, because corporations have payroll.

[Jane918]

He didn't pay himself at all from the corporation