Sole Proprietor Filed as S Corp

[sharpcougar]

This is a tough one guys and never seen anything like this. Here are the facts:

1. Doctor formed a PA with the State in 2019. An EIN was requested from the State for a Sole Proprietor.

2. Previous CPA filed an 1120-S  for 2019 instead of Schedule C. 

3. Tax payer paid themselves from what they thought was a corporation (because they thought they were) and all of the owner as well as employees were included in form 944.

4. State filing was done based on data in 1120-S.

After speaking with the IRS (I filed 2848), The 2019 return was rejected because the EIN was for sole Proprietor. thoughts on how to fix this mess!!

[IRonMaN]

If the return was rejected, file and/or amend his 1040 with a schedule C.  File an amended state 1120S showing zeroes.  Amend the payroll tax returns and W-2 if owner was shown as taking a salary.

[sjrcpa]

Errors on an EIN application are not binding.

Was an S election made by filing 2553? That is binding.

[qbteachmt]

"An EIN was requested from the State for a Sole Proprietor."

From the Feds? And separately, a State EIN?

[sharpcougar]

Anyway we can change the type of EIN with the IRS given that it was an error?

[sharpcougar]

S election was never made. EIN was filed with the IRS as a SP was a mistake. It was always meant for this entity to be an S corporation but list of errors took place. So how do I change the EIN to reflect a corporation? Is there a separate form?

[sharpcougar]

Sorry - EIN was filed with the IRS and NOT state. typo my part.

[sjrcpa]

"The 2019 return was rejected because the EIN was for sole Proprietor"

I'd say it was rejected because it wasn't an S Corp.

You can do what IRMN/Jeff said.

Or you can try to plead the case for a late election. Was 2019 1040 timely filed in accordance with it being an S corp?

[TaxGuyBill]

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@sharpcougar wrote:

1. Doctor formed a PA with the State in 2019.

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I'm not familiar with a "PA".  Does that qualify as a "domestic entity eligible to elect to be treated as a corporation"? 

If not, it needs to be filed as a Sole Proprietorship. 

If it does qualify (I'm guessing it does), it seems like it might qualify for a late-election for the S-corporation.  They were treating it as a corporation and didn't realize the election form was not sent in.  You may want to go that route.

As for the EIN, I have "heard" that you can just call the EIN office at the IRS (I think the telephone number may be on the EIN acceptance letter) and they can change it to the corporation.  But you still probably won't be able to e-file 2019 (and 2020 is questionable) and will need to file by mail.

[IRonMaN]

An S corp with reasonable salaries being paid but a 944 was filed for the year?

[sjrcpa]

Missed that. There's a whole bunch of screwup here.

[sjrcpa]

PA = Professional Association = Corporation. At least here in Maryland it does.

[sharpcougar]

So basically:

1. Amend 1120-S that was filed in 2019 and show amended one as a 0 Return.

2. Amend client's 1040 and bring in income that was on the 1120-S and show it on schedule C.

3. Amend 944 and take out the Sole Proprietor salary.

4. Get a new EIN for the Corporation.

5. File 2020 1120-S under new EIN.

Is that what you suggest?

[sharpcougar]

True. What a mess!!!

[sjrcpa]

You still need to make an S election. For 2020 it was due March 15, 2020.

[qbteachmt]

You would swap steps 2 and 3 in the sequence. 3 involves the salary as expense and the employer share of those taxes as expense, which will impact 2, so do 2 Second.

[qbteachmt]

Oh, don't overlook corrected W2, as well as any retirement plan participation.