What happens when you try and file for S-Corp status for tax purposes for your business, but you receive no reply from the IRS? What do you do then?
This same situation happened to one of our clients, who gave us permission to present their situation as a case study. (We will refer to our client as ABC Company to protect our client’s identity. We received permission from our client to present this case study to the public).
What Is an S-Corp?
Many of the small businesses we work with as a CPA firm file for S-Corp status. When you file for S-Corp status, you are now beholden to different methods and laws when filing your corporate taxes. Oftentimes, business owners will first file their business as an LLC. There is no official tax form if your business is registered as an LLC, so business owners then file for S-Corp status using Form 2553. When you are an S-Corp status, you then have a specific form to file your taxes, an 1120S.
When you file for S-Corp status, under a revenue procedure, you can ask for your S-Corp status to be effective by a certain date, which is a great planning tool in preparing to file personal income taxes and corporate taxes.
The Problem
Shank & Company, CPA, assisted ABC Company in filing for S-Corporation status electronically with the IRS in 2017. ABC Company already filed to be an LLC and wanted to have S-Corp status to be able to file the corporate taxes using the 1120S tax form. Initially, Shank & Company, CPA, heard no response from the IRS concerning the granting of S-Corp status to our client. Shank & Company assisted our client in filing his 2017 corporate taxes, which was declined. We assisted our client in filing the Form 2253 once more as well as mailed our clients 1120S tax form to the IRS. We received no updates on the rejection of the 2017 1120S tax form or the form 2553 for S-Corp status the second time and expected all was well.
Now we head into 2019. Shank & Company, CPA, files the corporate 1120S tax return for ABC Company for the year 2018 and it was rejected. Randy Shank, our President, resubmitted the return, believing it to be a simple electronic or tax software error. The return was rejected a second time, at which time, Randy called the IRS himself. The IRS informed us that S-Corp status for ABC Company was never granted, at which point Randy filed a third 2553 with the IRS. It was in waiting again for the 2553 to be accepted or denied that he developed a solution that bypassed the issue entirely.
The Solution
Rather than wait longer for word from the IRS about the acceptance or rejection of S-Corp status for ABC Company, he decided to amend the owner’s 2017 personal income tax return as well as his 2018 tax returns. Rather than present the business income/loss on schedule E of his client’s personal income tax returns for 2017 and 2018, he placed it on Schedule C of the returns. Placing the business income or loss there did not affect our client’s taxes owed nor his refund amount. The numbers remained the same. This solution allowed our client’s taxes to be filed timely with the IRS, thus avoiding penalties.
After the tax returns were amended and mailed to the IRS, our client received approval of S-Corp status 2 years and 2 months AFTER our initial request with the effective date in March 2017. It made no difference to our client or his business as his taxes were already filed timely with the IRS. However, if our client had accepted S-Corp status, the IRS could then have imposed late fees to his corporate taxes for both years. Ultimately, we advised our client to decline S-Corp status as his taxes were already filed and accepted by the IRS.
Due to this solution, our client avoided any late fee penalties as well as unnecessary stress and time wasted fighting these penalties. Even though this situation presented a true problem for ABC Company, our client had the advantage of working with our CPA firm to help him find a solution. In the end, his taxes were still filed timely, he avoided any late penalties imposed by the IRS, and he saved himself some time that he could now invest back into his own business.
Shank & Company, CPA, will deal with the IRS so that you do not. We understand that your time is valuable, whether you are here for personal income taxes or you are a business client. We provide a number If you receive a letter from the government and you are unsure as to what it is, bring it to us. We will happily investigate and deal with the government on your behalf so that you don’t have to.
Our goal is to help prospective and current business clients through every step as they establish their small business from directing you to the right forms to contacting government agencies on your behalf as needed. We offer a variety of services to our business clients including accounting, budgeting assistance, payroll services, and tax preparation for your personal and business taxes. (For a look at our payroll program, created specifically for non-accountant small businessmen, please read our blog post).
For questions and assistance in starting your own business, as well inquiries into how our accounting, payroll, and other services could benefit you and your business, contact us today at 513-442-1239, email at sandccpa@gmail.com, or fill out our Contact Us form.
