S-Corp no payroll done for prior years

[MRPLOW]

I have an S-corp client that I will be working on their 2009, 2010, 2011.
Payroll was done and a W-2 was issued for previous tax years. But no payroll was done for 2009, 2010, 2011.

How should I handle the officer salary. File 941's for back tax years or should I add the officer salary to a Schedule C to accomplish this?

[MichaelG]

What distributions were made in those years?
Did the corp have profit or losses in those years?
Did the shareholder(s) make loans to the corp in those years?
Did the corp re-pay any shareholder loans in those years?
What is the client's explanation for why there was no payroll in those years?
Are you sure you want this headache?

[MRPLOW]

What distributions were made in those years?
All profit was distributed

Did the corp have profit or losses in those years?
Yes a profit, it is in the service industry. I'm going to guess and say in the $50,000 neighborhood. Usually took a $25,000 W-2, with the rest in a distribution

Did the shareholder(s) make loans to the corp in those years?
No.

Did the corp re-pay any shareholder loans in those years?
No.

What is the client's explanation for why there was no payroll in those years?
I did the returns in previous years and client had ADP do the payroll. Had a death in the family and business income went down. He got behind and just put it as his last priority.
I should note this is a 1 owner/employee S-Corp.

Are you sure you want this headache?
No I'm not sure yet, I have not taken on the engagement yet.

[DaveO]

I had this issue a couple years ago. They were in their first year and had never issued wages. I issued a 1099 and put officer wages on a "C". Along came the audit and I was told by the auditor that there was a special penalty for this action. He had a number of other issues on his personal return and in the end I could see it would be better if he wasn't a corp at all for that year. I took the position that it was a failed corporation and that it all should be on a schedule "C". Eventually the auditor agreed and that's the way it ended.

[ttbtaxes]

I had a very similar situation recently. It involved unfiled 941s, 1120s and 1040s for several years with oodles of penalties. Have you had much experience dealing with the IRS and requesting penalty abatements?

I chose to say thanks, but no thanks. Too much of a headache and the client is going to be dissatisfied no matter the outcome.

As Dave points out, don't try to help the client, by assigning income, and, in the process, jeopardize yourself. Another "easy fix" for some people is to consider the money paid to the shareholder for payment of dividends with no payroll. It's not your fault payroll tax and corporate returns weren't filed.

Be very careful if you take this client on.