LLC- Corp Mess

[S T]

Is there anything worse than acquiring a “DIY” Biz Client?

History: Oct 2011 client formed an LLC, State of Texas, consists of Husband and Wife, and Son as Members. Filed for EIN# - received with a follow up letter confirmation from IRS with EIN# and to file a Partnership Form 1065 due by 4/15/2012.

So far so good, right - No wrong --Trying to piece the “paper trail” together, and
it appears the Client then subsequently files a form 8832 and marks the box on page 2 “A domestic eligible entity electing to be classified as an association taxable as a corporation” Client thought they had to file this form and intent was for partnership – but marked the wrong box.

Client as “self prepared” subsequently files a Form 1065 (as they still believe that is the entity form they are) in response they receive a Letter from IRS, stating that they (IRS) are unable to process the return as filed. “Your Form 8832 Entity Classification Election, was accepted to classify your LLC as a corporation effective “date” which is start date of the entity, therefore the Form 1065 is not valid for the tax period Oct 2011 – Dec 2011. Our records indicate you are required to file Form 1120 for the tax period indicated.

No Form 2553 filed for S Corp. So now this client has effectively elected a “C” Corp for this period for 2011, and nothing so far has been corrected for 2012 to current date.

My understanding is that a revocation of the “form 8832” can not be made back to inception date of October 2011 - For Short year 2011, either file a Form 1120 (has a small loss depending on Depreciation Elections) or file an 1120S with the Form2553 (late under Rev Proc 2007-62) Honestly I feel the Client is not in compliance with the S Corp and probably some uneven distributions if not in 2011, for sure during Jan-June 2012.

My question is which would be advisable 1120 or 1120S - terminate the election for Corp/SCorp asap – and revert the LLC back to a partnership. Do we have to apply for a new EIN#?

Assets in the business are Computers and Furniture and Fixtures - $4,000 and Startup/Org Expenses of $ 1,000.

Thanks for any assistance

Sandy

[AZ-Tax]

Let me guess the DIY says...

Its not my fault, nobody told me therefore what should you charge me extra.

[S T]

The client did admit they "screwed up" now they are looking for a fix and that is why I posted.

Looking for some thoughts on how to deal with this and get them back to a Partnership without much tax consequence for the remainder of 2012 (as in July 2012)

Can anyone share experience or thoughts?

Thanks

Sandy

[JohnH]

I don't see a big problem with IRS. I think you should keep it simple by preparng the 1120 for 2011 and 2012 in compliance with the Form 8832 elections. For 2013, you can let the client decide whether to file the 2553 or take some other action. (can an LLC change from a corp back to a partnership?)

This conforms to the paperwork the client filed, if there's a small loss then there won't be a penalty from IRS for 2011, and about the only problem would be the possibility of the BIG tax if an S-corp election is made next year and the corp is sold for a huge gain wihtin 5 yr. In the unlikely event of that happening, it would have been the result of the client's actions, not yours.

Making a late S-corp election would probably draw a late filing penalty. WIth 3 shareholders that's gonig to be huge. You can PROBABLY get the penalty abated, but I don't see the point of even going down that path. What happens if IRS digs in their heels?

State issues might affect this decision. If the corp is operating in NC, then there won't be any problem. However, the Texas penalties may differ - maybe their rules could force you to consider a more complicated approach.

[BHoffman]

I'd keep it really simple and just file another 8832 with late filing relief under 2009-41 attached to form 1065, electing partnership treatment. The EIN does not change. The 60 month rule does not apply for newly formed entities.

[JohnH]

Very elegant - I like that much better than my solution.
(I didn't know the 8832 could be "amended/corrected")

[S T]

Maybe 8832 Fix for LLC

JohnH thanks for your thoughts,

BHoffman, this could be such a Great Solution and an easy fix. Client seems to meet the late filing requirements under 2009-41.

Nothing to lose by trying it, worst case would be another Form 1065 rejection, right? and I still have some time for corrections, as I have extensions for all forms in place?

Sandy

[BHoffman]

Very elegant - I like that much better than my solution.
(I didn't know the 8832 could be "amended/corrected")

Hi JohnH - the initial form 8832 is not being amended or corrected. The MMLLC first elected to be taxed as a corporation. Now, it is making a new election to be taxed as a partnership. Unless I'm completely missing something, the instructions indicate that this is allowed on a newly formed entity since the 60 month rule doesn't apply and the late election relief is available.

There are probably many DIYers out there who screw up form 8832, and the IRS seems to be allowing a "fix" when it comes time to file the tax return. I doubt Sandy is the only tax preparer facing this problem!

[S T]

FYI for all and an update!

B Hoffman's instructions worked! Yea! - It took about 4 months, but client finally received the Acceptance Letter from IRS with the 8832 Classification as Partnership (back to inception of October 2011)! All forms re-submitted and the corrected 8832 with reference to Rev Proc 2009-41

Just made my day!

Thanks all for the Great Advice and Support that is received on this Board. I could not have accomplished this without you!

Sandy