Embezzlement Loss

[luke]

I need some HELP with this:

S-Corp was embezzled from over several year period (large $) - discovered in 2013 - embezzler is now in jail (NO hope of restitution!)
I will report as embezzlement loss on 1120S, FORM 4684!
My software automatically takes loss to FORM 4797 also (and line 4 of 1120S) - this makes the K1 show a huge loss on line1 AND embezzlement amount on line 10B of K1.
If this is correct then the loss will flow thru to taxpayer onto Schedule E page 2?

It seems to me that the embezzlement loss should "flow thru" to taxpayer and onto a FORM 4684 on FORM 1040??? (I can "force" my software to do this by overriding 1120S line 4 to check box saying FORM 4684 only and omitting FORM 4797)??

Will carry the loss back 3 years (because it is a theft) to offset taxes paid/owed on FORM 1040s!

What say YOU GUYS?

[taxea]

the instructions on the K1 tell you where to post the loss on the 1040.
It will only carry back if you do a 1045 following the instructions
It did go on the correct form for a business loss

[TaxGuyBill]

I don't know anything about this, but I did a test return using ProSeries, and this is what happened:

Before I entered the date on my worksheet, it produced the 4797, carried it to 1120-S line 4, and went to K-1 box 1.
AFTER I entered the date on my worksheet, it eliminated the 4797, eliminated 1120-S line 4, and went to K-1 box 10.

It should NOT be in BOTH box 1 and box 10 of the K-1. Box 10 is for "any other item of income or loss not included on lines 1 through 9".

http://www.irs.gov/instructions/i1120s/ch02.html#d0e3061

So the way ProSeries did it, NO 4797 (which means NO 1120-S Line 4), and ONLY in Box 10 of the K-1.


Yes, if the loss creates a NOL for the current year on the 1040, it can be carried back 3 years, usually by means of Form 1045.


I hope this helps!


EDIT: As a side note, I think you are supposed to issue 1099-MISCs to the embezzler.

http://www.journalofaccountancy.com/Issues/1999/Aug/TaxMatters.htm

[luke]

Thanks

Thanks guys - I have never had a return like this but it just didn't look right as entered!
I especially like the FORM 1099-MISC idea - unfortunately I don't have the address of the JAIL! ;-)

[wildbilll]

jail address

You should be able to get address from the court house or send it to regional jail
based on info in the news. I think you might be able to last known address.