C Corp Shareholder Performs Duties & receives 1099-MISC

[jeanniee]

At one time this 94% shareholder and only person performing duties received a W2 and was an employee of her C Corporation. At some point the tax preparer, now retired, said it was o.k. to issue a 1099-MISC to shareholder. Shareholder then files a schedule C and deducts home office expense and a boat load of other expenses to create a loss. Is there any scenario that makes this o.k. with the IRS? I say not, but am looking for current threads on this topic. In reading TTB page 5-23 there is "safe harbor rules for businesses". The 1st point: Reasonable Basis applies because they relied on the advice of an accountant. Point 2: Substantive consistency: I'll need to get more information to find out if she has been an employee since 1977, not sure on that. The biggest issue would be with 3: Reporting consistency: They would lose on this because they did not prepare 1099's. My first question: Does an officer of a c-corporation qualify as an employee under the "Common-Law Rules" which Section 530 applies to? If no, then this safe harbor wouldn't apply anyway. Second Question: If they do, should I go back and issue 1099's for past 3 years? I already told this new client that going forward W2's will have to be issued. Now I'm rethinking after reading this section of the Tax Book. Thanks for any help.

[ChEAr$]

At one time this 94% shareholder and only person performing duties received a W2 and was an employee of her C Corporation. At some point the tax preparer, now retired, said it was o.k. to issue a 1099-MISC to shareholder. Shareholder then files a schedule C and deducts home office expense and a boat load of other expenses to create a loss. Is there any scenario that makes this o.k. with the IRS? I say not, but am looking for current threads on this topic. In reading TTB page 5-23 there is "safe harbor rules for businesses". The 1st point: Reasonable Basis applies because they relied on the advice of an accountant. Point 2: Substantive consistency: I'll need to get more information to find out if she has been an employee since 1977, not sure on that. The biggest issue would be with 3: Reporting consistency: They would lose on this because they did not prepare 1099's. My first question: Does an officer of a c-corporation qualify as an employee under the "Common-Law Rules" which Section 530 applies to? If no, then this safe harbor wouldn't apply anyway. Second Question: If they do, should I go back and issue 1099's for past 3 years? I already told this new client that going forward W2's will have to be issued. Now I'm rethinking after reading this section of the Tax Book. Thanks for any help.

The first question to be answered - is this 94% shareholder also an officer in the corporation? I'm guessing the answer is yes, and therefore, by law an employee of the corporation. If this fits, case closed; W2 required; no 1099misc; no schedule c.

[TXEA]

ChEAr$ said all that needs to be said.

[jeanniee]

Thanks for your quick response. That was the first words out of my mouth to client. Just looking for a loophole I guess. Would you go back and amend prior 3 years or just correct going forward?

[TXEA]

The client should be advised that the prior years are incorrect and a rough of idea of the tax liability involved. Remember, if you amend, you have to amend payroll reports, state unemployment reports, prepare a W-2, hopefully there is not retirement plan for the business.......amended corporate returns and individual returns, etc, etc.....

But remember, Circular 230 requires us to notify a client of errors that come to our attention and a the tax consequences of such errors. It is up to the client to actually decide to do so.

Bottom line, the returns are incorrect.