My client was married from about 2006-2010. He was partners with his wife 50/50 in an S Corporation. The wife was the tax matters partner. The bookkeeper and tax accountant were friends of hers. They went through a very bitter divorce in 2010. The S Corporation rented out a large building that they partioned into various artist studios. From 2006 - 2009 the S Corporation reported about a 3,000 yearly ordinary loss. My client never got his 2010 K1 from his ex wife and filed his tax return without it (I was not the preparer). My client then gets a CP2000 for 2010, there is 221,000 of Rental Real Estate income on line 2 of form 1120S K1! The S Corporation didn't own any real estate or any other property - at all! They rented property and subleased to artists - that's it. My clients ex wife also used a different accountant for the 2010 Subchapter S tax return than she did for 2006-2009. My client has no idea who it is. We have ordered a copy of the tax return on form 4506. I am believing this is a "anger from a woman who was scorned". How do you suggest I rectify this. The CP2000 and adjustments are final. They are not to the Notice of Intent to Levy stage yet. My instinct is to amend and explain. My guess is that this will spark an audit of the S Corp and both owners for 2010. My question is: Is there something I'm overlooking. Is there another way to approach this suspected tax fraud other than amending and explaining. His ex wife will not speak with him nor will the bookkeeper and accountant all friends of his ex wife.
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I hate to say it but your client should have inquired about the 2010 K1 prior to filing his return. He was a 50 % owner of the Sub S and should have known that a K1 is required. I don't think IRS is going to show any sympathy that his ex did not give him a K1 and that is why he did not report that income.
I have a client who claimed that her ex did not give her a copy of the 1099-C and that is why she did not report it. IRS rejected her contention since her name was on the deed and mortgage!
If he was my client I would try to work with IRS to abate some of the penalties and pay the tax owed plus interest after getting a copy of the K1 either from that tax matters partner or the IRS.Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDR -
Thanks for your reply.
But...
My client expected the same 3.000 dollar ordinary loss he had gotten for the past 4 years.
He got the usual 3,000 dollar loss plus 221,000 net rental real estate income - the Sub S didn't own any rental real estate.
There was nothing that the Subchapter S Corporation owned that could have been sold for this kind of profit.
The ex wife refused to answer any of his requests for the k1 so he just filed.
Originally posted by ATSMAN View PostComment
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If what your client told you is true, then he needs a lawyer.
I see a situation here which has several land mines.
At a minimum this will involve the client, his ex, the IRS, and the person who prepared the 1120S. And if it's true, there's some serious tax fraud taking place here. That's going to be a tough one to prove. I'd be very surprised if he makes any progress without some legal action being taken to force disclosure of the financial information under state law. And I don't think the IRS will get involved in any of it, other than insisting that he pay the tax on the income showing on the K-1.
On the other hand, if he isn't being completely honest with you, then you'll be doing nothing but spinning your wheels at best, or making some pretty serious allegations against someone at worst. (someone who could have motivation to retaliate against you legally if you overstep in some minor way)
If you do take this one on, I'd love to hear how it plays out.Last edited by JohnH; 05-30-2014, 07:23 PM."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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What does the K-1, Line F say? Is it still 50%? If so, the wife would presumably have a similar K-1 with similar tax liability.
It will be interesting to find out what is on the corporate return and why it's on there.Comment
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I agree with JohnH that your client would be better served with a competent attorney if what you claim is outright fraud.
If your client was still a 50% shareholder in 2010 when this phantom income came into existence, what was his involvement in the business?
If he was totally disengaged, you have to really wonder why because he is still liable as a 50% shareholder? Perhaps a total audit of this business is warranted?
IMHO something does not pass the "smell" test. Before I go to bat for him I want to know exactly what is going on, before I get myself caught up in the middle of a tax fraud situation that could put my reputation at risk.Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDRComment
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No k1 yet
We don't have a K1 yet, just a tax return transcript of the 1120S from the IRS.Originally posted by TaxGuyBill View PostComment
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Thanks for your advice. You're right the IRS won't choose to get involved unless they have to. I should see a good tax lawyer.Originally posted by JohnH View PostComment
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So, does Schedule K help you? Each item times 50% would be on your client's K-1.Comment
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Schedule K is correctly split 50/50
I have a schedule K income figure of 427,477 which split 50/50 is 213,738. So this looks correct.Originally posted by Lion View Post
The strange elements of 2010 are: Gross rents went from 305,000 to 860,000 in 2010 - a 555,000 increase; total assets increased by 134,000; this amount disappeared in 2011; it looks like something was purchased and sold; my initial guess is that ex-spouse bought property and sold it - pocketed the money and gave my new client a K1 for half -Comment
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I don't understand how the S Corp rented a bldg. it didn't own?Originally posted by Judy rocks View PostYou have the right to remain silent. Anything you say will be misquoted, then used against you.Comment
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You don't need to own real estate to have real estate rental income. If you are a lessee where the lease that permits you to sublet the property, then the income you receive from subletting is still reported as real estate rental income.
So only the dollar amount in this case sounds questionable, not the mere existence of rental income on the K-1.Comment
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Yes, that's true. Thanks. It just wasn't adding up.Originally posted by Gary2 View PostYou have the right to remain silent. Anything you say will be misquoted, then used against you.Comment
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TMP rules don't apply to S-Corporations
Under TEFRA provisions, a partnership being audited must delegate someone to act as its official representative in IRS matters (the tax matters partner [TMP]). The provisions also apply to other entities that are taxed as partnerships (for example, certain limited liability companies); such entities also may be subject to these rules and thus may need to designate TMPs. Note, however, that these rules do not apply to S corporations.Originally posted by Judy rocks View PostComment
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IMO your client needs a lawyer. If the T/P owns a 50% interest in the corp, or did during the year 2010, then he should have the right to: (1) see the corp's books and records, (2) see the corp's annual tax returns (F-1120S), and (3) receive a distribution of 50% of that huge $200+k profit. It will probably take a lawsuit and subpoenas to do all this ... hence the lawyer.
If and when he finally sees the 1120S for 2010, he will also see the name and address of the person (and firm, if applicable) who prepared it. Then some pressure applied to that person and/or firm may produce some answers.
Added caution: Be vigil to the possibility that your client is not being fully forthcoming with you regarding all the facts about this.Roland Slugg
"I do what I can."Comment
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