Does it get any worse?

[Corduroy Frog]

How can this be any worse?

New customer wants me to file 2011 personal return. In 2011 he starts an S-corp. 2012, due to debt, he gives up controlling interest to two other shareholders, and all shareholders get put on payroll. On December 31, 2012 he gets fired by two other shareholders and surrenders his share of the S corp.

Taxpayer has not filed his 2011 return, and the IRS is chasing him. The auditor tells him she will accept a Schedule C as she tells him going through the process of an S return would be counterproductive and all they are interested in is HIS income.

It gets worse. The 2012 SCorp return is also under audit. The new shareholders had a CPA prepare their 2012 Scorp return. I have a Profit/Loss statement for 2012 from the CPA. There is about $1.5MM in gross receipts, but this includes income on a line item called, "Adjustment to Basis for 2012" for $105,000. Taxable income distributable to shareholders for 2012 is $53,000 and this includes the afore-described adjustment. My client did not receive a K-1 from the SCorp even though he was a shareholder all year long.

Adjustment to Basis? Whose basis? How can this be reported as income on an SCorp return?

Finally, my client and the new shareholders are also involved in litigation.

Comments or suggestions??

[ATSMAN]

Unless you are a tax attorney I would not touch this with a 10 ft pole. It appears this fellow may not have all the documentation in his possession to make his case and since the shareholders are involved in mutual litigation, good luck getting any info without a discovery motion.

[geekgirldany]

I'd run away about as far as I could. As soon as I heard the word "litigation".... whew no thank you.

[rkhan71]

Dig in

If you want to take this project, you are going to have to "dig in" and research the situation in its entirety. I would be charging a lot of money for my efforts though. Litigation does not mean anything if you are only being asked to prepare a return. Your job will be to determine the pieces of the puzzle as a tax preparer and act according to that. If it involves litigation, that is up to a lawyer as applicable. Ask him to engage a lawyer as necessary.

In summary though, if you are being engaged to do a return because the IRS is chasing him, then do his return(s) based on what a tax preparer would normally do. A tax return has to be done by someone. It is just a question of whether you feel competent enough to prepare a return that is appropriate to the circumstance (not that you are not competent, but are you with situation). Your job is to be the preparer and nothing less, given the variables. It really depends upon you and how comfortable you feel with the case.

Ray

[Roland Slugg]

New customer wants me to file 2011 personal return.

I assume you mean "prepare," not "file." Did you also mean "2012?" You said 2011, but everything else in your post refers to 2012.

Anyway, if he wants you to prepare his 2011 return, and you're willing to do it, why not just go about it in the usual way? Ask him for all his relevant tax information, including the 2011 K-1 from the S Corp, and be sure and see a copy of his 2010 return.

The part about the IRS auditor saying she will accept a Schedule C makes no sense to me. Did this person own a business in 2011? You certainly can't report the income or loss from an S Corp on a Schedule C. If this person did not receive a K-1 for the year 2011 but can make a reasonable estimate of his share of the income or loss that would have been reported on it, a F-8082 can be used.

[Corduroy Frog]

My sentiments exactly

Sluggo, filing a Sch C for this mess seems to be a bad idea, and I will only do this if there is something from the IRS in writing that tells us this is permissable. Otherwise it is not. Taxwise, the owner may be spared self-employment tax but a corporate tax must be filed for the state of Tennessee, with a tax which would approximate any savings to self-employment. A form 8082 is a good suggestion. However, the absence of a state corporate return is a problem, as a proprietorship has no personal income tax in Tennessee.

I am being retained to prepare 2011 for the individual, and my references to 2012 are only subsequent facts and events to spice up the scenario. I believe 2011 would be out-of-scope for the litigation. Also the reference in 2012 to "adjustment to basis" implies something happened in 2011. No one prepared an 1120S for this entity for 2011.

As is so often the case, I can turn down the work, but the guy has been referred to me by a circle of 5-6 friends, all of which are good customers. The best I can do is charge enough to wallow through the mess, if possible.