Enrolled Agent

[Edw Jay]

I need some clarification , please.

One of my closely held corporations is being audited by the IRS . They are going to tax the C -corp on the unreprted income. At the same time they will charge the stockholder the same amount as a dividend.

Will that dividend be in the 15% tax bracket?

Thanks for your help.

[sea-tax]

I need some clarification , please.

One of my closely held corporations is being audited by the IRS . They are going to tax the C -corp on the unreprted income. At the same time they will charge the stockholder the same amount as a dividend.

Will that dividend be in the 15% tax bracket?

Thanks for your help.

Yes it could be in the 5% or 15% depending on what bracket your client is in.

You said they will charge the shareholder the same amount as a dividend. Why?
Did he take the money out? If he did not distribute the money then I would argue why is he reporting a dividend in the first place.

[BOB W]

More than likely....

..... the IRS found deposits in his personal accounts and that is how they determined some or all of the unreported income.

Just another reason for being an S Corp or LLC

[Edwjay]

BOB W, sea-tax

The client had taken the money out of the Corp and deposited into his own account and was picked up at the audit.

You are right about the S instead of a C.

This was not my client, I was called in to represent at the Audit only. The client did not want the tax preparer to get involved.

[Jiggers]

I don't understand?

..... the IRS found deposits in his personal accounts and that is how they determined some or all of the unreported income.

Just another reason for being an S Corp or LLC

Why would it be another reason for being an S or LLC? The income would have had to be reported if it was an S, LLC, or C.

In this case, it may be better that it is a C. While the C may pay some tax, the distribution will be taxed using the capital gain rates. If an S or LLC, it is taxed at ordinary income. And, maybe if an LLC, subject to SE tax.

You can't find any documents showing that these funds were really loans from the C to the Shareholder? Or, could these be reimbursements for expenses, personal vehicle use, medical reimbursement plan, etc.? I know I am just fishing, but I would look at all options before caving in on this one.

If not, be prepared for lots of penalties for the taxpayer/shareholder/C. I would also get the taxpayer/shareholder/C on the right track. This might help with the auditor and how he sees things.

[BOB W]

You make ......

..... it sound like it is OK to incurr this extra tax when all is said and done. CGs or not there is an extra tax. But I guess it depends on the CCorp tax bracket, (professional or total "C" profits) and the $ amount of the adjustment to profits.

[Unregistered]

If the unreported income is not in doubts seems from the posts. I would not be to aggressive unless the "F" word has already been mentioned.

[Edwjay]

Unreported Income

As I was saying the other day. The client had astore wherein he sold various food products. He reported income from this activity on a C-Corp. and paid tax.

He also took money that had not been "rung" up and deposited into his personal account(s). He paid some invoices against this income from with his personal checks. The net differnce was over $ 100 K. in both years.

I was tryingt o "explain" to the RA , that this income should have been reported on Schedule C and if he made the adjustment on th e 1040 only, I could get my client to agree to a settlement.Not to happen.

Back and forth we went, the RA wanting to charge the C-Corp with the income first. There was no other facility, place of business for the sched. C. and wanted to tax the corp.
Then he woould tax the individual as receiving a dividend.( I now know, it would be at at the lower CG rates)

I was concerned about the F penalty, and going back as the oomission was greater than
25 %. As it turned we agreed on the 20 % penalty, no further yrs involved etc.
sincet the 2005 return has not yet been filed we can correct all of the taxable entities.

[veritas]

Personally I like it when the IRS gets knuckleheads like your client.

[Unregistered]

He also took money that had not been "rung" up and deposited into his personal account(s). He paid some invoices against this income from with his personal checks. The net differnce was over $ 100 K. in both years.

100K sounds a very large amount to me. I think your client is lucky that the RA agreed on a monetary penalty instead of referring the case to the CID.

So if 100K in two years was still not serious enough, what kind of case would the RA refer to the CID?

[VT-EA]

[QUOTE=Edwjay]The client had taken the money out of the Corp and deposited into his own account and was picked up at the audit.

Blunly put, the client embezzled! He alone should have income. The firm if on accrual accounting had income and then a loss. The firm if on cash never had the money.