Redundant 1065s

[Snaggletooth]

Not used to navigating this new board, otherwise might not have to start a new thread.

This jostling about whether to file a 1065 or not has been going on for some time. My problem is in the real world when two apparent morons show up in your office and one of them says, "Well, we're sorta partners." This should tell Armando right off the bat what he's in for.

We tell these guys first we've got to get some balance sheet information. How much did each of you contribute? "Well, sorta nothin'. He does his thing, and I do my thing, and when we need help we call on each other and split the billing from the customer." How much did you have in the bank at the end of your fiscal year? "Duh, fisical year? My doctor says I should have one every year." "Oh, we don't really have any MONEY, he takes his jobs and I take my jobs."

I'm sorry, sir, but we absolutely HAVE to file this 1065. I have to show all your assets and liabilities and track your basis in the company. "Oh, we don't have any bases. He works out of his home and I do too. I didn't think we had to do all this - we never have before. By the way, what's all this going to cost us?" Sir, my 1065s start at $500 and go up from there. At this point, the guys look at each other in shock, and finally one of them says, "OK, we'll try to find this information for you, and come back in a day or two."

What actually happens is they come back to someone else like HRB in a day or two, never reference "partners" and the guys at HRB fill out two schedule Cs and two 1040s. At this point, you have to wonder who the REAL moron is -- the customer or the preparer. - Ron J. Manchester, TN

[Bees Knees]

Two Schedule Cs

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As to your “two apparent morons,” Congress never intending to penalize guys in business together who don’t want to pay $500 to have a bunch of useless paperwork filled out just so that accountants and IRS employees will have something to keep them busy during the summer.

The Conference Committee Report concerning section 6698 of the Code states:

“The penalty will not be imposed if the partnership can show reasonable cause for failure to file a complete or timely return. Smaller partnerships (those with 10 or fewer partners) will not be subject to the penalty under this reasonable cause test so long as each partner fully reports his share of the income, deductions, and credits of the partnership ....” H.R. Rep No. 95-1800 (Conf. Report), 95th Cong., 2d Sess. 221 (1978), 1978-3 C.B. (Vol. 1) 521, 555.”

If Congress doesn’t care, why should we? Stop wasting people's money if they prefer to just file two Schedule C’s.

[Bees Knees]

IRS Instructions to 1065 make it clear.

The IRS does make a sort of half mention of this in the instructions to Form 1065.

http://www.irs.gov/pub/irs-pdf/i1065.pdf

The instructions for Question 4 of Schedule B read:

“Generally, the tax treatment of partnership items is determined at the partnership level in a consolidated audit proceeding under sections 6221 and 6234, rather than in separate proceedings with individual partners. Small partnerships are not subject to the rules for consolidated audit proceedings. “Small partnerships” are defined as any partnership having 10 or fewer partners each of whom is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner.”

The instructions go on to explain that a Small Partnership can “elect” to be covered under the Consolidated Audit Proceedings by choosing a Tax Matters Partner.

The question then is: “What if the Small Partnership does not elect to be covered under the Consolidated Audit Proceedings?" Well then, the IRS cannot audit the partnership at the partnership level. It can only audit individual partners to see if they properly reported their share of income and deductions on their 1040 return. If the IRS cannot audit at the partnership level, that means IT CANNOT AUDIT THE 1065!!!!

If the IRS cannot audit the 1065, why do you insist on having one filled out??? All that is needed is for each partner to properly report his or her share of income on their individual 1040. Period. End of story. You could fill out a 1065 with K-1s, if you so choose. But a substitute schedule (such as a Schedule C or Schedule E) showing proper tax calculations and allocations to the individual partner will also do, because what is on the 1040 is the ONLY thing the auditor can look at, and you NEVER attach the K-1 or the 1065 to the 1040.

[Lance Emerson]

No Penalty

There's no penalty for failing to file Schedule A to claim itemized deductions. How relieved I am to know that since there's no penalty for failing to file the Schedule, that's proof that it's not needed. Gosh, now that I look at it, there's also no penalty for failure to file Schedule C, Schedule SE, Schedule E. Holy smokes! Now I can REALLY be a paperless office.

As a matter of fact, there's not a single mention in the Internal Revenue Code or Regulations about any form or schedule.

As long as the tax is paid, that's all that counts. As long as there are no elections that required a specific format, you can send your return in on the back of a napkin!

Wow. How relieved I am to know I don't have to file any more paperwork. All I have to do is figure how much tax is owed, and have the client send it in.

You've made my life so much easier!

[Armando Beaujolais]

Aw, C'mon

>>>"Duh, fisical year? My doctor says I should have one every year." "Oh, we don't really have any MONEY, he takes his jobs and I take my jobs."

If he takes his jobs and I take my jobs, there is not a partnership. That's not what we're talking about. Merely sharing expenses or resources is not necessarily a partnership.

If they come in and say "We have a partnership. We went into business together. We've got a company name. Here's our card. We're working together. We collect income in our partnership's name. We're sharing expenses. All the money goes into and out of our partnership bank account. We bought a machine through our partnership. We have insurance through our partnership."

That's a partnership. You can try to talk them out of thinking of themselves as a partnership and try to talk them out of accounting for income and expenses as a partnership, but I don't believe that's the right thing to do.

People aren't any more sophisticated when it comes to corporations. They go to a seminar, talk to an attorney, or a next-door neighbor, then go down to the office supply store and get a do-it-yourself corporation packet. They go into business as a corporation.

Do you ignore the corporation's existstence also? Why have those stupid rules for reporting income and expenses from corporations and partnerships. Let's just make it easier for everybody and just do Schedule C's. That's where it all ends up anyway.

[Matt Sova]

Partnerships

If you believe you are wasting your clients money by filing a 1065 instead of 2 schedule C's, why not bring some value added service to the table? Discuss the LLC option with them and how it can protect their personal assets. Discuss the SE tax savings since the earnings from a Multi-member LLC are not subject to SE tax.

If they cannot see the value in the services you can provide, do you want them as a client?

[Bees Knees]

Same old same old...

There's no penalty for failing to file Schedule A to claim itemized deductions. How relieved I am to know that since there's no penalty for failing to file the Schedule, that's proof that it's not needed. Gosh, now that I look at it, there's also no penalty for failure to file Schedule C, Schedule SE, Schedule E. Holy smokes! Now I can REALLY be a paperless office. As a matter of fact, there's not a single mention in the Internal Revenue Code or Regulations about any form or schedule.

I already addressed that issue here http://www.thetaxbook.com/forums/sho...16&postcount=7 when I said: “Yes there is a penalty for not filing a Schedule C, D, SE or Form 2106. Its called code section 6702; frivolous income tax returns. You can get hit with a $500 penalty if your return “does not contain information on which the substantial correctness of the self-assessment may be judged.” There is no Rev. Proc. that allows you to by-pass this rule. There is one, however, for by-passing the 1065 filing requirements.”

Let me ask you this: If you need the 1065 all nice and neatly filled out before you do a 1040, do you also insist your Schedule C filers get that 1099-MISC from their payer before you will fill out that Schedule C? What’s the difference? There is a penalty for not issuing a 1099-MISC. Why do you put the number on the Schedule C without a 1099-MISC when one is required?

[Bees Knees]

You just proved my point.

If they come in and say "We have a partnership. We went into business together. We've got a company name. Here's our card. We're working together. We collect income in our partnership's name. We're sharing expenses. All the money goes into and out of our partnership bank account. We bought a machine through our partnership. We have insurance through our partnership."

That's a partnership.

Well, nobody in the history of being in business together has every had their act THAT together. I guess we have nothing to argue about, because if that is the requirement to be a partnership, then there are no partnerships out there because nobody in the real world would ever pass that test.