Frank S. Duke, Jr. wrote:

- quote -

YOu and me, too, Frank!

In my case, client came to me last year and I helped him
with forming the corporation, telling what needed to be done
and when, e.g. form 2553 within 75 days for youknowwhat, 941
forms end of quarter, and tax reports in January, and 1120S
due in March15th. I've done my job; so far, so good. the 75
days pass; nothing. October comes and goes; nothing, etc
etc,UNTIL April 14th of this year. (get the picture?)

the only saving grace I can see is that the contractor he
worked for (consulting for government) paid him and issued
him a 1099-misc in his name and number instead of the
corporation.

Only thing I know to do now, is to file the 1120 late with
zero income.

I'm just glad it's not three years worth like you. And I
thought that I had a problem!

In your case then, maybe the question might be, did he
personally receive the yearly income (as evidenced by
1099-misc in his name or number)? or did the corporation
indeed earn and properly entitled to the gross income?

And FWIW, IRS probably has sent a letter of inquiry re
missing 1120's and 941's. A power of attorney from client
would allow you to determine exact status. But as for the
EIN, without the other inquiries, they would never notice
non use of the number.

Cheer$,
Harlan Lunsford, EA n LA

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Frank S. Duke, Jr. wrote:

- quote -

Eventually, you'll get a letter from the IRS asking for the
tax returns. The letter will have a couple of responses to
choose from (one being a "we had no activity" response), or
you can write your own.

Phoebe

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Frank S. Duke, Jr. <dukefs[at]one.net> wrote:

- quote -

I would ask how he represented himself to his clients. Did
he claim to be a corporation? Did he furnish the
corporations EIN in lieu of his SSN and/or claim that he was
exempt from 1099 reporting status? Plus you mentioned that
he had a corporate bank account.

Depending on the answers to all of this, I don't think your
client can simply pretend that the corporation didn't exist
(or wasn't properly formed, etc.). So, I think you are stuck
with your second option. However, I wouldn't bother with the
1099s for the "dividend" payments, assuming that all such
amounts were actually reported on his 1040. Also, for the
time being, I wouldn't worry about FICA issues. But, it
sounds like he will likely owe some corporate income tax
(and penalties) for the years in question.

I HAVE seen situations where a corporation was formed, but
never appeared to be "activated." For example, where the
taxpayer never obtained an EIN for the corporation and
continued to use his personal bank account for all
transactions. In such cases I would "ignore" the
corporation, but its sounds like your case has progressed a
bit further.

MTW

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Frank S. Duke, Jr. <dukefs[at]one.net> wrote:

snip

- quote -

Option 2 is the one I would take. The penalties are due to
your client's own failure to properly file. I might
retroactively ask for an "S" election if I had an excuse
that fits in with one of the automatic Rev. Procs.

He may very well be audited and part/all of the payments be
reclassed as wages but since he will in effect (as a "C")
pay double tax the change may be offsetting.

- quote -

I think the "C" corp did come to life, the returns just
weren't filed. I don't see how he can choose to ignore the
form of business he initially chose just because he now
realizes another form would have been better. On the other
hand the IRS often has the right to choose substance over
form or vice versa.

Drew Edmundson, CPA (NC)

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Client retires from a large company and finds there are
opportunities to do consulting as a contractor. Rather than
file a schedule C, hires an attorney and forms a C-Corp.
Receives a EIN for the C-Corp, files papers with Ohio Sec.
Of State, etc.

Client is an inveterate procrastinator, has a falling out
with his accountant and never gets around to filing a tax
return for his C-Corp. He has consulting income in 2001,
2002 and 2003 and puts the money in the bank account of his
C-Corp. He has few expenses so essentially, the entire
income is as a result of his personal consulting efforts.
Total income since inception is about $35,000.

In each of the last 3 years, he declared a dividend of about
$8000 payable to him as the only shareholder. I took his
word for the fact that somebody else was handling the
C-Corp. return and that the dividend was legitimate even
though no 1099DIV was produced.

This year, I questioned him more closely on it and found
that no returns had ever been filed and that no 1099DIVs had
either. I told him I thought the C-Corp. would be viewed by
the IRS as a sham to avoid SE income and to convert ordinary
income into dividends. I told him I would not sign his
return unless he fixed this and as a result, he is on
extension.

I see two possible courses of action:
1. Assume that the C-Corp never existed - Amend 2001 and
2002 to reflect Schedule C income and file 2003 the same
way. He will pay interest on the underpayment of tax.
Since dividends were taxed as ordinary income in 2001 and
2002, he has already paid federal and state tax on $16,000.
He still owes tax on the amounts not distributed as
dividends as well as the SE tax and a 1% local income tax
that applies to SE income but not dividends. To me, this
seems the simplest solution with the least consequences.

2. File 1120A returns for 2001, 2002, and 2003 and issue
1099DIVs for the dividends - He will owe failure to file and
failure to pay penalties. He will also owe returns to the
State of Ohio. This feels like it has the potential to be a
real nest of snakes.

Does anybody have any experience with forming a C-Corp. and
never having it really come to life? Can you just walk away
and abandon it or will the IRS eventually wonder why the
unused EIN number is out there?

All freely provided advice guarantee correct or double your
money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA

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