As we approach the October 15 extended deadline for 1040s, some taxpayers face a tough call: they still haven’t received all of their K-1s. Yes, the extended K-1 deadline is normally September 15, but sometimes failure to file on time is an option for partnerships and S corporations, and the K-1s just aren’t done on time. The tax law tells you to report the income as best you can, and amend if you get better information. The IRS usually will understand.
Except when you control the S corporation with the delinquent K-1s.
A Californian, Dr. Sampson, owned two S corporations. His preparer hit a wall preparing the S corporation returns, according to the Tax Court (my emphasis):
Mr. Araradian has been preparing returns for Dr. Sampson and the corporations for many years. He receives the information necessary to prepare the corporations’ tax returns from Dr. Sampson’s administrator, who keeps general ledgers for both corporations using a computer program, QuickBooks, which is available to Mr. Araradian electronically. He also receives copies of the actual documents, such as bank statements and payroll reports, underlying the entries in QuickBooks (source documents), which he believes are necessary to verify the data in QuickBooks. before he will prepare a tax return. For neither of the years in issue did either corporation provide source documents to Mr. Araradian before the respective dates on which their Forms 1120S for those years were due. The corporations’ Forms 1120S for those years were delinquent because, without source documents Mr. Araradian would not prepare those returns.
Well, he still had the Quickbooks files, so he should be able to throw together a tentative taxable income number for the doctor, right? Apparently not:
And since he had not prepared the corporations’ returns by the dates on which petitioners’ 2008 and 2009 Forms 1040, U.S. Individual Income Tax Return (together, original returns), were due, Mr. Araradian did not have the corporations’ Schedules K-1, Shareholder’s Share of Income, Deductions, Credits, etc., from which to enter pass-through items from the corporations on the original returns.
Consequently, Mr. Araradian prepared the original returns omitting any income or losses passed through to petitioners from the corporations. He told Dr. Sampson in each case that he was making a statement on the return saying that pass-through items from the corporations were not being included. The statement that he made on each return is as follows:
THE ENCLOSED TAX RETURN FOR REGINALD AND GERVEL SAMPSON DOES NOT INCLUDE THE K-1’S FROM MONTEBELLO MEDICAL CENTER, INC. * * * AND REGINALD SAMSPN [sic] MD A PROF CORP * * *. THE * * * [2008/2009] PERSONAL INCOME TAX RETURN FOR REGINALD AND GERVEL SAMPSON WILL BE AMENDED ONCE THE TAXPAYER RECEIVES THE * * * [2008/2009] K-1’S.
So he had the Quickbooks files, but he just used zeros. For two years. That turned out to be less than the income that should have been reported, leading to over $130,000 in additional tax. The IRS didn’t think that was reasonable and assessed penalties.
The taxpayers argued they filed a “qualified amended returns” for the two years. The judge pointed out that the amended returns were filed after the IRS had contacted the taxpayers, so they didn’t work.
It seems strange to me that the preparer wouldn’t file a return based on the Quickbooks file alone, though maybe he felt the doctor’s bookkeeping wasn’t to be trusted without support. Given the penalties for filing late S corporation returns, it’s surprising that the doctor didn’t turn over the “underlying documents.” Considering that he had quite a bit of information in the Quickbooks files about the K-1 income, it’s surprising that they used zeros on the doctor’s 1040, instead of an estimate based on Quickbooks numbers. But the tax law can be full of surprises.
The moral? If you don’t have perfect information, the zero option may not be your next best option. If you can’t file perfect, it’s better to file something, and to try to make it as close as you can.
Cite: Sampson, T.C. Memo 2013-212.
Richard Borean and Kyle Pomerleau, Monday Map: Top Marginal Tax Rates on Sole Proprietorships and S-corporations (Tax Policy Blog). Today, S corporations:
Yes, increasing rates on the wealthy also increases tax rates on businesses.
Don Boudreaux, It’s Not Really a Taxingly Difficult Subject (Cafe Hayek): “Among the most economically naive calculations that people (including government officials) make is to estimate the growth in tax revenues based on the assumption that nothing changes beyond a hike in the tax.”
Peter Reilly, Sixth Circuit Highlights S Corporation Perils In Broz Decision “Don’t rely on your accountant to straighten every thing out with journal entries.”
Trish McIntire, Tip or Service Charge?
Jason Dinesen, Wisconsin State Tax Guidance for Same-Sex Married Couples
William Perez, Statute of Limitations on Tax Refunds. “Did you know that you can claim a tax refund for up to three years after the original deadline?”
Clint Stretch, Healthcare and Tax Reform: “Repealing the employer-provided healthcare exclusion might make sense in economic theory, but in the practical world, it would accelerate a day of reckoning on healthcare for which we are unprepared.”
Jack Townsend, On Harmless Error
Brian Mahany, FBAR Basics – Foreign Reporting 101
TaxProf, The IRS Scandal, Day 124
News from the profession: Oh Dear Lord, Grant Thornton’s Belfast Office Has a Willy Wonka Room (Going Concern)
Tags: TaxProf, Kay Bell, Russ Fox, Robert D Flach, William Perez, Going Concern, Trish McIntire, Joseph Henchman, Jack Townsend, Judge Halpern, Don Boudreaux, Brian Mahany, Kyle Pomerleau, Clint Stretch, Richard Borean