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Form 1120S Penalties and Interest

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Form 1120S (US Income Tax Return for an S Corporation) is used to report the income, gains, losses, deductions, credits, and related items, for any tax year covered, of a domestic corporation or other entity that elects to be treated as an S corporation by filing Form 2553. If the IRS accepts the election, Form 1120S must be filed as long as the election remains in effect.

This article will examine the penalties and interest that may be applied for failure to comply with the rules and regulations concerning the filing of Form 1120S when required. The penalties can be severe in some instances, so taxpayers subject to the requirements of the form should take notice of them.

There are numerous penalty and interest provisions that apply to the requirements of Form 1120S.

Late Filing of a Return

A penalty may be imposed if a return is filed after the applicable due date (including extensions), or if the return does not report all of the required information required, unless the failure to comply is due to reasonable cause.

For returns on which no tax liability is owed, the late filing penalty as of the time of this writing is $195 for each month (or part of a month), up to 12 months that the return is late or does not include the necessary information, multiplied by the total number of persons who were shareholders in the corporation for the tax year (during any part of the corporation’s tax year) in which the return is due. If a tax is due, this same penalty mechanism will be applied, plus a 5% penalty on the unpaid tax for each month (or part of a month) that the return is late. The maximum penalty will be capped at 25% of the unpaid tax. The minimum penalty for a return that is due, and more than 60 days late, is the lesser of the tax owed or $135.

Taxpayers who claim that the failure to timely file was due to reasonable cause must include an attached explanation with the return.

Late Payment of Tax

In general, a corporation that has a tax liability, but does not pay the tax when due, may be penalized ½ of 1% of the unpaid tax for each month (or part of a month) that the tax is unpaid. The late payment penalty is capped at a maximum of 25% of the unpaid tax. As with the failure to file penalty, taxpayers may be able to prevent or limit the imposition of the late payment penalty, provided that reasonable cause can be demonstrated.

Failure to Timely Furnish Information

A $100 penalty may be imposed for each failure to furnish a Schedule K-1 to a shareholder when due and/or for each failure to include on Schedule K-1 all required and accurate information. The penalty is applied to each Schedule K-1 for which a failure occurs. If a taxpayer intentionally disregards the requirement to report correct information, the penalty for each failure is increased to the greater of $250 or 10% of the aggregate amount of items required to be reported.

A reasonable cause exception is also available for this penalty.

Trust Fund Recovery Penalty

A trust fund recovery penalty may be imposed on all persons, including S-corporations, who are responsible for collecting, accounting for, and paying over various trust fund taxes (including certain excise, income, social security, and Medicare taxes) and who acted willfully in failing to collect, withhold, and/or pay such taxes (the IRS may determine who is responsible for such requirements). Such taxes are typically reported on various forms, including Form 720 (Quarterly Federal Excise Tax Return), Form 941 (Employer’s Quarterly Federal Tax Return), Form 944 (Employer’s Annual Federal Tax Return), and Form 945 (Annual Return of Withheld Federal Income Tax), among others.

The trust fund recovery penalty imposed is equal to the full amount of the unpaid trust fund tax.

Other Potential Penalties

Penalties can also be imposed for Form 1120S purposes under IRC sections 6662 (Imposition of accuracy-related penalty on underpayments), 6662A (Imposition of accuracy-related penalty on understatements with respect to reportable transactions), and 6663 (Imposition of fraud penalty).

Interest

In addition to the penalties described above, interest can be charged for failure to comply with various Form 1120S requirements.

Interest will be charged on taxes that are paid late even if a taxpayer is granted an extension of time to file. Interest can also charged on penalties imposed as a result of failure to file, fraud, negligence, substantial valuation misstatements, substantial tax understatements, and reportable transaction understatements from the due date (including extensions) to the date of actual payment. See IRC section 6621 and regulations for the applicable interest rates charged relating to such penalties.

Contact Sherayzen Law Office For Legal Help With 1120S Penalties

Whether you are facing substantial 1120S penalties, looking for proper tax planning to avoid such penalties, or just need assistance to comply with 1120S tax requirements, please contact Sherayzen Law Office.  Our experienced tax firm will guide you through the complex maze of the corporate tax law, provide rigorous IRS representation in disputing the penalties, and help you create and implement a creative ethical tax plan.

Tax Consequences of Converting a Rental Property into a Primary Residence

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Do you own a residential rental property that you plan to convert into your primary residence? Are you wondering if by doing so, you could still qualify for the capital gains exclusion on sales of a primary residence, when you do eventually sell? This article will examine these questions, and will explain some of the basic tax rules involved in turning a rental property into a primary residence.

The Capital Gains Exclusion for Sale of a Primary Residence- General Rules

In general, under Internal Revenue Code (IRC) section 121, taxpayers who reside in a primary residence, and who have both owned and lived (or used as a primary residence) in a home for at least two years within a five year period may qualify for the full capital gains exclusion of $500,000 on a joint filed tax return ($250,000 per spouse). However, taxpayers must not have already claimed this exemption within the past two years. Typically, each spouse of a married couple must meet both requirements in order to get the full exclusion. Certain exceptions may be available if the requirements are not met, depending upon the taxpayer’s circumstances. You will need to consult a tax attorney on this issue.

In converting a residential rental property into a primary residence, it should be noted that any depreciation taken while the property was a rental will not qualify for the capital gains exclusion, and will instead be subject to depreciation recapture. Depreciation deducted before May 6, 1997 will reduce the adjusted basis of a rental property, whereas depreciation deducted after that date will be taxed as a capital gain.

Non-qualified use of a Rental Property

In 2008, Congress amended IRC section 121, with the Housing and Economic Recovery Act, to add a limitation of the capital gains exclusion due to “nonqualified” use of a converted rental-to-primary residence. “Qualified” use is defined as any use of the property as a primary residence. “Non-qualified” use is defined as any use of the property other than as a primary residence, such as as a second home, a vacation property, a rental or investment property, or use of the property in a trade or business.

In general, the effect of the change is to limit the amount of capital gains exclusion to an allocation formula dependent upon non-qualified and qualified use of the property. For example, if the property is held for ten years and then sold, and for six of those years it was used as non-qualifying property, then 6/10 of the capital gain, would not be excluded. However, subject to certain exceptions, non-qualified use prior to January 1, 2009 will be ignored for purposes of the section

Contact Sherayzen Law Office For Tax Planning With Respect to Rental-Primary Residence Tax Planning

Taking advantage of the IRC section 121 capital gains exclusion may require detailed knowledge of the relevant tax rules and careful tax planning. Obviously, this article only provides some general background information for education purposes and should NOT be relied upon as a legal advice. Rather, you should contact Sherayzen Law Office to set up a consultation to discuss your particular fact situation. Our experienced tax firm will help you determine whether you may be able to take advantage of the IRC section 121 and how to do it.

Obtaining Private Letter Rulings

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At certain times, tax planning may involve taking a position on a tax return that is uncertain, or even controversial. If the position involves a potentially large liability, taxpayers may be left with the undesirable choices of either taking a risk in reporting the position or deciding not to and paying a much larger tax.

Thankfully, in some instances, the IRS allows for a way to receive clarification on a specific tax position for individual taxpayers, called Private Letter Rulings. The basic mechanism of obtaining a Private Letter Ruling is the essence of this essay.

Private Letter Rulings are issued by the National Office of the IRS upon request by individual taxpayers. Basically, Private Letter Rulings state how a specified tax position will be treated by the IRS if it is taken on a tax return. Hence, this process is one of the best ways to ensure proper, safe tax planning on otherwise potentially risky positions. The IRS will only issue letter rulings based upon actual transactions (even if they have not been completed yet); mere hypothetical scenarios will not qualify. While the IRS is not legally bound by letter rulings, in general, it has honored the determinations made to specific taxpayers.

A Private Letter Ruling that is issued to an individual taxpayer must be attached to the tax return filed for the year that the position in question is reported. In certain circumstances, the IRS may issue subsequent determinations to other taxpayers, based upon almost the same set of facts, that seem to contradict the earlier letter ruling. Generally, in such cases, the new ruling will not be applied retroactively to the original taxpayer who requested a letter ruling.

Furthermore, the IRS is required to make Private Letter Rulings available for the general public, with identifying individual details removed. In most cases, a Private Letter Ruling only applies to the individual taxpayer who request it. For the purposes of avoiding accuracy-related penalties, however, Private Letter Rulings issued after 1984 may be used as substantial authority by other non-requesting taxpayers.

Because a letter ruling represents the current IRS view of a tax issue, letter rulings may be superseded by new case law. Keep in mind, however, that there are limitations with respect to the IRS revocation or modification of a letter ruling sent to an individual taxpayer.

Of course, as most things in life, the benefits of a Private Letter Ruling come with certain costs. There is a fairly steep fee charged by the IRS for making a request. In addition, the legal fees involved in obtaining a Private Letter Ruling are often comparable to an administrative appeal or an arbitration case (depending on the complexity of your case). Also, there are certain prescribed areas of the law that the IRS will not rule on for Private Letter Purposes. The same applies to requests that involve only issues of fact. In fact, the complexity of obtaining the Private Ruling is such that your best course of action is to retain a tax attorney if you seek to minimize your potential tax liability and audit risk by requesting a letter ruling.

Contact Sherayzen Law Office For Help In Obtaining a Private Letter Ruling

Obtaining a Private Letter Ruling usually involves complex issues, and this articles only provides a very general background information that should not be relied upon in making the determination of your specific situation. Rather, if you would like to consider obtaining a Private Letter Ruling from the IRS, you should contact Sherayzen Law Office for legal help. Our experienced tax firm will help you determine whether your case qualifies for a Private Letter Ruling, whether this is the best course of action available, and provide rigorous, ethical and affordable IRS representation.

IRS Announces 2012 Standard Mileage Rates

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On December 9, 2011, the Internal Revenue Service issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on January 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 55.5 cents per mile for business miles driven;
  • 23 cents per mile driven for medical or moving purposes;
  • 14 cents per mile driven in service of charitable organizations.

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.

Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

Alternative Minimum Tax Foreign Tax Credit

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US persons are taxed on their worldwide income, but are allowed a foreign tax credit (FTC) for foreign taxes paid. In most cases, the FTC gives taxpayers a dollar-for-dollar credit against their US tax liability.

However, the FTC may be limited for Alternative Minimum Tax (AMT) purposes in order to ensure that a taxpayer’s US liability is only reduced on foreign-source income. This article will briefly examine some of the basic elements of the Alternative Minimum Tax Foreign Tax Credit (AMTFTC).

Alternative Minimum Tax Foreign Tax Credit Calculation

The AMT for individuals in calculated on Form 6251. Taxpayers who need to determine whether they will have an AMTFTC, will first need to calculate their foreign tax credit for their regular tax. Once this is done, line 34 of the form should be filled in, and if the amount on this line is greater than or equal to the amount on line 31 (see IRS instructions for specifics), then a zero would be entered on line 35 (the AMT line), and the instructions should be reviewed to determine whether the form will need to be attached to the tax return. If the AMT is not owed, line 32 of the form will still need to be filled in, in order to determine whether a taxpayer has an AMTFTC carryback or carryforward.

If the AMT is owed, the FTC may be limited by IRS rules. In general, for purposes of calculating the AMTFTC limitation, foreign-source AMT income (AMTI) is divided by total AMTI. This amount is then multiplied by the tentative minimum tax (and not the regular tax). This calculation must be determined for each separate basket type of income (i.e. general and passive income). FTCs that are not used because of the AMTFTC may be carried forward.

Taxpayers may elect to use regular foreign-source income in the numerator of this equation, provided that it does not exceed total AMTI.

Contact Sherayzen Law Office For Tax Help With Determining AMT, FTC and AMTFTC

Determing your Foreign Tax Credit and Alternative Minumum Tax can involve complex issues and this article only attempts to provide a very general background information that should not be relied upon in making the determination of your specific situation. Rather, you should contact Sherayzen Law Office for legal help with this issue. Our tax firm will help you determine your AMT, FTC and AMTFTC for the relevant tax years as well as provide sound tax planning for the future.