Your Top Secret Guide To Tax Reduction, Business Success and Solving IRS Debt Problems
As a broker, your primary job is marketing. Marketing yourself, your services, your client’s properties… you get the idea. Once the marketing is done, you then move on to the sales side of the house. You know, getting the clients to fall in love with the property, dealing with objections, bringing them back to reality, and ultimately getting the parties to sign a contact. Once those two things happen, you then move on to the technical part of your job. That is, the actual part of dealing with the real estate transaction itself and wrangling all the other parties that become involved.
Yet what was not obvious in the three roles mentioned above is this: you are also actually running a business. Furthermore, running a business is not what your pre-licensing class trained you to do. Still further, you were not trained on taxes and how they impact your business or your client’s scenario. To that end, it is your accountant’s job to help you understand and navigate these items. So, if you are going to select a partner to help you in this area, would it not make sense to find one who is experienced? Given the above, that is where this book and I enter the picture!
My goal for writing this book is three-fold. First, I want to help you understand how taxes impact you both from the standpoint of being a business owner as well as from the perspective of reducing them. It is important for all taxpayers to understand their responsibilities, the associated rules, and what can be done within those rules to legally reduce their tax liability. Second, like CPAs and other tax professionals, brokers are advisors to their clients. The better equipped you are to help your client as it relates to certain tax aspects of their transaction, the more efficiently you can address problems and close deals. Besides who does not like to close more deals? No broker that I am aware of!
Finally, tax problems are commonplace with those who earn money where no income tax withholding occurs. Think of anyone who is paid via cash (or check) or as an independent contractor (i.e. self-employed): dentists, brokers, attorneys, truck drivers, construction contractors, etc. I have known a fair number of brokers who have tax problems. As a CPA authorized to represent taxpayers before the Internal Revenue Service (IRS), I help them solve those issues. Not only do I assist them in resolving their issues, but also those of their clients so that deals can close. The key thing to know is that no matter how bad it initially seems, I have never been unable to help a client solve their tax debt matter.
Check out the video below to hear more and look below the video on ways that you can place an order.
You can also view this video on our YouTube Channel here.
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Every tax season we encounter some common issues and errors surrounding business owners who desire to be taxed as a S Corporation (S-Corp) by the IRS. What might those issues be? Well, usually one of the following:
Failing to make the S-Corp election entirely because they didn’t realize that Form 2553 needed to be filed with the IRS
Failing to make the election in a timely manner
In one of our previous posts we discuss the qualifications to become a S-Corp and some of the tax considerations. In this post, we are strictly going to discuss how to make the election and what to do if the deadline is missed.
When to Submit Form 2553
Form 2553 is used to tell the IRS that you want a corporation (or entity eligible to be taxed as a corporation, such as a single member LLC) to be taxed as a S-Corp. It is due:
No more than 2 months and 15 days after the beginning of the tax year the election is to take effect,
or at any time during the tax year preceding the tax year it is to take effect.
You can file the election at any time after thee above deadlines if your corporation meets the criteria for making a late S-Corp election (which we will discuss next).
It is important to note that the S-Corp election is made with the IRS, not the state. One is NOT changing their entity structure with the state. They are merely asking the IRS to tax the entity in a certain fashion. To help clarify what the election deadlines look like in practice, we’ve provided the following example:
Example 1 – New Corporation. New Corp, operates on a calendar year. It incorporated and began its first tax year on January 7th 2019. The 2-month period ends March 6th and 15 days after that is March 21st. To be a S-Corp beginning with its first tax year, it must file Form 2553 during the period that begins January 7th 2019 and ends March 21st 2019 (i.e. 2 months and 15 days after it incorporated). Because the corporation didn’t exist prior to January 7th, an election requesting an effective date prior to January 7th 2019 won’t be granted by the IRS.
Example 2 – New Corporation With Short Tax Year (less than 2 1/2 months). Short Corp, operates on a calendar year. It incorporated and began its first tax year on November 8th 2019. The 2-month period ends January 7th 2020 and 15 days after that is January 22nd 2020. To be an S corporation beginning with its short tax year, the corporation must file Form 2553 during the period that begins November 8th 2019 and ends January 22nd 2020. Because the corporation didn’t exist prior to November 8th, an election requesting an effective date prior to November 8th 2019 won’t be granted by the IRS.
Example 3 – Established Business. Old Corp, operates on a calendar year. It has been filing Form 1120 as a C corporation but wishes to make the S-Corp election for its next tax year (e.g. 2020) beginning January 1st. The 2-month period ends February 28th (the 29th in leap years) and 15 days after that is March 15th. To be a S-Corp in 2020, the corporation must file Form 2553 during the period that begins the first day (January 1st) of its last year as a C corporation (i.e. 2019) and ends March 15th of the year it wishes to be an S corporation (i.e. 2020). Because the corporation had a prior tax year, it can make the election at any time during 2019 but NO LATER than 2 months and 15 days beyond January 1st 2020 (i.e. the tax year the election is to be effective).
For the specific steps on when, where and how to submit your S-Corp election request, please refer to the Form 2553 Instructions per the IRS.
Requesting Relief for A Late S-Corp Status Election
So what happens if the deadline has passed to make the S-Corp election or you didn’t even know there was a deadline? Lucky for you, the IRS realizes that people makes mistakes and offers you some options to correct the oversight. They basically fall into the categories of:
Simply make the election effective for the NEXT year
Request relief stating that there was “reasonable cause”
Request relief using an IRS Revenue Procedure
Make the election effective next year. For those who miss the deadline, but don’t need it to be effective immediately, they can simply request that if be effective for the next year. For example, if you incorporate in late December 2019, but miss the March 15th 2020 deadline, you can always request that the election be effective for Tax Year 2021 by submitting Form 2553 prior to January 1st 2021.
Request relief on the grounds of reasonable cause. Reasonable cause refers to when a taxpayer didn’t file the forms on time due to a “valid reason” so to speak. In most cases, we’ve found the IRS to be fairly lenient when it comes to granting relief and allowing a corporation to elect S-Corp status in the year intended. Please note that reasonable causes may vary, and the IRS does not publish a list of what it considers to be one that is valid. However, there are numerous court cases that show that certain reasonable causes are “nearly always” allowed. Two of these typically include:
The company’s president, chief executive officer or similar responsible person neglected to file the election, or your corporation’s tax professional or accountant neglected to do so.
The corporation or its shareholders either did not know of the need to file an election or didn’t know they needed to file the election by a certain date.
If you are going to request relief on the grounds of reasonable cause, make sure that you address the following points within your statement:
What happened that caused the filing to be late and when did it happen?
How did these facts and circumstances result in the forms not being filed on time?
How did the company handle its financial and tax affairs during this time? Meaning, did they operate as if they were a S-Corp or did they delay individual income tax filings because they were intending to be a S-Corp?
What attempt did the company make to correct the situation when they learned they did not make the election correctly?
Request relief using an IRS Revenue Procedure. Rev. Proc. 2013-30 (PDF) facilitates the grant of relief to those who make a late S-Corp election. This procedure provides guidance for relief for late:
S corporation elections,
Electing Small Business Trust (ESBT) elections,
Qualified Subchapter S Trust (QSST) elections,
Qualified Subchapter S Subsidiary (QSub) elections, and
Corporate classification elections which the entity intended to take effect on the same date that the S corporation election would take effect.
Generally, the relief under the revenue procedure can be granted when the following requirements are met:
The entity intended to be classified as an S corporation, is an eligible entity, and failed to qualify as an S corporation solely because the election was not timely;
The entity has reasonable cause for its failure to make the election timely;
The entity and all shareholders reported their income consistent with an S corporation election in effect for the year the election should have been made and all subsequent years; and
Less than 3 years and 75 days have passed since the effective date of the election.
To assist in determining if an entity qualifies for late election relief, Rev. Proc. 2013-30 includes flow charts, as well as specific guidance for each of the five categories listed above.
If an entity does not qualify for relief under Rev. Proc. 2013-30, the entity may request relief by requesting a private letter ruling. The procedural requirements for requesting a letter ruling and the associated fees are described in Rev. Proc. 2019-1 (PDF). For more information on late election relief, check out this page on the IRS’ website.
Need help correcting a late S-Corp election? We’ve helped many companies that thought they filed their election or didn’t know they needed to file by a certain deadline obtain their desired S-Corp status. If you find yourself in this unfortunate predicament, you’re best advised to seek a professional who knows how to address the situation.
To that end, give us a call at 773-239-8850 or shoot us an email via the address contained in the footer of this page. The sooner you put us to work for you, the sooner you can have your election granted to you by the IRS!
If you you have tax debt, you have undoubtedly heard a lot about the Fresh Start Initiative (FSI) in radio ads, TV advertisements, online and more. Many of these advertisements will make you think that the IRS has some “special program” or that it is some recent change the IRS made. Both of these facts could be further from the truth.
You see, many tax experts and consumer advocates had accused the IRS of failing to assist those who had significant tax debt, but were trying to pay it off. So in 2011 (yes, 8 years ago at the time of this writing), the IRS announced the creation of a new initiative known as the FSI. This was in response to the critics, law makers and the fact that people were still being impacted by the recession.
The primary objective of the FSI was to give taxpayers who owed substantial back taxes the opportunity to consolidate their tax bills and pay them off in a convenient and orderly fashion. The key thing to take away is that the IRS made it easier for one to pay their debt. Contrary to what the advertisements say, the FSI was not:
A program to forgive a persons tax debt
Some magical bullet to simply give the IRS a fraction of the tax debt or “pennies on the dollar” and call it good
A program at all
What Changes Did the IRS Make with the FSI? The primary provisions of the program included the following:
Tax Lien Changes. The FSI increased the tax debt threshold at which the IRS will file a Notice of Federal Tax Lien (Letter 3172). The threshold amount increased from $5,000 to $10,000. This was a good thing because having a tax lien on your credit report can hinder several things (e.g. ability to get credit, a job, etc). But do keep in mind that the IRS (at its discretion) can still file a tax lien on someone if they have a debt that is below $10,000.
The IRS also made changes regarding the withdrawal of tax liens, which eliminates the Notice of a Tax Lien publicly. Specifically, it made it so a lien could be withdrawn via these situations:
The tax debt was paid off in full or the statute of limitations (CSED) was reached. Although IRS liens are generally self-releasing, they don’t always come off. Therefore, a taxpayer could now call the IRS and tell them to release the lien because they met either of the two qualifications.
If you have entered into OR converted your regular installment agreement to a Direct Debit installment agreement, the tax lien can be withdrawn if:
You are a qualifying taxpayer (i.e. individuals, businesses with income tax liability only, and out of business entities with any type of tax debt)
You owe $25,000 or less (If you owe more than $25,000, you may pay down the balance to $25,000 prior to requesting withdrawal of the Notice of Federal Tax Lien)
Your Direct Debit Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier
You are in full compliance with other filing and payment requirements
You have made three consecutive direct debit payments
You can’t have defaulted on your current, or any previous, Direct Debit Installment agreement.
Installment Agreement Changes. The FSI increased the threshold for which an individual can qualify for a Streamlined Installment Agreement from $25,000 to $50,000. It also expanded the tax debt amount threshold for small businesses to qualify for a Direct Debit Installment Agreement (DDIA) from $10,000 to $25,000. Furthermore, small businesses can pay down balances above $25,000 in order to qualify for a DDIA. The reason these increases are important is because they:
Require minimal, if any, financial disclosure to the IRS;
Don’t require an IRS manager to approve the payment terms;
Don’t require taxpayers to liquidate assets to pay the IRS; and,
Can be set up in one phone call or interaction with the IRS.
Offer in Compromise Changes. If a person qualifies, the OIC program allows a person to settle their debt for a “reduced” amount. The FSI made changes regarding the financial analysis component used to determine which taxpayers qualify for an OIC (or not). Specifically it made the following changes:
Lump Sum OIC Payment – The IRS now looks at only one year of future income versus four years (i.e. 12 vs 48 months).
Short-Term OIC Periodic Payment – The IRS now looks at two years of future income versus five years (i.e. 24 vs 60 months).
Currently Not Collectible Changes. When a taxpayer is in this IRS status, enforcement actions cease. To get into CNC, generally the taxpayer will need to provide sufficient documentation to justify this status with the IRS. The FSI made the process easier for individuals who owe $10,000 or less to qualify for a CNC by easing the documentation requirements.
Are YOU looking for a fresh start regarding your tax debt?
Look, we know that most with tax debt would love nothing more than for someone to waive a magic wand and make their debt disappear. While we can’t offer that, we can help you make your problem disappear if you engage us! For example, did you know that the IRS only has 10 years to collect on your tax debt? After that, it will vanish!
So take a look at the post above where we offer a product for only $75 where we will calculate your CSED. Or, you can visit this page and learn more about our IRS Debt Representation services. In either case, we encourage you to act NOW so that your fresh start can begin as soon as tomorrow!