My spouse and I started an S-corporation to pursue our small business idea in July 2021. Unfortunately, we rushed too quickly into our dreams and our business never took off. We never brought in any gross or net profits. Aside from IRS Form 2553, we haven't filed any other paperwork with the IRS since 2021. A few days ago, a family friend pointed out that we hadn't filed the annual IRS Form 1120-S, which was required even if we never made a single sale. We're good people, we've always paid our fair share and never had any problems with the IRS. What should we do? How can we rectify this situation? Would there be any penalties assessed and if so, how could I request that they be waived?
A corporation must file Form 1120-S if (a) it elected to be an S corporation by filing Form 2553, (b) the IRS accepted the election, and (c) the election remains in effect. After filing Form 2553, you should have received confirmation that Form 2553 was accepted. If you didn't receive notification of acceptance or nonacceptance of the election within 2 months of filing Form 2553 (5 months if you checked box Q1 to ask for a letter ruling), please follow up by calling 800-829-4933. Don't file Form 1120-S for any tax year before the year the election takes effect.
If you received acknowledgement of the election for 2021 a calendar year return is now over a year late. The penalty is about $2400 per shareholder. the 2022 calendar year return is now about 3 months late. About $600 per shareholder (about $200/month/shareholder for each month late with a maximum penalty of 12 months). Normally I would recoomend filng the 2021 return with a requet for abtement of any penalty along with a statement 1) you didn't ralize a return was due becuase you had no revenue and 2) that steps have been taken to timely file subsequent returns. But now that the 2022 return is also late, I don't know if the IRS would honor such a request. I suggest you confer with a tax pro for advice which could include liquidating and filing a final return. if you do nothing you risk the IRS sooner or later requesting the missing returns and then there may be little chance of abatement or reduction of penalties.
also see what others reply to this thread but don't wait to long
I'll add a few comments:
- You also need to consider the state tax penalty implications of not filing.
- Have you filed a dissolution with the Secretary of State where incorporation occurred?
- While you indicate there were no gross or net profits, what else may have transpired?
- Did you fund the S corporation with capital?
- Did you have any S corporation expenses?
- Did you purchase assets?
- Did you have start-up or organizational expenses?
- Legal Fees?
- There are too many unanswered questions at this point to really provide an assessment. Having a one on one with a tax professional is the way to go. The longer you wait, the more penalties can increase. The potential penalties at this point exceed the cost to meet with a tax professional and file the necessary returns. Don't procrastinate. Lesson learned.....planning and understanding is key in the tax world.
Also keep in mind the date of replies, as tax law changes.
There are too many unanswered questions for us to really help you, and you don't sound confident enough to do your own returns even if we asked a lot of questions and probed for all the details (which this board isn't really set up to do.)
See a tax professional. Once your situation is understood and all the right forms are prepared, the professional can also assist you with applying for a waiver of any penalties for cause, or as a first-timer. At the very least, you will need to file for 2021, 2022 and 2023, after you close the business.
On the positive side, if you spent money on the business but it never made money, you might have a loss you can apply against other income. But that all needs to be put down officially on paper and filed.
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