To File or Not to File

I have a client that owns a building to what used to be considered the rental property to the business. He no longer has the business but still owns the building. The building has been vacant for years but the LLC the owns the building is still active.

The tax payer has expenses associated with the real estate but does not want to file a tax return since it has no activity.

I ran into a situation similarly to this in the past which the tax payer did not file a tax return for the land owned by an LLC (of course these LLC's are taxed as partnerships and have filed form 1065 in the past).

The IRS agent who I spoke to after receiving a penalty for not filing a return stated that since expenses were incurred such as the required filing fee for the entity by the State, it was mandatory to file a return and refused to waive the penalty. Since then, I have file a tax return for all entities that have a federal tax ID number to stay on the safe side.

What do I do in this situation? The tax payer does not seem to have the building for rent and would potentially sell it the first chance he gets. It is considered an investment property now but as far as filing requirements, I'm a tad confused regarding the partnership..

Is the LLC a single-member LLC or a multi-member LLC?

The IRS agent who I spoke to after receiving a penalty for not filing a return stated that since expenses were incurred such as the required filing fee for the entity by the State, it was mandatory to file a return and refused to waive the penalty.. He was wrong, right?

... of course these LLC's are taxed as partnerships and have filed form 1065 in the past .... By "these" do you mean another client's, or this one that is the subject of your OP?

Is the LLC a single-member LLC or a multi-member LLC?. And is it taxed as an S corp by any remote chance?

The tax payer has expenses associated with the real estate but does not want to file a tax return since it has no activity.
. So he wants to forgo the deductions?

The IRS agent who I spoke to after receiving a penalty for not filing a return stated that since expenses were incurred such as the required filing fee for the entity by the State, it was mandatory to file a return and refused to waive the penalty.. He was wrong, right?

... of course these LLC's are taxed as partnerships and have filed form 1065 in the past .... By "these" do you mean another client's, or this one that is the subject of your OP?

Is the LLC a single-member LLC or a multi-member LLC?. And is it taxed as an S corp by any remote chance?

The tax payer has expenses associated with the real estate but does not want to file a tax return since it has no activity.
. So he wants to forgo the deductions?

This is a multi-member LLC taxed as a partnership (1065).
If the tax payer is allow to file a return based on the expenses alone, I would definitely go that route. My understanding is that you cannot file a return to claim expenses when the asset is not classified as a trade or business. This entity owns an asset that used to be classified as a trade or business since it was renting to another entity. Unfortunately not anymore, nor does he have intentions or renting in the future.

Hope this helps.

Reg. 1.6031(a)-1(a)(3)(i):

(i) A partnership that has no income, deductions, or credits for federal income tax purposes for a taxable year is not required to file a partnership return for that year.

So, if the MMLLC has no income, deductions or credits, and the State’s filing fee isn’t allowable as a business deduction, then no return needs to be filed for that year.

The IRS agent who I spoke to after receiving a penalty for not filing a return stated that since expenses were incurred such as the required filing fee for the entity by the State, it was mandatory to file a return and refused to waive the penalty. Since then, I have file a tax return for all entities that have a federal tax ID number to stay on the safe side.

From IRS website
Question
Must a partnership or corporation file an information return or income tax return even though it had no income for the year?
Answer
Partnerships and corporations have different standards for filing an information return or income tax return.
A domestic partnership must file an information return, unless it neither receives gross income nor pays or incurs any amount treated as a deduction or credit for federal tax purposes.

From CA FTB:All LLCs (not classified as a corporation) that are doing business in California, or file an article of organization or certificate of registration with the Secretary of State must file Form 568, Limited Liability Company Return of Income, pay the annual minimum franchise tax of $800, and LLC fee (if applicable).

It sounds like filing is required, even if the only business you did during the year is paying the State a filing fee.

If the tax payer is allow to file a return based on the expenses alone, I would definitely go that route. My understanding is that you cannot file a return to claim expenses when the asset is not classified as a trade or business. . Are there no property taxes? Is this not a property held for investment? Even if they do not ever hold it out for rent, they want to sell it, right? I am completely mystified by why no 1065 is being filed.

If the tax payer is allow to file a return based on the expenses alone, I would definitely go that route. My understanding is that you cannot file a return to claim expenses when the asset is not classified as a trade or business. . Are there no property taxes? Is this not a property held for investment? Even if they do not ever hold it out for rent, they want to sell it, right? I am completely mystified by why no 1065 is being filed.

The client definitely has a for sale sign. I filed a zero return. As far as the expenses go, I'm capitalizing all until it is sold. I think this is the safest route to go. Few bucks for a return is safer than a $10,000 bill from the IRS. If I remember correctly they charge an LLC $150/per month/per shareholder for all the years that was not filed. The bill was not pretty at all...