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Multiple partnerships filed as Sch C for multiple years

Technical topics regarding tax preparation.
#1
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Hey all,

Had a meeting with a potential new client, husband & wife. They have been self preparing their tax returns, nothing has every been prepared by an outside party. They are now realizing there are several issues, so came in for help.

Husband & wife have three businesses, all LLC's, and as I found out, all were setup as partnerships with the IRS (I requested the SS-4 to confirm) . They are both the partners of each entity, there are no outside partners. Two were setup in 2018, and another was setup in 2019 (no extensions were filed for 2019 for any of the businesses). The problem is that each business has been filed on schedule C of their personal return. No partnership returns have been filed since formation.

I'm unsure if there is anyway to proceed in correcting every return without them incurring significant non-filing penalties for each of the partnership return. I figure right now they are looking at approx $5,000 per return for each year/return, for 2018 and 2019. S

I'm wondering that because they did report the income, via Sch C, and assuming when I prepare the partnership returns the income is the same (hahaha), that I could use Rev Proc 84-35 to request abatement of penalties since they did pickup the income on the personal return. I'm also unsure if there is an alternative to filing the partnership return since none were every filed.

Any help, guidance, alternatives, additional questions, are all appreciated.
 

#2
JR1  
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Yeah, I don't know that you need to look for trouble. Isn't there a provision where a jointly owned partnership can split Sch. C's? And if so, tax won't change unless someone's over the SS limits. And since it's all reported, no 1065 penalties....

Now you can decide what to do going forward. I've suggest that clients dump one LLC member so that it's SMLLC....
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#3
DavidG  
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Perhaps they intended to file as a "qualified joint venture"-see IRC 761(f) and the Sch C instructions and therefore Form 1065 is not required. The facts don't indicate how they split the income and how they filed Schedule SE.
 

#4
HowardS  
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I believe H&W LLC's can only file as a QJV in community property states.
I suffer from depreciation.
 

#5
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ThatTaxGuy wrote:all were setup as partnerships with the IRS (I requested the SS-4 to confirm) .


An SS-4 does not establish a tax status. So, I wouldn't give that too much consideration.

Regarding posts #2 and #3 and #4, an LLC taxed as a partnership cannot operate as a QJV.

Rev Proc 2002-69 is your best bet and may be your saving grace. Especially if the clients and LLC are based in FL, a community property state.
 

#6
sjrcpa  
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I do not think FL is a community property state.
 

#7
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Yes, I think you're right. I was misremembering...scratch that.
 

#8
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Were business bank accounts opened for the partnerships, and if so was there any account activity. If no, then consider an initial and final return for each partnerships. Treat them as business ventures that never went past the planning stage. Then either continue with Schedule C, or if there is some utility to partnership treatment, start fresh and do it right this time.
Because on T.A. ten was the most you were allowed
 

#9
sjrcpa  
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Ae you sure they are both owners?
In whose name(s) were the Schedule Cs?
 

#10
DavidG  
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Please elaborate. I believe if H and W operate as an LLC/partnership, that is the classic situation a QJV election can be made.

ManVsTax wrote:Regarding posts #2 and #3 and #4, an LLC taxed as a partnership cannot operate as a QJV.
 

#11
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A qualified joint venture, for purposes of this provision, includes only businesses that are owned and operated by spouses as co-owners, and not in the name of a state law entity (including a limited partnership or limited liability company)

https://www.irs.gov/businesses/small-bu ... businesses
 

#12
DavidG  
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Thanks for the info. Luckily I don't have any QJVs.

ManVsTax wrote:A qualified joint venture, for purposes of this provision, includes only businesses that are owned and operated by spouses as co-owners, and not in the name of a state law entity (including a limited partnership or limited liability company)

https://www.irs.gov/businesses/small-bu ... businesses
 

#13
sjrcpa  
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See Rev. Proc. 2002-69
 

#14
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I'm also unsure if there is an alternative to filing the partnership return since none were every filed.

Yes, how about this crazy idea: Let sleeping dogs lie.
 

#15
Noobie  
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Jeff, that's a great idea until you have the IRS come back 6 years later asking for the 1065 like a client of mine just did.
 

#16
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Noobie wrote:Jeff, that's a great idea until you have the IRS come back 6 years later asking for the 1065 like a client of mine just did.


Why are they asking for a 1065? Was a 1099 issued?
 

#17
HowardS  
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Some years ago a taxpayer came to me in a state of panic. The IRS had sent a notice asking why she hadn't filed an 1120-S for the last 5 years. She had, in fact, file schedule C's for that period. She had issued 1099's using the S-Corp's EIN.
We called the number on the notice, explained what happened and she was told to file 1120-S's going forward. No penalties.
Probably best to do as Jeff suggests and deal later with any notices.
I suffer from depreciation.
 

#18
JR1  
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You can always say and show that the LLC never took effect, just as an S corp never took effect....
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#19
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Jeff, that's a great idea until you have the IRS come back 6 years later asking for the 1065 like a client of mine just did.

Nope, sorry.

We called the number on the notice, explained what happened and she was told to file 1120-S's going forward. No penalties.

Exactly.

Probably best to do as Jeff suggests and deal later with any notices.

Exactly again.

Don’t lose sight of the big picture here. We are dealing with an INCOME tax system. If all the income got reported and ended up in the right place, that’s good enough.

Things are a little different nowadays, because IRS can assess against the partnership, but even then, it would be easy to make your case.

They have been self preparing their tax returns

Very often, the worst clients to have. I would have gone into that initial meeting expecting the worst
 

#20
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Hey everyone,

Sorry, I lost track of this thread and did not respond to anyone, which I myself consider rude considering people put in there time to help. I just wanted to take a second and thank everyone who commented on. There are great ideas in this thread, and I really appreciate it.
 

#21
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DavidG wrote:Perhaps they intended to file as a "qualified joint venture"-see IRC 761(f) and the Sch C instructions and therefore Form 1065 is not required. The facts don't indicate how they split the income and how they filed Schedule SE.


In truth, they did not intend anything in particular. They filed the SS-4 themselves, based on what they considered a good idea, namely them both being co-owners, with no regard to the ramifications of different entity structures.
 

#22
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ManVsTax wrote:
ThatTaxGuy wrote:all were setup as partnerships with the IRS (I requested the SS-4 to confirm) .


An SS-4 does not establish a tax status. So, I wouldn't give that too much consideration.

Regarding posts #2 and #3 and #4, an LLC taxed as a partnership cannot operate as a QJV.

Rev Proc 2002-69 is your best bet and may be your saving grace. Especially if the clients and LLC are based in FL, a community property state.


ManVsTax, I'm not sure if you helped me out this with in a different thread. I had another issue with a fiscal year end on an SS-4 for an estate, and it was pointed out to me that the filing date is not determined by the SS-4, but what is shown on the first tax return.

My early training in the field always taught me that you go by what the SS-4 says, so it's been interesting to learn that there is a different perspective on this.

I did read an interest Tax Adviser article on 2002-69, and indeed, they are in FL, and Florida is not a community property state, but the article was interest none-the-less.
 

#23
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Noobie wrote:Jeff, that's a great idea until you have the IRS come back 6 years later asking for the 1065 like a client of mine just did.


This was exactly my concern, and the main reason I created this thread. Although I have a new perspective after reading the replies, my main concern was continuing to file the returns as they had been in the past, then the client gets a notice and they blame me for not correcting them going forward.
 

#24
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Jeff-Ohio wrote:
Jeff, that's a great idea until you have the IRS come back 6 years later asking for the 1065 like a client of mine just did.

Nope, sorry.

We called the number on the notice, explained what happened and she was told to file 1120-S's going forward. No penalties.

Exactly.

Probably best to do as Jeff suggests and deal later with any notices.

Exactly again.

Don’t lose sight of the big picture here. We are dealing with an INCOME tax system. If all the income got reported and ended up in the right place, that’s good enough.

Things are a little different nowadays, because IRS can assess against the partnership, but even then, it would be easy to make your case.

They have been self preparing their tax returns

Very often, the worst clients to have. I would have gone into that initial meeting expecting the worst


I think this is exactly how I am going to handle it...assuming the "potential" clients call me back. Yep, after a couple of conversations he ghosted me. Shocked pikachu face. I know...I know...but I still feel I learned something from this thread.
 

#25
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From a technical standpoint, RP 84-35 would relieve any late filing penalties in this situation, assuming the 1040s were filed timely.
~Captcook
 

#26
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CaptCook wrote:From a technical standpoint, RP 84-35 would relieve any late filing penalties in this situation, assuming the 1040s were filed timely.


Yeah, I've thought about that. My main concern is opening the can of worms that doesn't need to be. I would hate to file the returns, have them get hit with penalties, and not be able to get them abated.

Don't get me wrong, if they ever come back I will do what needs to be done. The point of this thread was to see what the options were, and I think I received some good ones.
 

#27
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To me, this is an argument to leave well enough alone. There's no value to "opening the can of worms". All penalties for doing it wrong would be removed.
~Captcook
 


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