ERC by bankrupt LLC IRS wont give refund to sole member

Here is a link to the guidance:
https://www.irs.gov/pub/irs-utl/2023-02 ... pliant.pdf

1. Does the IRS have the authority to apply the ERC refund to the employer payroll taxes or can the LLC elect to apply the ERC refund to the trust fund portion, thereby reducing the liability to the individual and offset the addition tax when she has to amend.

Here is an idea to the resolution to the taxpayer's LLC getting the ERC money to be applied to the LLC payroll liabilities and the individual having to file an amended return and paying additional tax. Have the LLC retroactively elect to be taxed as a C Corporation. Would electing a C Corporation status for income tax purposes also change the payroll filing status?

Now that tax season is over all of you tax preparers in New England need to go help the Canadians in Montreal put out those forest fires!

[quote=as a practical matter, preparer penalties for not carrying out the proper adjustments for prior years are definitely on the table.[/quote]

Nonsense. Given that there is no duty to amend and an amended return is not filed, how is it possible that a preparer would be exposed to penalties. For what?

The LLC's ERC will be allocated first to the non-trust fund liabilities, maximizing the client's 6672 exposure. The client also has exposure for any additional income tax liabilities arising from the failure to amend to reduce the compensation deduction.

IRS released guidance recently discussing where preparer penalties may be levied. The term "perpetuating a fraud" was contained therein. This has been interpreted to include if a preparer files or doesn't file returns consistent with reality.

I don't have the cite for this guidance at my fingertips. I'll track it down later.

Again, there is no basis for treating a failure to amend as fraud. Whatever contrary "interpretation" others may have is either ignorant or taken out of context.

Retroactively creating a C makes no difference in this fact pattern.

Only individuals get discharges in chapter 7 (liquidation), which is why it is usually stupid for entities to file a chapter 7.

The client is exposed for income tax liabilities caused by taking too large a compensation deduction. But the client is already in collections. Adding additional liabilities doesn't matter unless she intends to pay all of her personal tax liabilities. But the new assessment of income taxes would presumably delay her filing of a b'cy petition.

6672 penalties are not dischargeable in b'cy. 11 USC 523(a)(1)(A).

I was not faced with the problem in 2022, so I'll play Monday Morning Quarterback -> Given the uncertainty regarding the ERC, I'm thinking it would have been reasonable to plan on not getting the ERC, which would mean filing with a full compensation deduction. If the ERC was certain, the matching reduction in the compensation deduction was required.

[I am seeing a lot of unnecessary paranoia in this thread.]

Bankruptcy of passthrough and disregarded entities
Commentary from: "Corporate Tax Insights on Checkpoint" by Jack Cummings
The situation of an entity being in bankruptcy, but not being responsible for taxes on its own
income (including discharge of indebtedness income), can arise in three ways: (1) partnership in
bankruptcy, (2) S corporation in bankruptcy, and (3) tax disregarded entity, such as an LLC, in
bankruptcy. Because such a situation is obviously fraught with peril for the entity owners
(possibly taxation without representation), it is useful to review the issues.
The most important rules (some of which are not certain) are summarized as follows. Note:
Author references below are to the following WG&L Treatises:
[P'SHIP] McKee, Nelson, Whitmeyer - Federal Taxation of Partnerships & Partners
[S CORP] Eustice & Kuntz - Federal Income Taxation S Corporations
[LLC/DRE] Bishop & Kleinberger - Limited Liability Companies: Tax & Business Law
...
Disregarded LLC in bankruptcy. The single member LLC is a distinct legal entity that exists
apart from its member for bankruptcy purposes. (Gilliam v. Speier, 318 BR 712 (2004); 94
AFTR 2d 2004-7281 ) The Gilliam case required estimated taxes paid prior to filing bankruptcy
by the bankrupt LLC on behalf of its owner to be turned over to the bankrupt estate. It reasoned
that the owner got the benefit of limited liability and no double taxation and so it was not
improper to make the owner pay tax on the bankrupt LLC's income. To the same effect L. & L.
Holding Co., 101 AFTR 2d 2008–2081 (WD La. 2008) ruled that the owner of a disregarded
entity in bankruptcy was liable for its employment taxes. See Bishop & Kleinberger: Limited
Liability Companies 2.07.
Conclusion. The voluntary or involuntary bankruptcy of an LLC that is a disregarded entity
places the solvent, nonbankrupt, owner in line to pay tax on the LLC's income from before and
during bankruptcy, without having access to its cash flow. This is a situation to beware of.
Source: Federal Tax Updates on Checkpoint Newsstand tab 7/9/09

Nonsense. Given that there is no duty to amend and an amended return is not filed, how is it possible that a preparer would be exposed to penalties. For what?

Totally agree. Anyway, what Captain linked was about filing an amended return associated with an ERC claim that, as it turned out, was excessive/improper/bogus.

There are so many wayward thoughts on this thread, I wouldn’t even know where to begin.