ERC by bankrupt LLC IRS wont give refund to sole member

What a great time of year !!

Between a rock and hard place.

The LLC is in bankruptcy and has applied for the ERC and will get the refund. The IRS says the refund is at the LLC level and to be paid to the IRS to pay off the LLC's payroll tax liability.

The owner is also in debt to the IRS and the IRS's position is she is not entitled to the ERC money. The ironic point is that she will have to amend her schedule C for the year of the credit and pay additional tax on income for which she gets no benefit for the ERC credit.

Another twist in the road.

What do you think?

Art

Client is better off, tax debt is being paid. What happened to the losses from bankrupt LLC?

Big (main?) reason why an LLC with payroll has to have its own EIN. IRS did not want to get stuck arguing the "limited liability" issues when payroll taxes incurred by the LLC were not paid. Sounds like this fits your case.

BUT, she may have been stuck paying the PR tax liabilities anyway under the responsible party rules for trust fund taxes. So I don't think she has "lost her benefit" of the ERC credit.

If the IRS position is that she is not entitled to the ERC money. Maybe she could argue "tax benefit rule"? She never got the benefit of the ERC credit so why should she have to decrease the payroll expense deduction.

Just and idea.

Yes, Joan TB your point is well taken about the separate ID number for the payroll.

She will get the benefit.
It is the same as if she receives the money and then uses it to pay the payroll taxes.

She will get the benefit.
It is the same as if she receives the money and then uses it to pay the payroll taxes.

Agreed.
This is assuming when you say "IRS position is that she is not entitled to the money" you mean she doesn't get cash in hand. That really isn't "she is not entitled to the money". She just isn't entitled to direct the money at her discretion.
If your statement means something else, then our discussion may need to go a different direction.

Big (main?) reason why an LLC with payroll has to have its own EIN. IRS did not want to get stuck arguing the "limited liability" issues when payroll taxes incurred by the LLC were not paid. Sounds like this fits your case.

BUT, she may have been stuck paying the PR tax liabilities anyway under the responsible party rules for trust fund taxes. So I don't think she has "lost her benefit" of the ERC credit.

It's a good point that the taxpayer is probably personally liable after all the possible IRS maneuvers. My last client in a bankruptcy/past-due payroll tax situation not only got held personally liable but earned the 100% penalty.

They're now a cautionary tale for all future clients: If you're negotiating an installment plan on 250k of unpaid payroll taxes, don't buy a Lexus during the three-month period of finances the IRS is reviewing. Even if you "just need a reliable car to get around town in." Because they'll not only deny the installment plan, they'll throw the book at you regarding penalties.

Pigs get slaughtered.

I had a married couple running an S Corp come in 20+ years ago as new clients. Big sob story about how IRS is mistreating them, seized assets, former accountant screwed up, etc. We talked for a while. They left. Woman forgot her purse. I run out to the parking lot with it. They are each driving a new Corvette.
Found out business owed a couple hundred thousand of payroll taxes. I withdrew immediately.

What b'cy chapter?

Why doesn't it belong to the bankruptcy estate? The bankruptcy attorney should be dealing with it as this is NOT a tax issue.

[quote="They're now a cautionary tale for all future clients: If you're negotiating an installment plan on 250k of unpaid payroll taxes, don't buy a Lexus during the three-month period of finances the IRS is reviewing. Even if you "just need a reliable car to get around town in." Because they'll not only deny the installment plan, they'll throw the book at you regarding penalties.

That's inconsistent with my experience.

I don't see a reason to amend.

Note that the trust fund liabilities will be paid last, maximizing her 6672 exposure. Other than that, unless there is some undisclosed practical aspect to this fact pattern, I'm having trouble seeing what difference the ERC makes.

I don't see a reason to amend.

If I'm not mistaken, the reason to amend is because of the decrease in the wage deduction required by claiming the ERC. That creates a requirement to amend.

cite?

§3134(e) to Sec 280C(a)

This is well established law for anyone who has been paying attention to this or any other payroll or income tax credit. We've had dozens of discussions on this topic specifically regarding ERC.

I suppose one might argue that neither of those sections create a duty to amend. 280C(a) disallows the deduction, thus allowing the IRS to assess the additional tax. And penalties. Oh, and don't forget the interest.

However, one might advise a client to do nothing because there is no duty to amend. I think we all know, though, what a client generally thinks when they get a "love letter" from the IRS. Therefore, although there is no duty to amend, I think it would be unwise of any practitioner who becomes aware that ERC has been received, to sit and wait. Bad for the client's blood pressure, probably bad for their bank balance and makes the preparer look shoddy.

I found out this morning that a good client has filed forms 941X for ERC - I do not do the payroll. He believes amended returns for 2020 and 2021 are the right thing to do and so do I.

I think I mistook the question.
As to the statutory requirement to amend, there is none...technically.
However, as a practical matter, preparer penalties for not carrying out the proper adjustments for prior years are definitely on the table and likely to be levied if one were to advise not to file. Not amending is not a position I would take or advise. I have only one client for whom I prepare their income tax return and whose ERC I did not prepare. I haven't received all their information yet, but if it gets to a point of that ERC is not correct, I'm prepared to disengage.

Today's Current Federal Tax Developments podcast with Ed Zollars talks a bit about ERC audits. The IRS has apparently been requesting copies of amended income tax returns as a part of the basic information request of the audit and it sounds like a failure to file the amended returns is being held against the taxpayer in the audit. Which kind of makes sense, because if you take the position that the ERC claim is valid, then consistent with that position your wages are overstated on the income tax return and should be corrected as well.

Unfortunately it's also an economic issue for taxpayers -- I'm sure a lot of practitioners who advised their clients about amending the tax return ended up holding back the filing until the credit was processed, because the taxpayers often don't have the ability to pay and it would just be cruel to potentially subject clients to nasty letters from the IRS before the ERC is refunded to them.

Capt,

You wrote: "... as a practical matter, preparer penalties for not carrying out the proper adjustments for prior years are definitely on the table and likely to be levied if one were to advise not to file."

I'm having trouble seeing what the preparer did in your fact pattern that deserves a penalty. What penalty?

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.