Tax Penalty for Not Filing a Tax Return Every Year for Your Inactive Company or Trust
If you have an S corporation, C corporation, LLC taxed as a C or S, or irrevocable trust and have gotten a tax ID number, you have to file a tax return on that number every year. It doesn’t matter whether you owe any taxes or even do any business; the tax return has to be filed.
In the old days, folks – lots of folks – got their corporation or LLC and never filed a tax return. Oh, the boys in Nevada that set up the corporation were very efficient and got a tax ID number for the corporation, but the corporation never really did any business. As a result, there wasn’t any need to file a tax return.
In the good old days, when the IRS was nicer, people just ignored the corporation or LLC they set up. Yes, they got a tax ID number for it, but it never did any business, so no tax return was filed, and the IRS left it alone. That hasn’t been the case in the more recent past. For a number of years, the IRS has started charging a minimum penalty for not filing.
The costs vary depending upon the type of entity filing. The IRS substantially upped the fines in 2010. Section 16 of the Worker, Homeownership and Business Assistance Act of 2009, Public Law 111-92, increased the penalty for failure to file C and S Corporation returns (LLCs taxed as C or S corporations). The late filing penalty was increased from $89 per partner or shareholder to $195 per member or shareholder for each month or part of month that the business tax return is late.
I am seeing folks that have had their “dormant” company on the books for ten years getting hit with tens of thousands in fines, even though the company didn’t make a dime. They never even opened a checking account, but the lawyer or online site got a tax ID number for the company.
The IRS is DEAD SERIOUS about their fees. Since the IRS has tripled the number of agents in the past few years, they are out for blood. There is basically no way to escape paying the fines. People are getting killed by the fines. We have a new person in our office. He quit the IRS to come to our office. He was a special auditor at the IRS for 7 years. (The IRS only has a handful of special auditors.) He is working on the problem for my students
If you have an old dormant company, deal with it. The IRS may work with you. If you need to, shut it down. There is no answer as to exactly what to do. You will get a different answer from every accountant or attorney you talk to.
The IRS is your biggest asset protection threat. Do all you can to keep what you make. Your knowledge of the law may mean the difference between keeping it and retiring comfortable or losing it all and having to live on social security. That’s why I am naming my speech at the upcoming event “Using the Law to Make Money and Protect Your Assets.” I’ll see you there!
Lee R. Phillips
United States Supreme Court Counselor