LegaLees Corporation Warns, "If you own an Inactive or Defunct Business, Don't let the IRS Catch you With Your Pants Down."

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LegaLees reminds business owners that penalties for failing to file tax returns for inactive or defunct businesses add up fast.

Lee R. Phillips

Lee R. Phillips

“A small business is the most effective tax shelter an individual can use.”

A set of tax tips for small business owners has been released by LegaLees Corporation. “A small business is the most effective tax shelter an individual can use,” said Lee R. Phillips, attorney. “The problem is people are setting up small companies and then never doing anything with them,” he continued.

The scenario goes something like this. The entrepreneur, real estate investor, or ambitious money making individual attends a seminar where someone tells them the cure to all their problems is to form a corporation or LLC. In fact, the speaker just happens to be able to give them a deal on the establishment of a shiny new corporation or LLC.

As part of the package deal the company that is setting up the business entity even files for an Employer Identification Number (EIN) with the IRS. The paperwork is filed away in some drawer, and the entrepreneur, real estate investor, or ambitious money making individual forgets about the company. Every year they pay the annual fees to the state and say they will make money with their company next year.

Because the company hasn’t even opened a bank account and not a dime has been generated in the way of some sort of income, the entrepreneur, real estate investor, or ambitious money making individual never gives a thought to filing an annual tax return.

Maybe the scenario takes a different twist and the company does business for a year or two. The owners file tax returns, but then decide to close the business. Rather than actually filing articles of dissolution with the state and filing a final tax return, the owners simply let the company “lapse” with the state and stop paying the state fees. They were told that once they stopped paying the state fees the company would be gone.

Phillips points out that he sees these scenarios happening all the time. “What the business owners don’t understand is the IRS is now imposing penalties on companies that don’t file timely tax returns. Whether or not any activity occurs in the company,” he said.

“Owners of these inactive or defunct businesses are getting caught by the IRS with their pants down. It’s not embarrassing, it hurts financially. I have had business owners come in with tens of thousands of dollars in penalties on a company they never did a day’s business with,” he explained.

The IRS imposes a penalty on corporations and partnerships that don’t file, even though there isn’t any tax owing or activity in the business. The penalty is set out in the instructions for forms 1120s and 1065. They state:

“For returns on which no tax is due, the penalty is $195 for each month or part of a month (up to 12 months) the return is late or does not include the required information, multiplied by the total number of persons who were shareholders in the corporation (or partners in the partnership) during any part of the corporation's (or partnership’s) tax year for which the return is due.”

Phillips points out that these penalties apply to LLCs that are taxed as S corporations or partnerships. A company that was set up in 2010 with 5 owners and has just sat there with no activity without filing any tax returns could be assessed over $35,000.

“The IRS is dead serious about these penalties,” Phillips said. The IRS will waive the penalties for “good cause.” Phillips explained, “Good cause means death, hospitalization, maybe military service or something that would actually prevent the tax payer from filing. But, the IRS will make the argument that even if one owner wasn’t able to file, the other owners could have filed.”

Mr. Phillips serves as a counselor to the Supreme Court of the United States. He is the author of 11 books, along with his latest book Protecting Your Financial Future. He has written hundreds of articles for professional people assisting them in finding various strategies to use the law to protect their property, save taxes and make additional money. He enjoys helping other people apply the law, not only to provide asset protection and estate planning, but to use it to structure businesses and save taxes, helping individuals reach new financial heights.

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