What Happens When My S Corporation Owes Back Taxes and I’m Not an Officer or Employee?
Introduction
When an S corporation that you own stock in fails to file tax returns, it can lead to significant legal and financial complications. This article is designed to help you understand the potential consequences and actionable steps you can take.
The Risks and Consequences
The situation described is not ideal, and failure to file tax returns for three years or more can result in several serious issues. Here are the primary concerns:
Potential Penalties
The IRS will likely send notices requiring the company to file its S corporation returns for prior years. When the returns are filed late, the company will face penalties. These penalties are based on the number of owners and the number of months the returns are overdue. The penalties can be substantial, and they can affect not only the corporation but potentially the individual shareholders as well.
Tax Liabilities
As an owner, you might also have tax liabilities for your share of any profits included in the back returns. Even if you are not an officer or employee, you can be held personally responsible for taxes on your share of corporate profits. If you have financial statements that detail the company’s profits, you should use this information to file a return at least reporting your estimated share of profits.
Loss of Deduction Opportunity
Even if you are not actively involved in the company's operations, if the S corporation did not file K-1 schedules and had continuous losses, you might have missed out on the opportunity to claim those losses on your personal tax returns. This could result in an overpayment of personal taxes, which may need to be addressed.
Legal and Financial Risks
In extreme cases, the failure to file tax returns can lead to the corporation's suspension or deregistration in its home state, effectively making it unable to conduct business. As a minority shareholder with no control over the operations or financials of the company, your best course of action might be to consider surrendering your stock certificates and attempting to claim a worthless stock capital loss. However, you will need evidence that the corporation's debts exceed its assets.
Steps to Take
Here are the steps you can take to address the situation:
Consult an Attorney
Given the complexity of such issues, it is strongly recommended that you seek legal advice. An attorney can help you understand your rights and obligations as a minority shareholder and provide legal leverage to compel the management to file the back returns.
File Estimated Returns
Even if you are not an officer or employee, you should file estimated tax returns reporting your estimated share of profits. This can mitigate potential personal tax liabilities and ensure that you are in compliance with tax laws.
Seek Support from Other Shareholders
If there are other non-officer, non-employee shareholders, consider mobilizing them to support your efforts to get the back returns filed. Collective pressure might be more effective in compelling the management to act.
Conclusion
When an S corporation you own stock in fails to file tax returns, the potential consequences can be severe, both for the business and for individual shareholders. It is crucial to take prompt action and consider consulting with legal and tax experts to navigate this challenging situation.