top of page
Writer's pictureCraig W. Smalley, E.A.

The Worst Advice Dealing With a Tax Issue


I had an appointment with a client about two weeks ago with a real estate agent who happened to be taxed like a C-Corporation and was using a name that the State of Florida doesn’t allow.


First of all, the problems with the company from a state point of view are that real estate agents that become corporations must be named whatever name is on their real estate license, and they must either be a Professional Association, or a Professional Limited Liability Company. A Professional Association (PA) is like a Professional Corporation in other states and the company has to be limited to only the sales of real estate and can’t do anything else.


Then, we ran into the tax issue. The only thing that they can do, unless they want to pay a flat 35% as a professional service corporation, is to be taxed as an S-Corporation.


This company was a C-Corporation, but the tax preparer didn’t calculate the 35% tax on the income. In addition, they put down that the taxpayer was paid $85,000 on a W-2 Form.


It didn’t shock me when, during our appointment, the next letter she showed me was a lien in the amount of $49,000 against the corporation. Note that the IRS can match up salary with a tax return. Not to mention that the NAISC Number stated that the taxpayer was a real estate professional.


So, the IRS removed the $85,000 in wages and calculated the taxes at 35%. It was July by the time that I met her and her corporate tax return was on extension. What was my plan?


First of all, form a Professional Association. Complete an IRC § 351 Tax-Free Exchange by transferring the assets from the first corporation to the other corporation. Dissolve the first corporation, and start running things correctly.


Why would I give that advice? Going back to Corporations 101, unless we are talking about payroll taxes, once a corporation is dissolved there can be no claims brought against it. The only thing that the IRS could possibly do is state that the IRC § 351 transfer was done under fraudulent conveyance. However, the comeback to that would be that the taxpayer got bad advice, and it wasn’t until they got a second opinion that they knew what the other tax accountant had done to them.


Is this a risky strategy? Not really. With all of the budget cuts, I highly doubt the IRS will go after this client.


Secondly, the client has a tort against the old accountant for getting her into this mess to begin with. I have written several articles about how tax preparers, at the very least, should take some sort of test that evaluates their competency, but to just simply make up numbers and tack them onto a tax return should be criminal.


The only thing I know to do is to complain to the Office of Professional Responsibility, but will that get this tax professional to stop preparing returns? Hardly, but an injunction from a judge might.

bottom of page