Huge problem for a nice client and I don't know if I can help

[NECPA in NEBRASKA]

An elderly client signed a couple of papers and thought that she was co-signing a loan for a long time family friend. A huge mistake! As it turns out, she may well be a shareholder in a business that never got off the ground. It had a few sales, but mostly incurred debt. She pulled out most of her retirement money to pay off creditors in 2009 and 2010 and received a 1099C for 2010. Tax returns have never been filed, because the friend can't pay anyone to prepare them. She finally had him call me yesterday and he told me that he doesn't know where the legal paperwork is, but that there were originally three shareholders and that he and his ex-girlfriend broke up and signed the entire business over to my client. I asked if there were any attorneys involved, and he said that he wrote up the transfers himself. He claims that there was no stock issued to my client, but who knows? Even if someone will prepare the returns, she is going to get hit with penalties for non-filing of the K-1s for three years. I don't think that I can call it a business bad debt, unless the returns are filed. It is very difficult to talk to her, because she is horribly embarrassed and doesn't want her family to know what has happened. She also feels bad for him, because he is injured and can't work. Boo Hoo! He started crying on the phone yesterday and I about hung up. If she takes him to court, she won't get anything, because he has nothing. This has already cost her close to $100,000. Does anyone know if I can get her any tax relief? She is not insolvent yet. Thanks!

[jainen]

>>An elderly client... "

Call your county district attorney elder abuse office. They will be interested in this story.

Did you say "shareholder," as in limited liability corporation? Call the Secretary of State in your capitol, and find out what the history of this corporation is, including the names of the officers and whatever filings are public information (unfortunately, there may be a charge for copying). Turn it all over to the D.A. Then call the IRS practioner line and be completely honest. I doubt your client has a tax problem that can't be easily resolved. Her so-called friend, now--boo hoo indeed!

[JohnH]

II think a very important issue is finding out what type of entity it is. If it's a corp, then it's important to know whether a Form 2553 was ever filed. That will have a HUGE impact on whether there are even any late-filing penalties due, because if the company lost money and it's a C-corp then there won't be any late filing penalties.

Has anyone ever seen a home-grown corporation get the S-corp filing done correctly? I haven't. They will say they are an S-corp, but then you generally find out they filed articles of incorporation and never did anything else (oranizational meeting, by-laws, Form 2553, etc). Once they get the charter, they just assume they are an S-cop because they have a small number of shareholders.

(I'd think "shareholder" implies a corporation, whereas "member" implies a Limited Liability Company. I'm not familiar with the term "Limited Liability Corporation". )

As jainen said, your first step should be to contact your Sec of State and find out what's in the public record (if anything). In many states, all you have to do is look up the info on the Sec of State's web site - no phone call required. Maybe you'll learn that nothing was ever filed, no entity really exists, and your client can demostrate that some sort of fraud was perpetrated on her.

[NECPA in NEBRASKA]

I will check with the Secretary of State. He claims that it was an S Corp, but I will find out for sure. Thanks! She went to an attorney before, but she is adamant that she doesn't want to press charges or have her family find out. I will keep on her. Thank you so much Jainen and John for the advice. I feel really bad for her, but I also don't want to prepare any corporate returns, since I will never get paid and I don't trust the records.

[NECPA in NEBRASKA]

They were incorporated in Nebraska. They show her as the President, with his girlfriend as an officer in 06 and added him in 08. My client did not sign the secretary of state tax returns. He incorporated it himself without an attorney according to the articles. Now I have to find out the fed ID # and if they are truly an S corp.

[JohnH]

Even if it is an S corp, she would not be liable for the FTF penalty. I haven't looked at it lately, but I seem to recall that the FTF penalty for S-corps is imposed on the corporation only. So if the corp is defunct and has no assets, the penalty is uncollectible from anybody.

Just hope that the guy didn't bail out on any payroll taxes, because then things can get sticky.

He says he doesn't have the records - I already don't believe him. Of course, we all knew his type the minute you revealed he was having an elderly lady sign documents she didn't understand. He sounds like the type of scoundrel who doesn't know where anything is when someone else has a problem, but can move heaven and earth to come up with documentation when it's his behind on the line. I'd question everything he says, and not believe anything I can't verify through a third party. I'd be willing to bet that even if any documents show up, there will be missing signatures or forged signatures on some of them.

[NECPA in NEBRASKA]

John, This guy is a real gem. He told me that another CPA refuses to do any more work for him, without a big retainer. I can't believe that he thought that anyone would do any work for him. He said that he wanted all of the loss to go to my client, but I'm not touching a corporate return. There were no payroll taxes, because this business never did anything, according to him. My client had to pay tons of credit card debt, because she is an officer. I doubt that she was truly a shareholder, because she was not issued any stock certificates and didn't pay for any stock. The guy and woman just stuck her on as a shareholder and officer to get themselves off the hook, from what I can see. I want to make sure that the debt that she has paid is not considered a gift, so that I can at least take a business bad debt or theft loss without having to produce K-1s.

[JohnH]

Even listing her as a shareholder and officer would not make her liable for corporate debt, unless she signed something accepting personal liability. Of course, now that the credit card companies are paid, she isn't going to get any of that money back so it may be irrelevant.

You know, in the aftermath of the Madoff case there is some special treatment for some situations like this. I don't know if it applies in your case, but worth looking into. I have a similar client situation that came to light in 2011 so I'll be digging into it more in the coming months. I guess my frustration over the one I'm dealing with is showing through in my reaction to what you're dealing with in your client's dilemma. Mine has many of the same elements: 1) Widow being taken advantage of by someone she trusted; 2) She was embarrassed to tell her family; 3) Signing documents she didn't understand, 4) Lost a bunch of money and maybe her home before it's all over; 5) The scoundrel is probably going to get off scott free. Disgusting.

[NECPA in NEBRASKA]

It's very sad. The crooks only feel guilty and the victims are mortified that they were swindled. One of my client's passed away this year that was involved in an operation locally that was like Madoff and I will always think that part of the cause of death was the stress from the situation.

[JohnH]

I have a similar concern for this client's health. I have watched her decline as this process has played out, and it's obvious that the stress of this situation is weighing heavily on her.