Dissolved Corporation Being Illegally Operated, Did Not File Taxes, Issued W-2's

[Dewey]

Let's hope this is enough information to get a gist of an answer.

There was a S Corporation that was administratively dissolved in 2005. The owner has continued to operate it and carry on it's business for the past four years. The owner employed a couple people in that time.

Apparently, income tax statements have not been done or filed on the corporation since 2005 even though they've been operating it and employing people. No extensions have been filed, either.

It is a fact that the IRS verifies no income statements have been filed on this corporation since 2005 and the owners claimed to have issued W-2's and "kept current" with the state unemployment funding after 2005.

My question is, is there any way possible for this scenario to exist legitmately without there being massive tax fraud?

[Bubba Jimmy]

The IRS is chartered with enforcing the tax laws, not state laws regarding corporate status. Therefore, if the business has continued to withhold taxes from employee pay, remit those taxes to the government, and so forth then the only beef the IRS would have would be failure to file form 1120S, the corporation's tax return, and to issue K-1s to the share holders so they can flow the profits of the business to their individual tax returns. Running afoul of the state's requirements to maintain good standing with the state is not a real consideration of the IRS. I have no idea whether the officers and shareholders are committing any kind of "massive tax fraud". They may just be sloppy in how they administer the business.

[Dewey]

Right, we already know they're in deep with the state tax department for not maintaining good standing and filing and paying state taxes--including quarterlies.

Not only have they not filed 1120's, but apparently there are no 940 or 941's on file....even when the corporation was in good standing. They've had employees the entire time, too.

I guess my question was specifically--are those W-2's worth the paper they're written on? They may have withheld taxes from employee pay, but they certainly did not remit those to the government.

[Bubba Jimmy]

Did the company transmit the W-2's to the Social Security Administration as required? If not, then the IRS will have no record of them and there would likely be serious problems. If the company withheld taxes (SS, Medicare, and fed income tax) from employee's pay and failed to turn it over to the IRS then that is about as big a sin as you can commit in the eyes of the IRS because that is not the company's money to begin with. In cases like that, the IRS usually has a great deal of fun with the principles involved in the business.

Did the employees file their income tax returns based on those W2's they received? I'm actually very surprised that the IRS has not made an enormous stink about this situation already.

[Scott67]

A couple of comments on part of this. If the S Corporation actually was dissolved in 2005, and the owner continued to operate the business, he is not continuing to operate the corporation. He is operating the business as a sole proprietor or some other form if he has set it up. He would, of course, for business conducted after the dissolution, no longer have the advantages that the S Corporation provided him. So, there would be no payroll taxes due from the corporation to the IRS; he is probably personally liable though.

If, as you apparently suspect, the owner didn't execute the necessary documentation to make this clean, there are a number of different interpretations that could be taken, and the IRS would probably take the one that is most damaging.

And, like Bubba Jimmy, I'm really surprised that the IRS isn't already all over this. It seems the first time that any employee filed a W2 that had not already been reported to them by the employer it would trigger a number of immediate actions. If your facts are correct, that would have happened in 2006 or 2007. This leads me to consider that it is possible that your facts are not correct and/or there is more involved here that you are not aware of.

[Bubba Jimmy]

Great points, Scott. Actually, it's true in all cases that the individuals who are officers and shareholders of an S corp will be held liable for the corporation's bad deeds with regard to tax withholdings.

[Dewey]

Thank you both for your help!

I guess we will have to find a way to see if we can verify if anything was ever transmitted to the SSA. Uncovering all the rest of the fraud, I highly doubt it. Wouldn't the fact that the IRS has no 940's or 941's on file establish that nothing was ever transmitted to the SSA?

I'm beginning to suspect the IRS isn't as agile as I had once thought and I've learned that many governmental agencies don't communicate amongst themselves as well as I had thought. I have no doubt the IRS will eventually notice the discrepancy, it's just a matter of when. We did discover that several of the employees never got a W-2 and were paid under the table. However, the owner apparently religiously issued himself W-2's and somehow got big tax returns every year....we're still looking into that one.

In regards to officers and shareholders being held liable for the corporation's bad deeds in regard to tax withholdings.....is this what you reference:

"Where an employer is a company, every shareholder and director who controls or is regularly involved in the management of the company’s overall financial affairs shall be personally liable for the employees’ tax, additional tax, penalty or interest for which the company is liable." Employees’ Tax 1282. Personal liability of directors and shareholders
April 2005

[llworking]

Thank you both for your help!

I guess we will have to find a way to see if we can verify if anything was ever transmitted to the SSA. Uncovering all the rest of the fraud, I highly doubt it. Wouldn't the fact that the IRS has no 940's or 941's on file establish that nothing was ever transmitted to the SSA?

I'm beginning to suspect the IRS isn't as agile as I had once thought and I've learned that many governmental agencies don't communicate amongst themselves as well as I had thought. I have no doubt the IRS will eventually notice the discrepancy, it's just a matter of when. We did discover that several of the employees never got a W-2 and were paid under the table. However, the owner apparently religiously issued himself W-2's and somehow got big tax returns every year....we're still looking into that one.

In regards to officers and shareholders being held liable for the corporation's bad deeds in regard to tax withholdings.....is this what you reference:

"Where an employer is a company, every shareholder and director who controls or is regularly involved in the management of the company’s overall financial affairs shall be personally liable for the employees’ tax, additional tax, penalty or interest for which the company is liable." Employees’ Tax 1282. Personal liability of directors and shareholders
April 2005

Re the bolded....the owner is in serious, serious trouble. That just kicked the problem up a notch, into fraud.

Who are you in this situation? Are you an employee or another shareholder or what?

[Dewey]

Oh, you don't fully realize the "serious, serious" trouble the owner is in. This is just one aspect of the fraud recently uncovered....the one I understand the least, unfortunately, which is why I am here asking.

[Bubba Jimmy]

Wouldn't the fact that the IRS has no 940's or 941's on file establish that nothing was ever transmitted to the SSA?

Keep in mind that the filing of the W-2 forms with the Social Security Administration is a completely separate process from filing 941 and 940 employment tax forms. The IRS and SSA share information, but the 941 form is a tax return whereas the W-2 is a tax reporting document. You can file one, both, or neither.