- Accounting System Design
- Assuring Profitability
- Business Strategy
- Efficient Bookkeeping
- Financial Analysis
- Growth Planning
- Inaccurately Calculated Tax Liability
- Maximizing Resource Utilization
- Minimizing Tax Liabilities
- Preparing for Strategic Exit
- Real Estate Purchase
- Strategic Planning
- Successful Sale
Cleaning Up the Books and Securing a Tax Penalty Abatement
Two cardinal rules of business are to pay your taxes and file your tax returns on time. But many businesses are unaware of their complex tax requirements and can find themselves facing steep fines if they fall behind in their bookkeeping and tax filings.
One such client was a musical instrument sale and repair company. The owners had hired a business manager and a bookkeeper. While very well-versed in the industry, they were not accounting and tax experts, and the client had never hired an outside CPA firm to review and manage the accounting and tax issues. Making things more complicated was the fact that the owners operated this U.S.-based business from their office outside the U.S. The result was a lack of valuable management information and a serious backlog of unfiled tax returns.
More Efficient Bookkeeping
When a new business manager came on board they recognized the need to hire an outside CPA firm and reached out to Lagerquist Accounting & Advisory to assist in reconstructing the books and deal with the backlog of unfiled tax returns.
When Lagerquist Accounting & Advisory came in, the first thing they did was reconstruct the books from 2014 to 2017, correcting and consolidating all of the data into the most recent QuickBooks file created by the current business manager. Lagerquist then trained and supervised the business manager in maintaining complete and accurate transactions in their current QuickBooks file.
Once the books were complete and accurate, this allowed Lagerquist to address the unfiled payroll, sales, and income tax returns.
In addition to the understandable reality of international business owners being less familiar with U.S. tax requirements, there was also the fact that the business was formed as an LLC, which defaults to being taxed as a partnership. When foreign nationals own a U.S. partnership, the tax situation gets very complicated.
Lagerquist Accounting & Advisory worked with the company’s attorneys to have it structured so that the foreign company became the owner of the U.S. company, which allowed the entity to be taxed as a corporation rather than a partnership. These changes meant the foreign owners did not have to file U.S. personal tax returns or have non-resident withholding taken out of their earnings.
The final step was to try to reduce the penalties. Since no income tax returns had been filed prior to when Lagerquist was retained, Lagerquist prepared the income tax returns for 2014 through 2016. Because of transactions between the U.S. company and its foreign owner, Form 5472 was required to be included with the income tax returns. The IRS assessed a $10,000 penalty for late filing for each unfiled Form 5472 from 2014, 2015, and 2016.
IRS penalties are typically very rigid. However, Lagerquist was successful in getting the entire $30,000 penalty removed by providing the IRS with reasonable cause as to why the returns were filed late. Lagerquist also succeeded in getting additional smaller penalties removed from the IRS and other jurisdictions.
The company taking steps to improve its tax compliance as well as bookkeeping and accounting saved it tens of thousands of dollars immediately and reduced the likelihood of having problems in the future. To learn how to take similar steps or to discover how your business might be facing potential tax compliance issues, contact Lagerquist Accounting & Advisory today.