17 Jun I’m still waiting for a K-1 so I can file taxes. What can I do?

Q. I am a shareholder in a small 1120S (New Jersey C-corporation). As a shareholder I should receive an annual K-1 and copy of the federal tax filing for the business. In recent years the company has been lax in sending the K-1. I have had to file for a federal tax extension each year and despite efforts to reach the company, which is not in bankruptcy or closed, they have not responded for 2023 documents. I was fortunate to find the CPA firm preparing the company return for 2022 but they no longer do business with the firm. What can I do, or who should I notify to assist with this problem? Should I file federal taxes without the K-1? My research says the IRS may only have a minimal fine to impose but I am left with the problem of incorrect tax filing and subsequent penalties and interest charges. Is there an answer?
— Taxpayer, or trying to be

A. No one wants to mess with the IRS.

First let’s define an S Corporation and a C Corporation.

IBM is an example of a C Corporation, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

“IBM files its taxes and pays federal and state income tax on its profits,” he said. “IBM shareholders pay taxes on the dividend income received from IBM.”

S Corporations, on the other hand, tend to be much smaller than C Corporations.

“S Corporations are also called `passthrough’ entities because they pass their income to their shareholders who pay income taxes on their share of the income,” Kiely said. “S Corporation shareholders pay taxes on their share of the profits but not on the dividends received from the S Corporation.”

This is where the form K-1 comes into play.

The corporation uses this form to notify each shareholder of how much of the corporation’s income the shareholder has to pay federal and state income taxes on, Kiely said.

“A shareholder can’t file their income tax returns until they receive their K-1,” he said. “The problem is many small businesses and their CPA firms can’t close the books and prepare the tax returns by April 15th.”

This requires the shareholders to file income tax extensions, as you’ve experienced.

But importantly, Kiely said, an extension is an extension to file the taxes, not an extension to pay the tax.

“To properly file an extension, the shareholder must include an estimate of the S Corporations income. For many people, they simply have no idea what the profit will be,” Kiely said. “You ask if there is an answer to this problem. Unfortunately, the answer is no.”

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This story was originally published in June 2024.

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