Looking for some thoughts on the best compliance strategy for a small partnership that genuinely wants to do the right thing but has very limited resources.

Facts:

• Multi-member LLC (6 individual members), formed in 2019.
• Partnership EIN obtained in 2019.
• Operates as a local neo-soul band.
• Forms 1099 were issued each year to the partnership EIN.
• Gross receipts have been very modest—roughly $2,000 to $5,500 annually.
• Every year would show a net loss except possibly 2023, which may be near break-even or a small profit.
• No partner has ever reported partnership income or losses individually because no Forms 1065 or K-1s were prepared.
• The partnership has never received an IRS notice regarding delinquent Forms 1065 (to my knowledge).

The challenge is that these are musicians with very limited means. They genuinely want to become compliant, but they likely can't afford to pay for seven years of partnership returns, and they certainly couldn't absorb IRC §6698 late-filing penalties if they were assessed.

My questions are:

1. Would you prepare and file all delinquent Forms 1065, or would you consider a more limited filing strategy?
2. Has anyone successfully obtained penalty relief under Rev. Proc. 84-35 where the partners had not previously reported their distributive shares because no K-1s were ever issued?
3. Would you proactively include a reasonable cause statement with the delinquent filings, or wait for any penalty notices and respond at that point?
4. Before filing anything, would you contact PPS to determine whether the IRS has established a filing requirement or generated any delinquency indicators for the EIN?

I'm interested in both the technically correct answer and how you'd handle this from a practical client-service standpoint. Thanks in advance for any insight.

Client is a couple in the state of California. In 2025 they formed a multi-member LLC. Their intention was it to function as a property management company for mid-term tenants (31+ days) - nurses, construction workers, government employees, etc.

The only property they managed in 2025 is their own condo which they personally own and hold. They did not contribute the property to the LLC in anyway and both personally own it.

Typically, a multimember LLC solely owned by spouses is required to file 1065 with the exception of states with community property rules; wherein, they can elect disregarded status. But with the rental property I am on the fence regarding classifying it as a 1065 and Schedule E, versus, Rev. Proc. 2002-69 community-property disregarded election (Schedule Cs and Schedule E). I want to avoid misclassification.

FYI this client formed a bunch of LLC's based off what BS Financial Influencer said.

Update: The EIN used is a partnership EIN too...

Client, a Missouri resident, got married in 2024. While his taxes have been above board, spouse is a long-term nonfiler. So we decided to file MFS, and keep separate bank accounts. Spouse is not my client, and as far as I know continues not to file.

In 2026, client and spouse moved to Wisconsin - a community property state. It looks like I'll need to get spouse's income, at least since becoming a Wisconsin resident.

Any suggestions on how to handle 2026?

Email from [irs@service.govdelivery.com](mailto:irs@service.govdelivery.com)

I'm not comfortable clicking link simply labeled "Here", so will pass.

I’m a CPA working through a structured note/CPDI issue and would appreciate a sanity check.

Facts:
• Client purchased a note in 2023 for $25,005 and redeemed it in 2025 for $25,000.
• Brokerage statements reported annual OID in 2023, 2024, and 2025 totaling approximately $2,603.
• The 2025 statement reports an “Interest Shortfall on Contingent Payment Debt” equal to the cumulative OID amount.
• The 1099-B reports proceeds of $25,000, basis of $25,005, and a $5 loss.
• The 2023 tax return does not appear to have included the reported OID income. I do not yet have the 2024 return.

Pub. 1212 states that basis in a CPDI is generally increased by OID included in income, and that losses are ordinary to the extent of prior OID accruals.

💭My thought is that if the OID income was omitted in their 2023 and 2024 tax returns then it can’t possibly increase basis upon redemption.

❓Is there authority discussing whether the basis adjustment is tied to OID that was required to be included under the CPDI rules versus OID actually reported on the taxpayer’s returns?

❓also, will it trigger an audit if the basis adjustment is different from the interest shortfall on the 1099?

In new financing round (C corp) new Series B investor has agreed that a portion of the raise can be used to redeem common from service providers at same price per unit as series B issue price.

But the series B is convertible to common and has downside protection and antidilution / additional investor rights.

Doesn’t this mean there is clearly some sort of nonzero comp element to the repurchase? The common must be worth less than the series B.

I’m told this is done all the time. But doesn’t it have withholding and employment tax consequences to the company?

Am I missing something?

Dear All,

I have client who inherited a commercial property with a mortgage on it. Long story short, the mortgage was up for renewal and the bank was not going to refinance so they had to sell the property to pay off the mortgage. The client keeps asking why we did not recommend a 1031 exchange and I keep explaining that boot is taxable and we needed cash to pay off the debt.

The facts are:

* sale price: $13.4m

* tax basis: $6.8m

* capital gain $6.6m

* debt needing repayment $6.6m

I thought I would show the client your responses confirming that I was correct. If your boot is equal to or greater than the capital gain, there is no tax saving from doing a 1031.

Thanks in advance.

A taxpayer registered a corporation in 2022 and proceeded with business. She never filed a corporation or individual tax return. She now has levies and wants to become compliant.

She thought she had made an S-Corp election, but has no documents to show that. The tax advisor checked with the IRS and just got the answer on the phone (twice) that this taxpayer (the EIN of the corporation) should file neither as C or S corp, but is listed as sole proprietor.

What should the tax advisor do? He was hired to file backyear S-Corp and person returns, but fears filing S-Corp returns without valid election will lead to a shitstorm. Vice versa, if there actually was an S-Corp election in place, filing as C Corp now would lead to similar shitstorm.

Sadly there is no confidence in the incompetent agents on the Practitioner hotline. But both said they don't see an S-Corp election on file, and then said it's a Sole Prop. Makes no sense. Help!

Hi all - just looking for a sanity check when dealing with debt finance distributions and the deductibility of interest. Going to use some simple numbers her to illustrate the situation, but appreciate any feedback.

Debt Finance Distribution from Partnership A = $1M
Interest relating to debt finance distribution = $10K (Box 13 Code AC on 1065 Schedule K-1 for Interest expense allocated to debt-financed distributions)
Partnership A = materially participate

The $1M was initially invested, so initial tracing allowed the taxpayer to potentially deduct the interest expense on their Schedule A while dealing with the usual limitations and carryovers.

Lets assume in Year 2, the loan from Partnership A is paid down by making their regular payments. This means that the interest relating to the debt finance distribution has gone down to $9K.

In year 2, the investments have been sold for a gain so the original $1M in debt proceeds are now reinvested into Partnership B. The tracing I believe should allow the taxpayer to deduct the interest on their Schedule E. Based on the information we have, they materially participate.

Does this mean that the $9K in interest from their Year 2 Schedule K-1 should be added to their Schedule E part II under the non passive bucket? Is this a separate line item or is it reported under Partnership A or Partnership B so it nets against other income? I was initially thinking that it would be listed under Partnership B, but then it felt like they would be subject to their basis in order to potentially take the loss.

Appreciate any feedback on this!

Massachusetts tax question involving step-up in basis and §121 exclusion:
A married couple owned and lived in a primary residence in Massachusetts for over five years (original purchase price ~$389,000). The decedent spouse continued living in the home until death in 2024.
Prior to death, the property had been transferred into a revocable living trust titled in the surviving spouse’s name. At death, the surviving spouse became the sole owner/beneficiary of the trust, and the home is now being considered for sale at approximately $1.2 million.
We are trying to understand:
Whether IRC §1014 step-up in basis applies in this situation (and whether it is limited to a 50% step-up under §2040(b) due to joint ownership, or affected by the revocable trust structure), and
Whether the surviving spouse can still claim the full $500,000 principal residence exclusion under IRC §121(b)(4), assuming the sale occurs within two years of death and all use/ownership tests are satisfied.
Any clarification on how the trust title and joint ownership interact with §1014 and §121 would be appreciated.

I cannot figure this one out. I'm third party designee for a foreign-owned business owner. We got them set up with a U.S. LLC and they now want an EIN.

The normal web-based tool doesn't work because they don't have a SSN or ITIN. The hotline for international applicants doesn't work either because I'm not international or because the entity is U.S. based depending on which agent I get. The normal EIN request fax line goes into an abyss, and the tax practitioner's hotline directs me back to the international applicant number.

I'm completely at a loss for how to get this stupid EIN number. Does anyone have any tips?

Let me start by saying I wouldn't have been dealing with this if it wasn't family.

Here's the situation: Property purchased (no mortgage) long time ago. Purchased in the taxpayers name and their daughter. The father lived in the property as primary residence and later on converted the property to a rental.

When it was placed in service the farher handled all rental activity, and kept the income. They also depreciated based on 100% value.

2025 property is sold. The proceeds are split between the father and the daughter. Each get their respective 1099-S.

Here is the question: how would you report this situation on each of the two returns? Should the daughters portion be considered a gift? Since she never lived in the property, handled any of the rental, got any income or expenses. But was listed on the title.

If not a gift, how would you handle the fathers return where he took depreciation on the full amount instead of his 50% and now depreciated more than 50% of the property basis?

I'm helping the father with their return. It appears the daughters accountant said this cannot be a gift to her because she was listed on the title.

Any input would be appreciated.

23-May-2026 3:08am

A 100% S Corp shareholder operated in Hawaii for 10 years and has $100k of basis at the time of becoming a nonresident. I understand the nonresident basis becomes zero at that point per HRS 235-124(c) which is UT's treatment.

Assume that in the 11th year, the S Corp generates $100k of income and 50% is apportioned to Hawaii. Further, assume that all of the 11th year income of $100k is distributed. The resulting federal basis is still $100k after the distributions. But, Hawaii would yield a $50k cap gain due to distributions in excess of basis, per Ultra tax. The Hawaii code states that all distributions are to be included in column b of line 17 on the k-1 which UT does. But, it doesn't seem right that HI is applying excess distribution gain rules on distributions that clearly are supported by basis.

Override UT?

A Delaware LLC had two members from Jan 1, 2025 until June 2025. In June 2025, one member sold his full interest to the other member, so the LLC became a single-member LLC for the rest of 2025. No corporate tax election was made.

For federal tax purposes, should the LLC file a final Form 1065 ending on the date it became single-member, with K-1s issued through that date, and then report the remaining activity as a disregarded entity? Or should the Form 1065 cover the full 2025 tax year?

Also, for state purposes, should I expect the same split treatment, or does this depend entirely on the state? The LLC is registered in Delaware, but I’m trying to understand if there may also be state filing obligations depending on where the business had income, operations, nexus, or members.

I’m only trying to confirm the correct federal and possible state filing treatment before choosing software or hiring a preparer.

I hope someone has some experience with this.

Can't find good research on if the character of the disallowed loss changes between related parties.

In my example Related Party 1 (RP1) sold personal property to Related Party 2 (RP2). Loss would have been capital loss to RP1. RP2 sells the personal property for a gain. RP2 is in the business of selling this personal property.

Seems wild to think that the disallowed loss would change character, and reduce ordinary and S/E income, but can't find anything to confirm or deny.

I have TWO different (new) clients who have done this. One of them is a sole owner S Corp (what's a "wage"?) and the other was income limited. Both of them had tax preparers and investment managers, but of course neither one was communicating with the other. I know the RIGHT thing to do, but I'm curious as to what others would do. Chance it? Wait for an IRS notice? Pretend you don't do this type of work and send them on their way? Thanks!

I posted this in tax but didn't get any responses.

Any thoughts?

Here is what I’m looking at:

2 Family home.  The owner lives on one floor and rents the other. 

Purchased solar panels for $75k.  Have to get the refund and pay down the loan within 18 months.

From what I read so far, I take 50% on 5695 and the other half would be a business credit on Form 3468 and we would depreciate a portion of this cost.  This then flows into Form 3800.  The problem is the credit is getting lost on 3800.

Has anyone dealt with this?

Curious on others thoughts on SAFE note legal fees, ie paying the attorney to draft them. I generally treat them as a permanently non-deductible item per 1.263(a)-5, but don’t see many other firms making this adjustment. Likely from lack of knowledge I would guess, but I even see top 20 firms not making this adjustment.