I was a member of a class s corporation for 8 years. I was bought out under a buy/sell agreement in February 2012. The company bought me out for $1 but have withheld dividends for several of the previous years. The company also had a $180,000 or so water bill refund for many years off over charging prior to March 2012. The company also amended my 2011 K-1 from a loss to a to a gain but never distributed the money. I have asked for the corporate returns and a copy of the charter but have not received them. I was a 11% owner in the company but never was allowed to be privy to the financial dealings of the company. I had a injury that caused me to be fired and have not gotten back on my feet financially. I have lost everything and can't afford to pay tax on money I never received.
First of all, I'm very sorry for your financial loss. I know how hard this situation is for you. You would be best served by hiring a tax attorney that would be willing to work your case on contingency (very, very hard to find in this economy). Your former employer may also be undergoing the same audit as you because it amended your Schedule K-1. Moreover, the other shareholders must have had their Schedules K-1 amended as well. It is not uncommon for the IRS to open an audit for all shareholders and the corporation under these circumstances since so many taxpayers were affected by the actions of a single person (i.e., the S corp). Even if you are the only shareholder affected, the IRS will likely force the S corp to hand over information related to your audit under they "summons" authority (a very strong administrative power the IRS has to force persons to turn over tax-related information).
There are a number of reasons why your former S corp realized net income in 2011 and reversed a prior net loss for that year. Note that simply recognizing a net gain does not require the S corp to distribute anything to its shareholders. For that matter, the S corp is not required to distribute dividends to its shareholders either. The S corp's obligations to its shareholders should be stated in its bylaws. I also note that shareholders generally have the right under state law to inspect the corporation's books and records. Depending on the wording of the buy-sell agreement, you may or may not have a case against the former S-corp. These agreements tend to have a "hold-harmless" clause in which the shareholder who is bought-out agrees to waive any claims he had/would have against the S-corp.
I wish you the best.
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Oscar Javier Ornelas
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You will need to speak with a tax attorney. If you are currently under audit, a tax attorney can help dispute the audit and file a tax court petition if needed. If you have already been audit and you owe additional tax, then you might want talk to a tax attorney about the IRS Offer in Compromise program, Currently Not Collectible status, bankruptcy, or a payment plan. It really depends on your current financial situation, so it's best to talk to a tax attorney in person or over the phone about you matter.
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My fellow counselors have provided you with excellent advice and you should follow it. Since you have not received the requested information from the manager(s) of the S corporation, you may want to look into the possibility of filing an action against it for an accounting in your local court. Unfortunately, that will take considerable funds that you may not have.
Good luck in your effort to sort out your problems.
The answer to this question does not establish an attorney-client relationship. Moreover, this attorney is licensed to practiced law ONLY in the State of California. Answers to questions from users in other jurisdictions or states are meant to provide only general information. Users should contact a local attorney in their jurisdiction or state to address their specific tax issue.