My partner is claiming that we have to pay $50,000 penalties to IRS for the errors on our original LLC tax return. He hasn't provided a copy of the notice (since his address is on the records). Does IRS charge penalties on the original LLC return even though we have amended tax returns?

I guess it depends. If you do not file your LLC returns, I mean your original returns, on time and pay your taxes by the due date, you may have to pay penalties. You may also have to pay penalties if you substantially understate your tax liabilities, understate reportable transactions, file an erroneous claim for refund or credit, or file a frivolous tax submission or etc.Taxpayers who file amended returns to correct mistakes on their returns are NOT exempt from penalties and interest. For the IRS, penalties and interest are tools used to encourage compulsory adherence to tax law. Therefore, they are applied to all IRS infractions, including those that relate to amended returns. There is, however, a nuanced difference in how penalties are assessed to amended returns; The IRS usually automatically corrects typical calculation errors. However, an amended return is filed to make changes to a taxpayer's deductions, exemptions, credits or income. If your amended return results in you owing tax as in your case, interest penalties will be assessed on the tax owed ; For tax years beginning after 2009, the late filing penalty for a partnership return is $195 for each month or part of a month (up to 12 months) the return is late (or does not contain the required information) multiplied by the total number of persons who were partners in the partnership during any part of the partnership’s tax year. No penalty will be imposed if the partnership shows that the late filing was due to reasonable cause.You may also be assessed penalties if you substantially understate the tax on your original return, were negligent or etc.So for more accurate info in detail , you can contact a CPA/an IRS EA in your local area.

We did file original LLC tax returns on time. Our LLC is partnership based and so there are no taxes owed.
We amended tax returns voluntarily since we got a second opinion from another CPA who found excessive deduction of start up expenses (instead of capitalizing them).
In this scenario is it reasonable for the IRS to assess $50K even though our tax returns were prepared by a CPA? Is our CPA responsible for paying the penalties?

#1; OK then, as mentioned previously, the IRS will not assess penalties if there is no tax due.



#2;I guess I don’t think the whole of $50K. LLC's can deduct up to $5K in start-up and $5K in organizational costs; what I am sure is that your taxable income/ tax liability must have been understated while your biz operating expenses, deductible start up exp of the LLC, must have been overstated as excessive deduction of start up expenses were written off instead of being capitalized.




#3; In general, the CPA should be potentially liable for the penalties, possibly the interest, and, generally, not the tax amount. However, based on your particular facts and circumstances, it is possible the CPA could be liable for all of the assessment.As fr as I know, CPA's are not REQUIRED to carry professional liability insurance but many do As the CPA made a mistake that caused you to owe more (unlikely) / was the actual liability understated. the most you could ask for is for him to compensate you for the interest. Most CPAs will cover any penalties and sometimes the interest if they make an error. They generally are under no legal obligation to do so, however. In any event you owe the tax and nobody will cover that for you. Most professionals carry Errors and Omissions liability insurance but that's reserved for the major errors that result in penalties; the cpa is responsible for the accuracy of his work and since you pay him to do the work in that manner, you need to go back to him and demand he take care of it . OR since you owe the tax to IRS .Then, you can sue the CPA for malpractice as they pass themselves off as professionals. They should have know better and assisted you with this error even refunding.

Regarding #2, Our LLC is partnership based and so not taxed at the LLC level. The $50K is the penalty assessed by the IRS. The CPA who prepared our original returns deducted much larger expenses (80K for 2011 and 160K for 2012). Since I signed the tax return my partner is mad at me and is threatening to sue me even though we amended our LLC tax returns based on the 2nd CPA feedback which was extremely conservative - only $5K/year as startup expenses deduction.
My partner has not provided me a copy of the IRS notice. Isn't it his fiduciary duty to provide me this information? Is there a way to call IRS and ask them to mail me a copy? He is also expecting me to pay the $50K penalty since it was my fault to have signed the return without reviewing.

If the original CPA is liable for the penalty, under which insurance can we claim? Our original CPA is also not happy as we used for another CPA for amending our LLC tax returns. Is he still liable to pay the penalty? Can we request IRS for more time? Should we hire a EA to deal with this?
I am concerned that they may ask me to pay the $50K which is a large amount that I can't afford.
Thanks for all your help.

As mentioned previously, most tax professionals will cover the penalties if the error is their fault. Some will even cover the interest as well. In reality, the IRS will often waive penalties (but never interest) when the taxpayer has good reason to request it and they generally consider errors by tax professionals as good enough reason to waive the penalty. Interest is never waived as you had use of the money. ANYWAY, the taxpayer alone is liable for any tax, regardless of who made the error. There's no way around that, nor will any tax professional cover that even if they were at fault themselves. Your CPA should be attending the audit with you. He/she should be explaining How he arrived at the amount of taxes owed. As long as he made a silly mistake then he/she should pay; however, the error was based on false information provided by you then you pay. So you need to contact the CPA. Give him a copy of the notice from the IRS and ask what's going on.

My partner has not provided a copy of the IRS notice. Since our relationship has strained, he is not providing any info.
Can I call the IRS and request for a copy of the notice?
Will IRS give enough time to pay the penalty? If we need more time, can we ask for an extension to enable us to ask our CPA who filed this return?

Regarding #2, Our LLC is partnership based and so not taxed at the LLC level. The $50K is the penalty assessed by the IRS. The CPA who prepared our original returns deducted much larger expenses (80K for 2011 and 160K for 2012). Since I signed the tax return my partner is mad at me and is threatening to sue me even though we amended our LLC tax returns based on the 2nd CPA feedback which was extremely conservative - only $5K/year as startup expenses deduction.”=====> Correct; however, you can elect to deduct up to $5K of business start-up .The $5K deduction is reduced by the amount your total start-up costs exceeding $50K. Any remaining costs must be amortized.
My partner has not provided me a copy of the IRS notice. Isn't it his fiduciary duty to provide me this information?”=>>>>>I can’t tell you anything on the decision. I guess as said he needs to provide you the copy of the IRS notice; you need to talk to your partner(or you may let your CPA talk to the partner so that he can give the copy to the CPA or to you) so that you can see the notice from the IRS.

“ Is there a way to call IRS and ask them to mail me a copy? He is also expecting me to pay the $50K penalty since it was my fault to have signed the return without reviewing.”======>>It is beyond my decision. It is up to yu and your partner’s compromise/decision or etc.

If the original CPA is liable for the penalty, under which insurance can we claim? Our original CPA is also not happy as we used for another CPA for amending our LLC tax returns. Is he still liable to pay the penalty? Can we request IRS for more time? Should we hire a EA to deal with this?”======>>As mentioned previously, most tax professionals will cover the penalties if the error is their fault. Some will even cover the interest as well. In reality, the IRS will often waive penalties (but never interest) when you have good reason to request it and they generally consider errors by tax professionals as good enough reason to waive the penalty. Interest is never waived as you had use of the money. However, you alone is liable for any tax, regardless of who made the error. There's no way around that, nor will any tax professional cover that even if they were at fault themselves. Your CPA should be attending the audit with you. He/she should be explaining How he arrived at the amount of taxes owed. As long as he made a silly mistake then he/she should pay; however, the error was based on false information provided by you then you pay. So you need to contact the CPA and let the partner proved him the IRS notice or etc. Or you let your partner gove you the notice and give the CPA the copy of the notice from the IRS and ask what's going on.
I am concerned that they may ask me to pay the $50K which is a large amount that I can't afford.”===>>> If you cannot pay the full amount of taxes, $50K, you owe, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. You also should contact the IRS to discuss your payment options at 1-800-829-1040. The agency may be able to provide some relief such as a short-term extension to pay, an installment agreement or an offer in compromise. In some cases, the agency may be able to waive penalties. However, the agency is unable to waive interest charges which accrue on unpaid tax bills If you find yourself unable to pay the IRS the tax you owe, you have several options. If you don't have the amount owed at filing time, the IRS offers a 120-day grace period during which you aren't penalized if you pay the full amount. During the grace period, you should try to borrow the amount of money you owe through a home equity loan or personal loan. The interest that accrues on your tax debts would far outweigh the interest owed on any bank loan; If you haven't been able to come up with the money before the 120-day mark, you can request an installment agreement. The terms of the agreement are set at the time the agreement goes into effect, and they are not subject to change. You might be charged an installment setup fee, depending on your economic and employment status. This is a non-negotiable fee that is paid upfront or worked into your balance owed, but it would then start to accrue interest as well. Form 656, Offer in Compromise, is a procedure whereby you can offer the IRS a amount to settle your complete tax, interest and penalty debt. The minimum amount the IRS will settle for is your "net equity in assets" plus the "net monthly cash flow" for five years. Throughout the duration of your installment agreement, you must pay all payments on time. If you are unable to make a payment, you must contact the IRS to review your options. If you miss a payment without contacting the IRS, your agreement will default and the IRS will begin more aggressive collection attempts. If you owe less than $10K in taxes, and you have no outstanding debts to the IRS, you can submit Form 9465 to initiate an Installment Setup Agreement. This plan allows you to set your own monthly payment amount, which is very helpful. If you are unable to pay in installments or by any other means, the IRS will begin collection attempts. This includes filing a tax lien or levy on your employment salary, any secondary income you receive, any bank accounts you have, and any property you own. Before this happens, ask a revenue officer to review your case file. Revenue officers are IRS personnel specially trained to assist citizens who have fallen on financial hardship and find themselves in default status. There is no guarantee they will help you, but it can't hurt.If the actions taken by the IRS to collect the money you owe have created extreme hardship, then you can file Form 911 to temporarily halt the collection attempts while you rectify your situation. This technique buys you some time, but not much time. If your account with the IRS has been in default for a long time, you can file Form 656 to make an Offer in Compromise. This is an offer, by you, to settle the outstanding tax balance in one shot. If your account is relatively new, the IRS is likely to deny your offer. PLEASE contact a CPA/an IRS EA in your local area for your fed/state LLC returns.

In the process of trying to understand what went wrong with the original LLC return, I found there were several errors in the returns.
a. Amortization period for depreciation was set to 15 years (though it's a commercial building) - $1,151
b. Incorrectly classified one of the refunds as "other income" ($863)
c. Incorrectly classified all non construction related costs as "outside services". - $78,276

Assuming even if our accountant classified #c as "outside services", isn't the CPA duty not to deduct this expense?
I had told CPA several times that this is a ground up construction.
I guess the return may have done by his new employee. Isn't the CPA still liable for all these errors?

As mentioned previously, " Your CPA should be attending the audit with you. He/she should be explaining How he arrived at the amount of taxes owed. As long as he made a silly mistake then he/she should pay; however, the error was based on false information provided by you then you pay. So you need to contact the CPA. Give him a copy of the notice from the IRS and ask what's going on. "