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Dude, not gonna sugarcoat it - you're in deep trouble if you get caught. I worked for a state revenue department for 5 years. What you've done is textbook tax fraud, not just a mistake. The fact that you knowingly collected money as "tax" and pocketed it makes this so much worse than just not knowing you needed to collect. Your best bet is to find a tax attorney who specializes in sales tax ASAP. Like yesterday. Voluntary disclosure is probably your only reasonable option, but with the amount you're talking about ($60-130k), you need professional representation to navigate this.
Thanks for the straight talk. I know I messed up big time. Do you think being in Canada offers any protection, or does that actually make it worse? And roughly what percentage of the collected amount would penalties typically be?
Being in Canada doesn't protect you - it potentially complicates things. US states can work with Canadian authorities, plus they can go after your US assets including marketplace accounts/funds. eBay and other platforms also comply with tax authorities when legal action is involved. Regarding penalties, it varies by state, but for intentional fraud (which is what this would be classified as), you're typically looking at: - 100% of the tax collected - Interest (varies by state, typically 4-10% annually) - Fraud penalties (50-100% of the tax amount) - Possibly collection fees and other costs So worst case, you could be looking at 2-3 times the amount you collected. With voluntary disclosure, you might get the fraud penalties waived, which would be huge. But you'd almost certainly still owe the base tax amount plus interest.
I'm super confused about this whole situation. If OP is in Canada selling to US customers, why would they even be collecting US sales tax? I thought sellers only have to collect sales tax if they have a physical presence in a state? Can someone explain how this works?
That used to be the case, but it all changed after the South Dakota v. Wayfair Supreme Court decision in 2018. Now states can require remote sellers (including international ones) to collect sales tax once they pass certain economic thresholds - usually around $100k in sales or 200 transactions. So if OP was selling enough to US customers in specific states, they would legally be required to collect and remit sales tax to those states, even though they're physically located in Canada.
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One thing nobody's mentioned - make sure you're filing your S Corp extension ELECTRONICALLY if possible. Paper extensions can get lost or delayed. I learned this the hard way last year when my mailed extension wasn't processed and I got hit with late filing penalties. Had to go through a whole appeal process to get them removed.
Wait, can you file the S Corp extension (Form 7004) electronically yourself? Or do you need a tax professional to do it? We're trying to save money where we can since our first year was so rough.
Yes, you can absolutely file the Form 7004 electronically yourself! You don't need a tax professional. You can use the IRS e-file system, or many tax software programs include the ability to e-file the extension. If you're really trying to save money, even the free versions of some tax software will let you prepare and e-file just the extension forms. Just make sure you still estimate any taxes owed properly, as the extension only gives you more time to file the paperwork, not more time to pay.
Don't forget that while the S Corp itself doesn't pay income tax, if you have employees (including yourself as an owner-employee), you still need to make sure all your employment tax deposits are current. The extension doesn't apply to those!
This is so important! My friend got an extension for his S Corp but didn't realize he still needed to make his quarterly payroll tax deposits on time. Ended up with some hefty penalties.
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One drawback nobody's mentioned yet - once you elect S Corp status, you typically need to keep it for at least 5 years before changing back (unless you get IRS permission). So if your business situation changes or you realize the benefits aren't worth the hassle, you're still locked in. Also, if you have plans to seek outside investors down the road, S Corps have strict limitations on who can be shareholders (no foreign investors, no corporate investors, limited to 100 shareholders, etc). This can severely restrict your future growth options.
Is the 5-year thing a hard rule? I thought there was some flexibility if your business circumstances changed significantly.
There's no absolute 5-year "lock-in" rule, but the IRS generally won't allow you to terminate S status within 5 years without a legitimate business purpose. A significant change in business circumstances can qualify, but simple "tax planning" or "it was more work than I expected" usually won't be enough. The IRS is wary of businesses jumping back and forth between tax statuses purely to minimize taxes, so they put these restrictions in place. If you do want to terminate within 5 years, you'd need to file a letter requesting permission and explaining your circumstances.
After 5 years as an S Corp, I can tell you the biggest hassle isn't even the paperwork—it's the strict banking separation you need to maintain. No more casual mixing of personal and business expenses! Every single financial transaction has to be properly categorized, and you need to be super consistent with how you handle your salary vs distributions. My CPA charges me extra now because my books are more complex. Also, health insurance rules are a pain. If you're covering yourself, the premiums have to be reported as income on your W-2 even though you might get a deduction elsewhere. It's just one more complication.
Do you think the tax savings have outweighed the extra costs and hassle in your case? Would you do it again if you had the choice?
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Whatever you do, don't ignore this! I made that mistake and ended up with a tax lien that destroyed my credit score for years. The IRS has more collection power than any other creditor. Call them directly, be honest about your situation, and they'll usually work with you. Despite their reputation, most IRS agents I've dealt with have been reasonable when you're proactive about resolving your debt.
This is so true. My brother ignored his tax debt and eventually had his wages garnished - they took 25% of his paycheck until the debt was paid. The IRS doesn't mess around with collections.
Exactly. And garnishment is actually worse than a payment plan because you have no control over the amount taken. With a payment plan, you can at least negotiate a monthly amount that works for your budget.
Has anyone actually tried requesting penalty abatement themselves? I've heard mixed things about how likely the IRS is to approve these requests.
I successfully got First Time Penalty Abatement last year. The key is that you need a clean compliance history for the 3 prior years. If you meet that criteria, they almost always approve it. I just called and specifically asked for "First Time Penalty Abatement under IRM 20.1.1.3.3.2.1" and the agent processed it right away.
Emma Wilson
Just an additional tip that might help - if you still have access to your Jackson Hewitt account, you might be able to log in and view your previous returns. Most tax preparers keep digital copies of returns they've filed for clients. If you can see last year's return, you can find your AGI on Line 11 of your 1040 form. That number should work as your electronic signature if you didn't set up a specific PIN.
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Malik Thomas
•Do you know if the AGI has to be exactly right? Like if my AGI was $48,296.75, would I enter 48296 or 48297? Or would I use cents too somehow?
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Emma Wilson
•You only need to enter the whole dollar amount without cents. So if your AGI was $48,296.75, you would just enter 48296. This is one of the most common mistakes people make. The system only asks for 5 digits though, which means if your AGI has more than 5 digits (like in your example), you'll need to enter all of them - not just 5 digits. The "5-digit" terminology is confusing because it's really asking for your Self-Select PIN if you created one, or your AGI if you didn't.
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Isabella Oliveira
I ran into the exact same problem. For me, it turned out I needed to enter "0" as my electronic signature. If your AGI last year was zero or negative, that's what you need to enter!
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Ravi Kapoor
•This worked for me too! I had a really low income year in 2022 and my AGI was actually negative. I kept trying different numbers until I finally just entered "0" and my return was accepted.
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