This thread has been incredibly valuable! I'm currently exploring a similar F Reorganization for my manufacturing S-Corp sale (around $3.5M valuation) and the insights shared here are exactly what I needed. The consistent pattern of $180K-$250K+ tax savings with relatively modest upfront costs ($12K-$15K in specialized legal fees) makes this structure very compelling. What really gives me confidence is hearing from multiple people who've successfully navigated IRS audits of these transactions. I'm particularly interested in the timeline discussions - the 10-12 week process seems very manageable for our projected closing schedule. The emphasis on specialized M&A tax counsel versus general CPAs is also clear from everyone's experiences. One specific question: Has anyone dealt with situations where the S-Corp had significant accumulated adjustments account (AAA) balances? My company has built up substantial AAA over the years, and I'm wondering if this affects the F Reorganization mechanics or provides any additional tax benefits during the sale process. Also, for those who mentioned using the tax analysis as negotiating leverage - did you find that demonstrating your understanding of the mutual benefits helped build trust with the PE buyers throughout the broader deal process? The practical details shared here - from sequencing requirements to state tax considerations - have been far more helpful than generic tax guidance. Thanks to everyone for such thorough real-world insights!

Dylan, great question about the AAA balance! I actually had a similar situation with my S-Corp that had built up substantial AAA over about 8 years of operations. The good news is that the F Reorganization preserves the AAA balance, and it can actually work in your favor during the sale process. When structured properly, the accumulated adjustments account essentially "flows through" with the reorganization, maintaining the tax attributes of the original S-Corp. In my case, we had about $400K in AAA, and my tax attorney explained that this essentially represented previously taxed income that could be distributed tax-free to shareholders. During the F Reorg process, this AAA balance transfers to the holding company structure, preserving those tax attributes. One key benefit is that if there are any distributions needed as part of the transaction structuring, the AAA balance allows for tax-free distributions up to that amount. This can be particularly helpful if you need to clean up the balance sheet or make adjustments before the final sale. Regarding your negotiation question - absolutely! When I could intelligently discuss the mutual tax benefits with the PE firm, it definitely built credibility and trust. They appreciated working with someone who understood why they needed the F Reorg structure rather than someone who was resistant or confused about the complexity. Your $3.5M transaction size should work perfectly with this structure. The AAA balance actually strengthens your position rather than complicating it. Just make sure your specialized tax counsel factors the AAA into their overall structuring analysis - it's another tool in the toolkit for optimizing the transaction.

This thread has been incredibly helpful! I'm in a somewhat similar boat - just discovered my partner has some tax compliance issues and I've been losing sleep over it. What really stands out to me from reading everyone's experiences is how much the "unknown" factor amplifies the stress. It sounds like once you actually understand what you're dealing with - whether through the AI tools people mentioned, getting tax transcripts, or talking to professionals - the situation becomes much more manageable. I'm particularly interested in what @Hiroshi Nakamura mentioned about the IRS preferring payment plans over asset seizure. That's reassuring since I keep imagining worst-case scenarios about losing our home or having bank accounts frozen. One question for those who've been through this: how long did it typically take from when your spouse finally filed the back returns to when you felt like the situation was truly resolved? I'm trying to set realistic expectations for how long this stress might last once we start addressing it properly. Also, has anyone dealt with state tax issues alongside federal? I'm wondering if state agencies are typically as willing to work with payment plans as the IRS seems to be.

I've been following this thread closely as someone who went through a very similar situation last year. What helped me the most was creating a timeline of exactly which years needed to be addressed and gathering all the documents first before doing anything else. One thing I haven't seen mentioned yet is that if your husband was doing contract work, he might actually be entitled to refunds for some of those years if taxes were withheld from his payments or if he's eligible for certain credits. I know it sounds counterintuitive when you're panicking about owing money, but my husband ended up getting refunds for 2 of the 4 years he hadn't filed, which significantly reduced the overall amount owed. Also, regarding your joint accounts - I'd suggest opening a separate account in just your name and moving some funds there temporarily while this gets sorted out. It won't protect assets that are already jointly owned, but it can give you peace of mind knowing you have access to some money that's clearly yours if anything gets frozen during the resolution process. The key thing I learned is that the IRS is surprisingly reasonable once you start communicating with them. They genuinely want to collect what's owed rather than destroy people financially, so payment plans are almost always available. Your husband just needs to stop avoiding this - every day of delay makes it worse and more expensive.

I'm dealing with a very similar situation right now! My family's S-Corp just went through this exact issue with our accountant. What we discovered is that many accountants get confused about the ownership attribution rules and mistakenly apply the 2%+ shareholder restrictions to ALL family members, even when they have zero ownership. The key distinction is actual ownership vs. family relationship. Just because you're related to the owner doesn't automatically make you subject to the shareholder rules. Since you explicitly stated you have no ownership stake and receive a regular W-2, your health insurance premiums should be treated exactly like any other non-owner employee's. I'd suggest asking your accountant to show you the specific IRS code section they're relying on for their position. The attribution rules in IRC Section 318 only apply when determining if someone is a more-than-2% shareholder - they don't automatically disqualify family member employees from standard employee benefits if those family members don't actually own stock. Your situation sounds straightforward - you should be able to maintain the same health insurance deduction treatment you had as a C-Corp employee.

This is exactly the kind of confusion I see all the time in family businesses! Your accountant is definitely wrong here. As a zero-ownership employee, you should be treated exactly like any other W-2 employee for health insurance purposes. The 2% shareholder rules that restrict S-Corp health insurance deductions only apply to actual shareholders (and their spouses/dependents), not to family members who simply work for the company without owning stock. Since you explicitly have no ownership stake, your health insurance premiums should remain fully deductible as a business expense - just like they were when you were a C-Corp. I'd recommend getting a second opinion from a CPA who specializes in S-Corp taxation. Many accountants get tripped up by family business scenarios and incorrectly assume that ANY family relationship triggers the shareholder restrictions, but that's not how the tax code works. The key is actual ownership percentage, not family ties. Your dad (as the owner) will need to follow the special S-Corp rules for his own health insurance, but yours should be straightforward employee benefits with no special treatment required.

Has anyone else noticed that a lot of accountants seem confused about S corp basis calculations? I've had three different CPAs give me three different answers about how to handle distributions when we've had prior losses.

I'd definitely recommend getting a second opinion on this. Based on what you've described, it sounds like your tax preparer might be misunderstanding something about your situation. The key issue is tracking your basis correctly. Your basis in the S corp stock starts with your initial investment, gets reduced by your share of losses, gets reduced by distributions you receive, and gets increased by additional capital contributions or your share of income. If you made additional capital contributions during 2024 (like the $75K you mentioned in another comment), those should increase your basis and likely eliminate any capital gains treatment on your distributions. Make sure your tax preparer has accounted for all capital contributions, not just your original investment. Also, if you've made any loans to the S corp (even informal ones where you paid business expenses out of pocket), those create "debt basis" which can help absorb losses and avoid capital gains on distributions. I'd suggest asking your tax preparer to show you the specific basis calculation they're using. They should be able to walk through: starting basis + capital contributions + income - losses - distributions = ending basis. If that number goes negative, only the negative portion would be capital gains. Don't just accept their conclusion without understanding the math behind it - this is a common area where even experienced preparers make mistakes.

Y'all are making this way more complicated than it needs to be. Just look at your W-2 at the end of the year. Box 12 with code W shows your HSA contributions. Whatever your employer reports there is what the IRS will see. Most payroll systems automatically handle this based on pay date, not pay period. If you want to be 100% sure, just ask your payroll department to show you how the January paycheck will be coded on your W-2. That will tell you which year it counts toward.

Don't forget that if you can't max out through payroll for whatever reason, you can still make direct HSA contributions (outside of payroll) until the tax filing deadline. You'll miss out on the FICA tax savings that payroll deductions give you, but you'll still get the income tax deduction.