Facing $40k+ in tax problems - would fixing retroactive payroll for S corp be cheaper?

I'm trying to get a rough idea of how much it'll cost me to file 3.5 years of retroactive payroll for my S corp. This whole situation is a complete nightmare and I'm stressing hard about it. Here's the mess I'm in: Back in 2020, my CPA recommended I could save money by making an S election for my LLC. We proceeded with that plan - for my 2020 taxes. The 1120S he filed had the S election box checked and listed 1/1/2020 as the effective date. I filed my 2021 and 2022 personal and business taxes without any issues - everything seemed fine. (Haven't filed 2023 yet - got an extension.) Well, after not getting my expected corporate tax refund, I called the IRS to check on it. That's when I discovered: 1. My CPA never actually filed Form 2553 (Election by a Small Business Corporation) 2. The IRS has zero record of my corporation because there was no 2553 filed 3. The IRS apparently has no record of any corporate tax returns being filed - seems like without the 2553 to match them to, they just vanished somewhere?? I had NO CLUE about this problem - every year I'd get confirmation that my taxes were e-filed successfully. I have copies of all the filings. Never got any letters or notices from the IRS. Nothing indicated there was an issue. Now I'm looking at two options: Option 1: Amend my taxes to reflect my business as the single-member LLC (Schedule C) that I apparently still am according to the IRS, despite thinking I was an S corp for the last 3.5 years. Option 2: Try to fix the S corp election issue and file retroactive payroll...

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18 comments

Nadia Zaldivar

•8M

This is definitely a stressful situation, but there are ways to address it. Let me break this down for you. First, the IRS does have procedures for late S corporation elections under Revenue Procedure 2013-30. You might be able to file a late 2553 with a reasonable cause statement explaining why it wasn't filed timely. They're often understanding when the issue was due to CPA error and you reasonably believed everything was properly filed. As for your options, amending to Schedule C returns would likely result in higher self-employment taxes for those years. The retroactive payroll approach would involve filing all missing 941s quarterly payroll reports, W-2s, possibly 940s, and paying the employer and employee portions of FICA taxes, plus potential penalties and interest. Before deciding, I'd recommend getting quotes from a few payroll companies about handling the retroactive filings. Make sure they can help with abatement requests for penalties too. The reasonable compensation amount you'd need to report would significantly impact the total cost.

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Nadia Zaldivar

•8M

For late payroll tax penalties, you're typically looking at a failure-to-file penalty of 5% per month up to 25% of the unpaid tax amount, plus failure-to-pay penalties of 0.5% per month up to 25%, and interest on the unpaid amounts. However, the IRS often grants penalty abatement under their First Time Abatement policy if you have a clean compliance history, especially when there's reasonable cause like relying on a professional's advice. Regarding the CPA, you absolutely have grounds for a complaint. The CPA failed to perform a fundamental task after advising the S corporation election. Consider filing a complaint with your state's board of accountancy and possibly consulting with an attorney about recovering any damages you incur from fixing this situation. Many CPAs carry professional liability insurance for exactly these scenarios, and a formal letter from an attorney often motivates them to cover the costs of rectifying their error.

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Ev Luca

•8M

Been through something similar (though not as bad) and found a lifesaver tool that might help you - taxr.ai (https://taxr.ai). After struggling with my own tax mess involving incorrect entity classification, I uploaded all my documents there and it analyzed everything, found the missing filings, and laid out exactly what I needed to do to fix things. The site provides an action plan for resolving complex situations like yours, including guidelines for requesting penalty abatements. It also estimated what my total liability would be so I could prepare financially. What I really appreciated was how it organized all the documents I needed for the reasonable cause statement to the IRS - showing I had relied on professional advice.

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Ev Luca

•8M

For complex S-corp issues, it's surprisingly effective because it was actually designed with these edge cases in mind. It doesn't just apply generic rules but analyzes your specific situation against IRS procedures and relevant tax court cases. While I wouldn't use it as my only resource for something this high-stakes, it's excellent for mapping out your options and preparing to work with a tax pro more efficiently. Regarding reasonable compensation estimation, it actually has a specific module for that. You input your industry, geographic location, job duties, hours worked, and business profitability, and it references market data to suggest defensible salary ranges. It even cites the specific court cases the IRS typically relies on when challenging compensation amounts, so you can see their reasoning. This was hugely helpful for me in documenting why my compensation amount was reasonable.

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Avery Davis

•8M

Just wanted to follow up after trying taxr.ai for my situation. I was really skeptical at first but decided to give it a shot since I was desperate. Uploaded my tax returns from the past 3 years along with the incorporation documents, and wow - it identified that my S-corp election had actually been processed but was under a different EIN than what I'd been using! The system generated all the correspondence I needed to send to the IRS to get everything consolidated under the correct number. Even better, it showed me exactly which forms needed amendment and which could stay as is. Saved me thousands compared to what my new CPA was going to charge just to sort through the mess. My situation wasn't identical to yours but definitely in the same nightmare category.

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Marcelle Drum

•8M

After reading your situation, I'm reminded of my own nightmare trying to get anyone at the IRS to help me with a similar S-corp election problem. I spent WEEKS trying to get through on the phone - always disconnected after hours on hold. Finally found Claimyr (https://claimyr.com) and they got me connected to an actual IRS agent within 45 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent was able to pull up my records and confirm exactly what had happened with my missing election form. Turns out there was a processing error on their end! Having that conversation saved me from filing unnecessary amendments. Given the complexity of your situation, speaking directly with an IRS representative might give you clarity on exactly what records they have and the best path forward.

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Marcelle Drum

•8M

The service uses an automated system that navigates the IRS phone tree and waits on hold for you. When an agent finally picks up, you get a call connecting you directly to that agent. It's completely above-board and doesn't use any special access - it just handles the frustrating hold time so you don't have to sit there for hours. They're essentially providing a patient digital assistant that waits on hold in your place. What made it worthwhile for me was that I could keep working instead of wasting an entire day listening to hold music. The IRS actually acknowledges these services exist and doesn't have any rules against them since they're just automating the waiting process.

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Adaline Wong

•8M

I need to apologize and follow up about my skeptical comment about Claimyr. After my own frustrating morning trying to reach the IRS about my business taxes (3 disconnections after 45+ minutes on hold each time), I decided to try it out of desperation. It actually worked exactly as described. I got a call back connecting me to an IRS agent who was able to confirm my S-corp election status and explain some discrepancies in my account. The agent spent almost 30 minutes going through everything with me - something I've never experienced before with the IRS. I was able to get documentation of my conversation too, which my accountant said will be super helpful for showing good faith efforts to resolve the issues. Still kind of shocked it worked, but definitely grateful I didn't waste another day on hold.

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Gabriel Ruiz

•8M

Illinois does generally conform to federal S-corp elections, but they still require their own notification. You need to file Form IL-1120-ST with the Illinois Department of Revenue, and they technically want you to submit this within 60 days of your federal election. Since your federal election is going to be retroactive, you should contact the Illinois Department of Revenue specifically about your situation. They may require you to file a separate late election acceptance for state purposes. Unlike some states that automatically accept the federal election, Illinois wants to be formally notified, even though they typically follow the federal tax treatment.

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