6 ms·

Ask HN: Please help, I messed up badly - will the IRS go after me?

I visit this site daily but chose to use a new account (just for now). The problem I have is following. I live outside of the US and am not a US citizen. I used to sell software via resellers - they pay me 50% of the sales as royalties (something like the app store). Last year I decided to create a C corporation in the US to make the business look more "serious". My friend became the only director & CEO of this business (he does this for free). I also signed a license agreement between me & the company where the company gets a license to the software & basically the company pays everything it gets from the reseller to me as a license fee. I send money from the company account to my personal account oversees, as I see fit. Basically all the company makes I withraw to my account in my country. I also pay taxes & everything on this - according to the local law. No problems on this side. Now I am facing the problem that I figured I need to send the federal tax return - the form 1120 - for the corporation (my friend as the ceo will send this) - to the IRS and starting freaking out that it will look very suscipicous if it shows (for instance) net receipts of $111,200 (this is what the company got from the reseller for the products) and expenses (other expenses) will be license fees of $111,200. I started freaking out that what if the license fee can't be deducted as expense? What if it has to be "amortized" etc..? In this case, might I put "consulting fees" in the amount of $111,200 as the sole business expense? What I need is to slash the company's taxble income to 0 and what I need to avoid is the company paying any taxes. Can I do it like this? If bad things happen, will the IRS go after me in my country? Please help - this community is a blessing. I know I'm stupid I didn't consult this before with a lawyer etc but maybe you'll have some ideas.

pmjordan 17y ago
I think you need to talk to an accountant. If you're making $111k a year that should hopefully not be a problem.
- differentaccnow 17y ago
  Thank you for your reply. I know but it will take me a while because there are no accountants here who would know about handling of US corporation. And I have no idea how to get in touch with someone who might know.. In the meantime I would like to know what more people think. Thank you all - I appreciate this so much..
  - pmjordan 17y ago
    Maybe if you told us what country you're in, other HNers from that country might be able to recommend accountants - there must be other small-to-medium sized companies in your country that at least export to the US. That said, maybe someone here could recommend a US-based accountant who would be willing to sort this out for you. I don't know whether you have this where you are, but most European countries have government-sponsored bureaus for supporting businesses. They might be able to help directly or refer you to someone (presumably an accountant) who can. Finally, have you actually asked your/an accountant? They may not be able to answer your questions directly, but there's a good chance they'd know someone who can.
RiderOfGiraffes 17y ago
If you were dealing with HMRC (UK) rather than IRS (USA) then no matter where you are based I would strongly recommend that you contact them directly and ask them for their advice. As a director of two companies I have found that they are helpful beyond expectations. The people I deal with are there to ensure that everything is legal and above board, they are not there to make you pay as much as possible. More than once I've had HMRC make suggestions that would reduce what I pay, and their advice is free. Sadly, youa re dealing with the IRS, and I have no idea if they are the same. The impression one gets from outside the USA is that you must pay professionals for their advice and assistance in dealing with Government agencies, rather than dealing with the agencies themselves. IANAL, and in particular I have no direct experience f taxation issues in the USA, but my advice would be to find an accountant in the USA who is willing to discuss this will you via email. Your friend should be able to find one, and I suggest he might be legally required to do so. In return, you should sort out some way for him to get compensation, because most likely it is he taking the risks on your behalf.
- differentaccnow 17y ago
  Thank you for your time - I really appreciate it. The problem is that the friend is not in the US either. I hope someone who reads this will know something from their own experience. But I know I need to find the accountant. Again, thank you so much for your reply.
ErrantX 17y ago
The problem I forsee you having - even if you do work out the companies taxable income to $0 - is that it looks a lot like a Dumnmy corporation [1] where the cash is going out of the US. Im not sure if that would interest the IRS or not but I cant help but feel that it would :) 1. http://en.wikipedia.org/wiki/Dummy_corporation http://en.wikipedia.org/wiki/Dummy_corporation
avinashv 17y ago
You've essentially set up a dummy corporation to shuttle money outside the United States to avoid paying US tax. Not only that, but I read in the comments that the friend who you've set up as a director is also not in the States? You should contact a United States accountant and tax lawyer immediately and talk to them. I'd avoid email, and instead stick to using the telephone. You're not entirely up shit creek--many countries have taxation treaties with the United States that lessen the burden to those who have to pay double tax, though I doubt it applies in your situation. I should also mention that your friend is, from what I can see, liable for you. I am not a lawyer. Please, seek professional advice!
- differentaccnow 17y ago
  Hello, thank you for your reply. What do you mean by "shuttle money outside united states"? There'a license agreement between me and the company - where the company pays for the right to redistribute the software. This can't be legal?
  - carbocation 17y ago
    I can't say for sure what the GP post was thinking, but consider this: you set up a US corporation that had income of $100,000 and was controlled by you (as you state, you wired the money out whenever you wished). Hence shuttling money. You are asking how to avoid paying US taxes on this, but it seems that either the corporation or your person would owe US taxes. I am not an accountant or lawyer or owner of a multinational corporation. Best of luck.
  - jj_aa 17y ago
    I think avinashv is trying to give you perspective on how it might look to the IRS in the worst case scenario, not suggesting that there's no way such an arrangement could be legal.
    - avinashv 17y ago
      This. Not my finest wording, but as an unbiased observer, that is how it looks. And you can be sure that if the IRS is going to be biased, it sure as hell isn't going to be in your favor.
owinebarger 17y ago
I don't know about the IRS, but if you were counting on the benefits of liability limitation, you shouldn't. Based on your description it would seem straightforward to "pierce the corporate veil".
patrickgzill 17y ago
The income for the company is $0 because of the expenses, which are payments to overseas suppliers (you). You should pay a small amount to the CEO perhaps. Do not classify them as royalties, since they have required with-holding rules and are a mess to deal with. Far better to classify them as software purchases. It will matter which country you are in, look up the tax treaty between the US and your country, if they have one. IANAL, YMMV, etc.
tptacek 17y ago
The IRS is less likely to "come after you" as they are to send you a bill.
secret 17y ago
I'm in Miami where almost every accountant/lawyer has to be familiar with international rules/laws. I can recommend some professionals if you decide to go that route.
- differentaccnow 17y ago
  Thank you. Can you please send some contact info at thisisthemail12@yahoo.com? Thank you again.
  - secret 17y ago
    Sent. :)
DougWebb 17y ago
I'm not too familiar with C corporations, but years ago I did consulting work as an S corporation, and one of the rules was that if the corporation doesn't show a profit in 3 of the past 5 years the S corporation status is revoked and the activity is treated as a hobby instead. That means expenses can't be deducted from earnings. There might be a similar rule for C corporations, where you can have non-profitable years without losing the C corporation status but if that goes on for too long your expense deduction might become limited. One thing I do know about C corporations was that it's not enough to just establish one; you also have to run it like a real corporation. A single non-paid CEO is not sufficient; you need a board of directors with regular meetings and proper paperwork evidence of the meetings and business operations. If you haven't got that and the IRS does come investigating, they're much more likely to disallow the C corporation status and treat you as an individual instead. Then it comes down to the tax law treaties between the US and your country to determine whether or not your US-derived income is taxable to the US. In most cases, you have to pay taxes to whichever jurisdiction wants more money, and you get a credit in the other jurisdiction for the amount they would have taxed you on the same income.
patio11 17y ago
OK, first thing: calm down. Second thing: Taxation in the United States, as in many other countries, is based on a variant of the honor system. The IRS accepts over 98% of all returns as written. If you are one of those 98%, that is pretty much the end of the analysis. If not, the IRS is going to probably send you a letter asking you to justify what you have put on your return. Here is where your competent legal advisor comes in, but the answer is likely to be "The American corporation exists to pass payments to me in Nation X, where I am a resident. I pay taxes in X. My understanding is that, owing to X's tax treaty with the US on the subject of royalties, I am not subject to American income tax on the payments at issue." Then one of two things happens: either a) the IRS says "Oh, OK." or b) the IRS spends a lot of time and money having their experts think it over and then says "No, actually, we rather think you are." At that point you have a bunch of life-not-nearly-over options: you can just pay the money (you will be charged interest and may be assessed a penalty if they believe you were not acting in good faith), you can work out a payment arrangement with them, you can litigate the outcome, etc etc. Third thing: Go get competent legal advice. Sadly, it likely won't be cheap for international legal issues. However, it also isn't cheap for the IRS to worry about this, and at $111,200 you're probably beneath their radar most of the time. (Always remember there are millions upon millions of corporations much bigger than you moving trillions of dollars through America's borders. Many of them will screw up on their taxes this year in some way -- there are often multiple competing interpretations of the relevant laws. Keep copious records, file honestly, and don't worry about it until they tell you you have a reason to worry about it.)
- tptacek 17y ago
  NB: They may accept returns as written, but if your returns are inconsistent with someone else's returns (someone's usually giving you money and telling the IRS why), you'll get a bill. They're also not going to ask you to justify your return, so much as they're basically going to invoice you and leave it to your and your tax professional to wriggle your way out of it. If you don't respond, they'll suck the money directly out of your bank account.
- andrewljohnson 17y ago
  I think "millions upon millions" is an overstatement.... maybe a couple million would be a better way to put it. The SBA says there are 29.6M total small businesses, many of which makes 0 dollars, negative dollars, or way less than even 100,000/year. http://web.sba.gov/faqs/faqindex.cfm?areaID=24 http://web.sba.gov/faqs/faqindex.cfm?areaID=24
sireat 17y ago
I think the key here is the exact amounts matching going in and out, that does look suspicious. You need to structure it like a real business(which it is).
lfact443 17y ago
I PERSONALLY THINK YOUR JUST THINKING ABOUT DOING THIS TYPE OF BUSINESS,SO THESE COMMENTS ARE ACTUALLY TEACHING YOU HOW!
- dzlobin 17y ago
  Ease off the capslock, captain cool.
differentaccnow 17y ago
Thank you all for responding - this is a great community!

pmjordan 17y ago

I think you need to talk to an accountant. If you're making $111k a year that should hopefully not be a problem.

differentaccnow 17y ago
Thank you for your reply. I know but it will take me a while because there are no accountants here who would know about handling of US corporation. And I have no idea how to get in touch with someone who might know.. In the meantime I would like to know what more people think. Thank you all - I appreciate this so much..
- pmjordan 17y ago
  Maybe if you told us what country you're in, other HNers from that country might be able to recommend accountants - there must be other small-to-medium sized companies in your country that at least export to the US. That said, maybe someone here could recommend a US-based accountant who would be willing to sort this out for you. I don't know whether you have this where you are, but most European countries have government-sponsored bureaus for supporting businesses. They might be able to help directly or refer you to someone (presumably an accountant) who can. Finally, have you actually asked your/an accountant? They may not be able to answer your questions directly, but there's a good chance they'd know someone who can.

RiderOfGiraffes 17y ago

If you were dealing with HMRC (UK) rather than IRS (USA) then no matter where you are based I would strongly recommend that you contact them directly and ask them for their advice. As a director of two companies I have found that they are helpful beyond expectations. The people I deal with are there to ensure that everything is legal and above board, they are not there to make you pay as much as possible. More than once I've had HMRC make suggestions that would reduce what I pay, and their advice is free. Sadly, youa re dealing with the IRS, and I have no idea if they are the same. The impression one gets from outside the USA is that you must pay professionals for their advice and assistance in dealing with Government agencies, rather than dealing with the agencies themselves. IANAL, and in particular I have no direct experience f taxation issues in the USA, but my advice would be to find an accountant in the USA who is willing to discuss this will you via email. Your friend should be able to find one, and I suggest he might be legally required to do so. In return, you should sort out some way for him to get compensation, because most likely it is he taking the risks on your behalf.

differentaccnow 17y ago
Thank you for your time - I really appreciate it. The problem is that the friend is not in the US either. I hope someone who reads this will know something from their own experience. But I know I need to find the accountant. Again, thank you so much for your reply.

ErrantX 17y ago

The problem I forsee you having - even if you do work out the companies taxable income to $0 - is that it looks a lot like a Dumnmy corporation [1] where the cash is going out of the US. Im not sure if that would interest the IRS or not but I cant help but feel that it would :) 1. http://en.wikipedia.org/wiki/Dummy_corporation http://en.wikipedia.org/wiki/Dummy_corporation

avinashv 17y ago

You've essentially set up a dummy corporation to shuttle money outside the United States to avoid paying US tax. Not only that, but I read in the comments that the friend who you've set up as a director is also not in the States? You should contact a United States accountant and tax lawyer immediately and talk to them. I'd avoid email, and instead stick to using the telephone. You're not entirely up shit creek--many countries have taxation treaties with the United States that lessen the burden to those who have to pay double tax, though I doubt it applies in your situation. I should also mention that your friend is, from what I can see, liable for you. I am not a lawyer. Please, seek professional advice!

differentaccnow 17y ago
Hello, thank you for your reply. What do you mean by "shuttle money outside united states"? There'a license agreement between me and the company - where the company pays for the right to redistribute the software. This can't be legal?
- carbocation 17y ago
  I can't say for sure what the GP post was thinking, but consider this: you set up a US corporation that had income of $100,000 and was controlled by you (as you state, you wired the money out whenever you wished). Hence shuttling money. You are asking how to avoid paying US taxes on this, but it seems that either the corporation or your person would owe US taxes. I am not an accountant or lawyer or owner of a multinational corporation. Best of luck.
- jj_aa 17y ago
  I think avinashv is trying to give you perspective on how it might look to the IRS in the worst case scenario, not suggesting that there's no way such an arrangement could be legal.
  - avinashv 17y ago
    This. Not my finest wording, but as an unbiased observer, that is how it looks. And you can be sure that if the IRS is going to be biased, it sure as hell isn't going to be in your favor.

owinebarger 17y ago

I don't know about the IRS, but if you were counting on the benefits of liability limitation, you shouldn't. Based on your description it would seem straightforward to "pierce the corporate veil".

patrickgzill 17y ago

The income for the company is $0 because of the expenses, which are payments to overseas suppliers (you). You should pay a small amount to the CEO perhaps. Do not classify them as royalties, since they have required with-holding rules and are a mess to deal with. Far better to classify them as software purchases. It will matter which country you are in, look up the tax treaty between the US and your country, if they have one. IANAL, YMMV, etc.

tptacek 17y ago

The IRS is less likely to "come after you" as they are to send you a bill.

secret 17y ago

I'm in Miami where almost every accountant/lawyer has to be familiar with international rules/laws. I can recommend some professionals if you decide to go that route.

differentaccnow 17y ago
Thank you. Can you please send some contact info at thisisthemail12@yahoo.com? Thank you again.
- secret 17y ago
  Sent. :)

DougWebb 17y ago

I'm not too familiar with C corporations, but years ago I did consulting work as an S corporation, and one of the rules was that if the corporation doesn't show a profit in 3 of the past 5 years the S corporation status is revoked and the activity is treated as a hobby instead. That means expenses can't be deducted from earnings. There might be a similar rule for C corporations, where you can have non-profitable years without losing the C corporation status but if that goes on for too long your expense deduction might become limited. One thing I do know about C corporations was that it's not enough to just establish one; you also have to run it like a real corporation. A single non-paid CEO is not sufficient; you need a board of directors with regular meetings and proper paperwork evidence of the meetings and business operations. If you haven't got that and the IRS does come investigating, they're much more likely to disallow the C corporation status and treat you as an individual instead. Then it comes down to the tax law treaties between the US and your country to determine whether or not your US-derived income is taxable to the US. In most cases, you have to pay taxes to whichever jurisdiction wants more money, and you get a credit in the other jurisdiction for the amount they would have taxed you on the same income.

patio11 17y ago

OK, first thing: calm down. Second thing: Taxation in the United States, as in many other countries, is based on a variant of the honor system. The IRS accepts over 98% of all returns as written. If you are one of those 98%, that is pretty much the end of the analysis. If not, the IRS is going to probably send you a letter asking you to justify what you have put on your return. Here is where your competent legal advisor comes in, but the answer is likely to be "The American corporation exists to pass payments to me in Nation X, where I am a resident. I pay taxes in X. My understanding is that, owing to X's tax treaty with the US on the subject of royalties, I am not subject to American income tax on the payments at issue." Then one of two things happens: either a) the IRS says "Oh, OK." or b) the IRS spends a lot of time and money having their experts think it over and then says "No, actually, we rather think you are." At that point you have a bunch of life-not-nearly-over options: you can just pay the money (you will be charged interest and may be assessed a penalty if they believe you were not acting in good faith), you can work out a payment arrangement with them, you can litigate the outcome, etc etc. Third thing: Go get competent legal advice. Sadly, it likely won't be cheap for international legal issues. However, it also isn't cheap for the IRS to worry about this, and at $111,200 you're probably beneath their radar most of the time. (Always remember there are millions upon millions of corporations much bigger than you moving trillions of dollars through America's borders. Many of them will screw up on their taxes this year in some way -- there are often multiple competing interpretations of the relevant laws. Keep copious records, file honestly, and don't worry about it until they tell you you have a reason to worry about it.)

tptacek 17y ago
NB: They may accept returns as written, but if your returns are inconsistent with someone else's returns (someone's usually giving you money and telling the IRS why), you'll get a bill. They're also not going to ask you to justify your return, so much as they're basically going to invoice you and leave it to your and your tax professional to wriggle your way out of it. If you don't respond, they'll suck the money directly out of your bank account.
andrewljohnson 17y ago
I think "millions upon millions" is an overstatement.... maybe a couple million would be a better way to put it. The SBA says there are 29.6M total small businesses, many of which makes 0 dollars, negative dollars, or way less than even 100,000/year. http://web.sba.gov/faqs/faqindex.cfm?areaID=24 http://web.sba.gov/faqs/faqindex.cfm?areaID=24

sireat 17y ago

I think the key here is the exact amounts matching going in and out, that does look suspicious. You need to structure it like a real business(which it is).

lfact443 17y ago

I PERSONALLY THINK YOUR JUST THINKING ABOUT DOING THIS TYPE OF BUSINESS,SO THESE COMMENTS ARE ACTUALLY TEACHING YOU HOW!

dzlobin 17y ago
Ease off the capslock, captain cool.

differentaccnow 17y ago

Thank you all for responding - this is a great community!