Discussion:Basis on underreporting interest income
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Discussion Forum Index --> Tax Questions --> Basis on underreporting interest income
| 2 July 2007 | |
| I have a new client who has been receiving payment on a note payable from a corporation she invested in. The corporation has deducted interest expense to her as they are on accrual basis, and have also been making cash payments to her, however they told her it was return of her investment. They plan on paying off the balance next year, which is why she came to me.
I am planning on amending past three years to report the interest income, which will increase her balance due. For the years the statute is closed, how does one correct this error? I know most of the time folks just reduce basis in the note so the interest is received in the current year, but this will dump an inordinate amount of income in one year and create a whole bunch of other issues. My first reaction is to correct years that are open, and pass on past years, hold some money in case irs opens prior years for significant underpayment. | |
| 2 July 2007 | |
| I think I agree with that scenario Cola. Did they ever give her a 1099-INT for the interest they accrued? I don't know how many years back the interest has been accruing but could you pick up additional interest in the previous 3 years filings to account for the entire interest that was written off or will this also dump a huge amount of interest income into those years?
Just a thought mind you :) | |
Bottom Line (talk|edits) said: | 2 July 2007 |
| I was thinking the same thing | |
| 2 July 2007 | |
| they never received a 1099. my client is clueless on these issues. i considered dumping excess in furthest year back, but would skew that year also. Give some of the circumstances, i want my return to be right as rain and also her past three same way. | |
| 3 July 2007 | |
| You should amend all the years it pertains to. Statute of limitations do not prevent you from reporting the returns correctly in all prior years. Knowing what you do now, would not revising all years be fraud? Refer this to your malpractice insurance carrier and see what they say. Just doing the prior 3 years sounds like the lazy way out. | |
| 3 July 2007 | |
| We as tax professionals are not miracle workers, nor can we predict what other preparers were thinking, or had to work with when the prior returns were prepared.
It's amazing that with all the fact situations posted on this board, not just this thread, clients expect us to act as the fix-it-shop after it's been screwed up royally by others - either through actions or inactions of the client, or of the preparer(s) or both. How can we be responsible for others' actions? DZC-how can you expect Cola to go back to years that are closed simply to "correct a wrong" that Cola didn't create? | |
| 3 July 2007 | |
| If you know about it, you can correct it or ignore it. Your choice. I guess since COLA didn't "create a wrong" Why not leave all years alone and just do it correctly the next year. Why just 3 years. Personally, I would tell client to have old tax preparer fix the error and I would correct in future years. I doubt if the client will go back thou. | |
| 3 July 2007 | |
| Wait a minute. The corporation told the client that the cash payments she received was a return of her investment. This means she has been receiving her principal back, and has no interest income to report. The corporation says it has been accruing interest payable to her, and the cash paid to her was for principal only. So, has there has been an error? Colacpa sees that it would be better for the client to recognize the interest income over time rather than all at once, but it appears that the client is going to receive her interest all at once if one follows the intent of the corporation.
Is there a loan agreement that might disclose the terms of the note? | |
