Discussion:Help needed on a really ugly tax return

The history of the QB data file is that it is about five years old and started life as another corporation. The client created a new corporation effective 01/01/06 and continued using the same data file. They use AR and AP, so the history was still there. On Jan 1 06, they had all their outstanding receivables still waiting to be collected, it didn't make sense to go back and re-enter invoices for the new corp, which BTW is the same business, new name and ID #'s etc. They also brought in some assets and debt from a sole proprietorship they ceased to use at the time of the new corp. When all that filtered into the QB books, in order to tie to the 06 TR, we now have this adjustment.

I would appreciate any thoughts and help in identifying this weird transaction on my TR.

So, essentially, $21,847 is gone and you don't know what happened to it?

Perhaps you should come up with a starting balance for shareholder's basis from the information you have records for from previously filed tax returns - contributions, distributions, income, loss, etc, and also adjust the starting AAA.

What I'm getting at is your going forward & reporting current & future figures correctly & not try to identify errors from previous years, plus adjusting the starting balances so that they tie into something you can back up with prior tax returns and actual balance sheet amounts.

Does that make any sense?

I had very similar situation and numbers a few years back. Ended up reviewing/adjusting detailed QB accounting for current corp from day 1 to best of my ability, trying to tie to prior year tax returns. QB files from client did not match tax returns prepared by CPA firm (2 tax accountants earlier), and CPA firm refused to provide any reconciling data and worksheets (couldn't believe it). While this was going on, and reviewing current year QB entries for preparation of current returns, I saw that client was not consistently and properly taking medical premiums into his W-2 income. By looking closely at these items from 2001 thru 2002 in QB entries, I was able to recreate nearly exactly the 2001 and 2002 tax return income and balance sheets. The prior accountants were coming up with the right tax numbers, but were not giving prior year adjusting entries to the corporation for updating the QB files. Unfortunately this is a common practice by accountants. I have done it myself with QB clients who are really inept at accounting.... explaining adjusting entries to some clients is so time-consuming it is tempting to just skip it. But I will never skip it in the future !

That's a really interesting issue. It can be so hard to get paid for adjusting the books for inept clients, so I've started to give all corporate clients a printout of their general ledger and journal entries for each tax return, in addition to the depreciation schedule and any workpapers they might need to recreate the tax returns. It's a big stack of paper, but at least if I get hit by a bus, there's nothing in my workpapers that the client might need.

I just adjust their Quickbooks starting balances each year & go forward.

First if the client is keeping the Quickbooks, look for entries in a current period that voids a check, invoice to a customer, or an invoice from a vendor, that was dated in the prior period. QB will place some of this items in the prior year automatically. Second, if you if you record an adjustment in the current year of income or expense you now have the potential for "two" years being incorrect.

If, you must enter the adjustment somewhere,

1. enter then retained earnings, there is no reconciliation provide for in the 1120S, 2. the label can be "prior period adjustment", the label doesn't really matter that much, you would still have to "prove" what it is questioned, by the IRS, client, or the next accountant.