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Discussion:New Client--bad return

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Discussion Forum Index --> Business Growth Community --> New Client--bad return

Sjpaccounting (talk|edits) said:

27 February 2010
I don't know where to post this...but I will post it here. Please move if it is not in the right place.

I went to meet with a potential new client today...as I was glancing through their s-corp return from 2008, I first noticed that their assets were -xx, so I paged over to sch L and was just sad as what I saw...

The previous preparer had amortized something..what I don't know...because it was just amortization....and more importantly...the balance sheet was not even in balance...it was -xx for assets and then xx,xxx for equity and liabilities. I mean seriously??? Do I amend the previous year? I highly doubt they will want to...but going forward, how to fix really? My, now client, even went so far to say that she empties out the bank account at the end of the year...because what is the point of keeping money in it after all taxes are paid. They only get paid once a year for the s-corp, but she didn't understand anything about basis or anything like that...and she has had the corporation AND accountants for as long as the corporation has been open.

How can that preparer sleep at night, knowing they couldn't even balance sch L???

Taxea (talk|edits) said:

27 February 2010
Ask the client for the prior preparers worksheets for 08. Ask why the client is coming to you this year. Explain the consequences of the errors and her actions with the bank account for 08 return and offer to amend it before you complete 09.

Explain that you cannot do 09 if she expects you to continue with what you know to be wrong. Let her make the decision as to whether you will proceed. You do not need a client that can get you into trouble.

Sjpaccounting (talk|edits) said:

27 February 2010
Oh I have already explained the error...I also explained that her 2008 return is not correct. She simply does not know about corporate returns and trusted that the accounting company she went to did. She left the previous preparer because she felt they charged her too much for a basic return. I told her, what they charged is in line with a corporate and individual return...it just should have been correct.

I have not confronted her about amending the 2008 return yet...especially since I will not do it for free and she has already paid X amount for last year's return...

Belle (talk|edits) said:

February 27, 2010
It's possible (but doesn't sound likely) that the income/expense figures are correct. If the corp meets certain requirements, the balance sheet isn't required. I (almost) always prepare one, and wouldn't submit one that was out of balance. (edit - only on small partnerships have I ever used that option). And determining basis correctly without the balance sheet being in balance would be almost impossible. I'm assuming schedules showing the shareholder basis aren't with the return?

WBR (talk|edits) said:

27 February 2010
Depending on how long they have been incorporated you might ask for all the prior corp returns.

Belle (talk|edits) said:

February 27, 2010
Not a bad idea, but without distribution and loan info, it may still be a can of worms. I wonder if there's a bookkeeping system of any kind?

Southparkcpa (talk|edits) said:

27 February 2010
The longer you are in practice....the more of this you will see.

the barrier to entry in our business is not much and the amount of bad work out there no longer surprises me.

I have seen balance sheets out of balance, interest expense on returns where it should be capitalized, losses from schedule E on oncome over 200K (no R/E exception), deductions where no basis exists.

I wish the IRS had a stronger audit query to pick this stuff up.

Belle (talk|edits) said:

February 28, 2010
SP, I agree. Makes me question why I even bother to try so hard to get 'it' right sometimes (usually in late March when I'm exhausted). Perhaps ignorance really is bliss?

Sjpaccounting (talk|edits) said:

28 February 2010
I actually think that the income and expenses are fine. She says she keeps a spreadsheet, and there isn't much too much activity in the business...but why file a schedule L that is out of balance...that is what gets me!

There were no schedules or back up for shareholder basis...when I talked to her today, it was like the first time she had ever heard about it. They have had this s-corp since the end of 2006.

Is there no way to proceed if she does not want to amend 2008? She said she was going to create a shareholder basis work sheet...I told her to google s-corp shareholder basis and she will have quite an eyeopener...that her "simple" return, really is complex...

Kevinh5 (talk|edits) said:

28 February 2010
With all of the K-1s and end of year balance sheets, tracking basis is a lot easier.

Uncle Sam (talk|edits) said:

28 February 2010
I would ask the client to request of the former accountant, a copy of their worksheets, or schedules that were used in the preparation of the corporation return.

If she doesn't owe the prior accountant any fees, then there should be no reason for refusal. Copies of software printouts would suffice also for the end of 2008. But you need to get your opening balances reconciled.

I know of preparers who don't even know how to prepare Balance Sheet information and just leave it blank because they don't understand it. This might be the case here.

Kevinh5 (talk|edits) said:

28 February 2010
"their gross receipts were under $250K so it wasn't required" is a real cop out, don't you think?

Uncle Sam (talk|edits) said:

28 February 2010
Any decent preparer would complete the Balance sheet whether it was required or not. If not

disclosed on the corporation return, at least the preparer should have a copy in the file of the information that would have been shown. It provides information for future reference rather than having to recreate it.

AEM CPA (talk|edits) said:

28 February 2010
Not filing a balance sheet because it wasn't required is one thing. Filing a balance sheet that doesn't balance is another. If you're going to include it, it HAS to balance if you care about your job.

95% sure it's equity that's off - maybe he didn't bother with timing differences or something. The P&L could still be right. You should still amend the 1120S, at least to remove the balance sheet (if possible).

Sjpaccounting (talk|edits) said:

28 February 2010
Actually...I believe it is the assets that are incorrect on the balance sheet. The preparer did not even worry about cash or anything on the balance sheet....and she had cash. Equity seems like it could be in line.

I will ask her to get the previous preparer's worksheets. Creating a basis worksheet would not be too hard with this corp...since there is really very little activity. I always prepare a balance sheet...it gives me comfort in knowing it is balanced.

The previous company that prepared the return is a pretty decent sized company around here too, and a CPA firm...clearly her return fell through the cracks! I would think any CPA would see the very first page of the s-corp and think something must be wrong....because that is what I did when I saw her assets at -45.

Death&Taxes (talk|edits) said:

28 February 2010
I suspect it might be a software flaw: If I check a box that says 'don't fill in Schedule L' all entries are erased, but perhaps the software used did not do that but plugged in the book loss or profit etc. Just guessing, though you would think someone would notice this, and if this wasn't the first year, one would think some taxing authority might also notice. e.g., Pennsylvania will complain if you don't attach a balance sheet.

Szptax (talk|edits) said:

28 February 2010
I have one like this as well. There are more issues than the balance sheet though. I looked at this client's balance sheet and it has negative assets. This particular guy went to a CPA, who I know for 2005, but prepared them himself 2006 through 2008. Its a mess. My recommendation was that 2006-2006 should be amended. I only have a signed engagement for 2009, and we are discussing the prior years. I said that I could and would only prepare the 2009 with a balanced balance sheet in order to do that the beginning balance had to balance as well. I can calculate basis - if the 2006-2008 are correct. Right now I am looking at his QuickBooks.

The largest looming overriding issue is that he is "renting" part of his home to his S corporation.

This is quite a challenge. Of course he decided to prepare them himself because it couldn't be that hard to do and he didn't want to pay anyone. He has a ton of credit card debt he is trying to pay off. Much is on personal cards but has been recorded under the corp. "Ok" if its really due to him for corporate items but I don't really know. And to top it off at the end of our 3 hour meeting he told me he was trying to fix everything and get it settled because he is terminally ill. With his disease, he might have two years left.

Although they should be amended, there may be no point in amending if there will ultimately be no exposure. So far he tells me he hasn't gotten any notices. Its hard to imagine. As far as the other returns are concerned, they should be amended but what if he chooses not to? Would you only prepare 2009 after the prior years are amended. What if he decides to amend himself?

Right now I am filing an extension and mulling the options.

Fsteincpa (talk|edits) said:

28 February 2010
If you have explained everything to your client, you can offer two options, go back and amend prior years, or work everything in the current year to correct the issue. No, it's not perfect, but it's better to get them correct going forward than to do nothing at all.

It is quite possible that income and expenses have been properly recorded each year and that the balance sheet is just out of whack. The balance sheet can be fixed. And the difference will have to put somewhere. Adjust Retained earnings or due to/due from shareholders.

Odds are it is a smaller S-Corp. Probably a mom and pop type outfit that really did not need to be a corp anyhow.

Get them fixed going forward and help them going forward. Sometimes you need an ounce of practicality.

Szptax (talk|edits) said:

28 February 2010
For Sjpaccounting, I think you are probably correct. Its probably just a balance sheet issue.

For my client, I can get the 12/31/08 balance sheet correct. The decision to amend is the client's. My advice is to amend because the issues I saw are warrant an amendment. I am certain there are errors in the prior years. One being the "rent". Whether the corrections would change the tax liability, I am not sure. Since he is terminal, it may not matter anyway as terrible as that is. At least that's what I think. But someone wiser than me may see it differently and see some pitfall that I do not in this situation.

Ilovedangerousdogs (talk|edits) said:

28 February 2010
Balance sheets.....I work with mostly small businesses that give me spreadsheets, green sheets, etc and I prepare returns from that. I keep track of basis for S-corps in a spread sheet that I doubt my client understands. I provide that to them if I do NOT prepare their individual return. I find it extremely hard to get balance sheet info. They use business credit cards, personal credit cards, and I never find out about a loan until they try to expense interest. If things don't look right I request a meeting and try to go over everything. Many times have I been told that I am to picky and why can't I use what they gave me. I explain that this is my job, let me do it. (in a nice way)I explain to the client why a balance sheet is important even though they are under the 250,000.

I also have them sign the engagement letter and highlight the part that says something like, if you lie to me or the IRS you can pay 100,000 in penalties and go to jail.

If I were in your case I would definitley get copies of 2006 and 2007 and let them know that they need to amend (if you have definitley found that they need to), why and how much it will cost. If their only concern is how much it costs, then they don't sound like a good client to have.

Szptax (talk|edits) said:

28 February 2010
I have copies of 2005 through 2008. For me it looks mostly like a fixed asset issue - but again the rent is also an issue, as is a vehicle. Without touching the old years - I could prepare the balance sheet as it should look - prior year mistakes and all (incorrect depreciation). But eventually you need to fix it - therein in the problem. Fixing prior year stuff and changing the beginning balance sheet.

WillyB (talk|edits) said:

28 February 2010
There is no law requiring a practitioner to correct prior year errors, but you do need to get decent starting numbers for the current year. That is often the big problem.

When the prospective client is complaining about prices right off that bat, has left prior accountant because "they cost too much", has no idea what you are doing and is not interested why it should be done, has poor or no books (what are books?) ... it starts to make a bad-smelling brew. Most likely the prior accountant did not complete the balance sheet because it was impossible to get the numbers from client.

Ask permission to talk to the prior accountant and for prior accountant to talk to you. If would-be client says no... That is a really bad sign.

Uncle Sam (talk|edits) said:

28 February 2010
>>Most likely the prior accountant did not complete the balance sheet because it was impossible to get the numbers from client.<<

That's no excuse for not having a Balance Sheet balance correctly.

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