Discussion:Use of Estimated Expenses
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| {{ForumReplyPost|UserID=FloridaCPA|Date=7 November 2009|Text=Well...its not a TOTAL mess...but the bank cannot come up with a detail of the Line Of Credit activity that was taken on their home and put into the business ($250K) so we assumed all large deposits into the corp bank acct that were not service income (not in business yet) and couldn't trace from some where else...was from LOC...I'm off about $3K from the bank's year end figure but dont know if I got it all. I have some cr card stmts but they are not complete...there is some co-mingling...but t/p is familiar with the nature of the charges that we've categorized them accordingly...most are in the nature of start up expenses and since she's way past the election time to amortize them she'll have to leave that as an asset any way. There are disburesements from bank stmt not detailled in ck register that I am charging to shareholder loan b/c they can't-won't come up with better explanations...the IRS is all over them to file...I'll take another look at the 8275. }} | {{ForumReplyPost|UserID=FloridaCPA|Date=7 November 2009|Text=Well...its not a TOTAL mess...but the bank cannot come up with a detail of the Line Of Credit activity that was taken on their home and put into the business ($250K) so we assumed all large deposits into the corp bank acct that were not service income (not in business yet) and couldn't trace from some where else...was from LOC...I'm off about $3K from the bank's year end figure but dont know if I got it all. I have some cr card stmts but they are not complete...there is some co-mingling...but t/p is familiar with the nature of the charges that we've categorized them accordingly...most are in the nature of start up expenses and since she's way past the election time to amortize them she'll have to leave that as an asset any way. There are disburesements from bank stmt not detailled in ck register that I am charging to shareholder loan b/c they can't-won't come up with better explanations...the IRS is all over them to file...I'll take another look at the 8275. }} | ||
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| + | {{ForumReplyPost|UserID=RoyDaleOne|Date=7 November 2009|Text=I always discourse that estimates were used to prepare the return when I have missing records. | ||
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| + | Why would you not, everything to gain and nothing to lose?}} | ||
Revision as of 17:36, 7 November 2009
Discussion Forum Index --> Tax Questions --> Use of Estimated Expenses
| 7 March 2006 | |
| Taxpayer (S Corp) lost four months of credit card statements. Attempts to obtain copies from the credit card company will take too long and taxpayer wants to file.
He wants to extrapolate the 8 months he has to come up with annual amounts, i.e. estimates. What are the issues? Do these amounts need to be labeled estimates on the tax returns? What about the flow through K-1s, labeled as estimates? I’ve suggested extending, but he wants to know if this option is available to him. | |
| 7 March 2006 | |
| Practically speaking, most of us would do it and not disclose one thing...what's the worst that happens? You get audited and discover that the actual has allocated too much to Office and not enough to Travel, or some such thing. Big deal. Who cares? IF there's something radically wrong later, like a bunch of personal expenditures that you didn't expect, or all meals and ent...you can amend. Otherwise, it's merely allocation issues of all deductible stuff anyway. Matters not in my opin. | |
FloridaCPA (talk|edits) said: | 5 November 2009 |
| I have a client who opened a business late in 2006 after spending $500K to open the business. THey borrowed on their home and every credit card they could put their hands on. Their books are awful (I'm sure you know the type of client I am referring to). Entries aren't always made in the ckbook, they didn't reconcile anything. I've roughly reconciled to the bank stmts what I could, and taken info from their incomplete cr card stmts...you know the type of client. They are trying hard to help but during this time, and ever since they opened the business, they've just been trying to keep head above water.
To prepare the 1120S'06 I've tried to be conservative and took many positions that were unfavorable to them because they cannot provide better info. We've (client & I) had to guess at the nature some of the credit card charges (all reasonable guesses)...and where there was very insufficient data, I took positions on the return that went against them (I'm sure we've missed alot of expenses). I have no idea how they'll hold up in an audit - and think it would completely depend on how sympathetic the agent was to a small business just trying to survive. I don't see any reason to suspect the client of intentional fraud...so.... At this point they desperately just want the return finished (so we can start on '07) and are willing to deal with any consequences of the numbers not being perfectly accurate. Do I have return preparer penalty exposure? Should I disclose that the return has a lot of 'estimates" and "soft numbers", I've lookd at the Form 8275 but it doesnt seem to address the situation. I would hate to turn them away - if so, they'd never get into compliance. I actually have 2 clients like this right now (sigh) - and they are both desperate to get back into compliance w/IRS. How do you handle these kinds of situations? | |
| 5 November 2009 | |
| I think you are ok as long as you document the steps you took to reasonably reconstruct missing data. Without a reasonable reconstruction you must resolve in favor of IRS and not your client. We are not permitted to simply accept "Well I think it was $XX" from the client, plug in the number and move along. | |
FloridaCPA (talk|edits) said: | 5 November 2009 |
| thanks Kathi...would you attach a statment to the return?...ie in the course of preparing the returns certain assumptions were necessarily made regarding the nature of some of the taxpayers 2006 receipts and expenditures | |
| 5 November 2009 | |
| Not I would not attach anything or do a disclosure form. | |
FloridaCPA (talk|edits) said: | 5 November 2009 |
| thanks...wish I was more comfortable with the darn thing! | |
WIBadgerCPA (talk|edits) said: | 5 November 2009 |
| Just curious, but what do you mean by "you must resolve in favor of IRS and not your client". Where does that come from. Typically, in gray areas, wouldn't you resolve in favor of your client, if there is an issue? | |
| 5 November 2009 | |
| What I meant was in the absence of any supporting data or reasonable reconstruction of that data you'd have to ignore it as a tax deduction. | |
| 5 November 2009 | |
| For further clarification of my opinion: In the facts given above for missing credit card statements paid from the corporate bank account, using the 8 months of info you do have, a reasonable reconstruction could be argued to apply those facts to the missing 4 months of statements. (Me, I would insist on waiting for the copies of those 4 months but I can be hard nosed.)
An unreasonable method would be for the client to say no copies of statements whatsoever are available. All you know is the total of checks written. Client wants to represent that total in percentages for this and that with no reconstruction steps. I would not accept that and if no statement data is going to be provided to me, the entire amount of the checks would not be handled as business deductions by me. | |
| 5 November 2009 | |
| Given the possibility of penalty under §6694, I would suggest using Form 8275 to protect yourself.
I would not use the words "reasonable guess" on the Form but rather use language that explains why you've taken the action you have. I know others will disagree but IMO, given the facts as you have presented them, you absolutely need the disclosure. | |
Death&Taxes (talk|edits) said: | 5 November 2009 |
| I am not sure if Kathi is writing about the original post, which mentions missing credit card statements, or FloridaCPA's which sounds much more involved. | |
| 5 November 2009 | |
| It's all the same subject matter, how do you proceed with reconstruction of missing data. | |
FloridaCPA (talk|edits) said: | 7 November 2009 |
| Well...its not a TOTAL mess...but the bank cannot come up with a detail of the Line Of Credit activity that was taken on their home and put into the business ($250K) so we assumed all large deposits into the corp bank acct that were not service income (not in business yet) and couldn't trace from some where else...was from LOC...I'm off about $3K from the bank's year end figure but dont know if I got it all. I have some cr card stmts but they are not complete...there is some co-mingling...but t/p is familiar with the nature of the charges that we've categorized them accordingly...most are in the nature of start up expenses and since she's way past the election time to amortize them she'll have to leave that as an asset any way. There are disburesements from bank stmt not detailled in ck register that I am charging to shareholder loan b/c they can't-won't come up with better explanations...the IRS is all over them to file...I'll take another look at the 8275. | |
RoyDaleOne (talk|edits) said: | 7 November 2009 |
| I always discourse that estimates were used to prepare the return when I have missing records.
Why would you not, everything to gain and nothing to lose? | |
