How Would You Handle This Mess?

[Ringers]

At the end of March a fellow horseshoe player (hence my name and avatar) asked me if I wanted to take over the accounting and tax preparation for his printing firm from the accounting firm that has been doing his books and returns for the past 12 years. Here is what I found:

1. His printing firm is a Sub S ACCRUAL corporation with him, his brother, and his sister as sole stockholders.

2. He and his brother are sole stockholders in another Sub S ACCRUAL corporation which owns the building which is rented to the printing firm.

3. The rental of the property to the printing firm has been going on since about 2002 and both corporations have been accrual based Sub -S corps since then.

This is where it gets dicey!

A. The current accountant has only been depreciating the building for the last 3 years!

B. The current accountant has accrued rents payable of $216000 on the printing corporations books, which has had them

showing a loss each year. ($12000 rent paid and additional $36000 rents payable each year for last 6 years)

C. The current accountant has NOT shown the Rents Receivable on the books or tax returns of the other Sub S accrual

corporation, which has them showing slight losses each year also, only reporting the $12000 received.

D. In 2012, the accountant added $106000 of previously unlisted, fully depreciated, machinery on the books and tax

returns of the printing corporation.

There are numerous other items, such as reporting loans from stockholders as bank loans, etc. which make the tax returns ticking time bombs.

I know your first suggestions would be to run fast and far away from this situation, but I do not want to leave my friend with this potential big bill from the IRS.

What would you do???????

[JohnH]

I don't think you will need to walk away from this.

Once you explain what will be involved in straightening it out, both in terms of accounting costs & tax liabilities, they are probably going to decide to make "other arrangements".

[Jack from Ohio]

HUGE retainer (cash only) upfront!! Tell the owners that the "straightening out" will be expensive due to your fees and the IRS penalties and interest involved. Stick to that!!

Since you are aware of what has and has not been happening, if you prepare any returns that are not following the rules, you put your head on the chopping block.

If they balk at your pricing, hand them their documentation and wish them a good day. If they try to convince you to do other than the correct steps...

RUN FORREST RUN!!!

Note: Incompetence or total disregard for the tax laws on their part, does NOT constitute ANY responsibility on your part to "fix" the mess or continue the deceptive practices.

[BulldogTom]

I would not suggest you walk away, unless you feel that the client is not interested in properly reporting his business activities.

Pull out Form 3115, the change in accounting method form. I would approach the depreciation as a change in accounting method and make all the depreciation corrections in one year. At the same time, I would make all the adjusting entries into the current year for the rents on both sets of books and take all the charges in the current year and ask for a payment plan to get it all paid off over time.

You know your client. If they want to cheat, then you don't want them. I am reading into your post, but it seems to me like they had some suspicions that the books and tax returns were not up to par, and your expertise and ethics may be just what they are looking for. You may be surprised that that is what they really want.

On the other hand, they may send you packing when you tell them what the issues are and go running back to the previous accountant. Either way, you will be able to sleep well.

Tom

Hollister, CA

Edited May 8, 2014 by kcjenkins
to add the form number Tom forgot.

[kcjenkins]

http://www.irs.gov/pub/irs-pdf/i3115.pdf

[Ringers]

Thank to all for your advice. I will post what eventually happens.

Thanks again!!