Prior Period Adjustment

[David]

An 1120S client changed something in 2013 after the 2013 tax returns were completed. During 2014 we told them to close their year and don't make any entries to the prior year. Something still slipped by.

There is an additional $1,785 increase to the 2013 equity/retained earnings. I am reporting that as a prior period adjustment in the equity section on the balance sheet.

I have seen this adjustment on new client's tax returns prepared by other tax preparers.

I'm sure this is a red flag to the IRS, unless they don't consider $1,785 a material amount.

Have any of you who have made this adjustment ever had an issue with the IRS?

Another option would be to enter the beginning balance sheet and beginning M-2 balance according to the client's current 2013 financial statements. However, I think that would be worse than the prior adjustment entry since the IRS probably flags beginning balances that don't match the prior year tax return.

How do those of you who have this issue handle it?

Thanks.

 

[Lee B]

Since the most likely reason for this increase is either an increase in sales or a decrease in expenses, wouldn't an amended tax return be in order ?

It shouldn't that hard to track down the change.

 

 

[BHoffman]

IMHO:  $1,785 is not a material amount.  If possible, you could track it down in client's books and correct the date of the transaction(s) to 2014 before finishing the 2014 tax return (preferred).  We can assume the 2013 tax return is correct, and the client's 2014 books are wrong due to his violation of the closing period.

Or simply report the amount as 2014 income and finish the tax return now rather than amend the 2013, and then spend the necessary time to find the badly dated transaction(s) in client's books and fix them later.  This would not be my advice if the amount was material.

I wouldn't change the balance sheet or the M-2 or create a prior period adjustment as these options will result in an understatement of income.  This is a timing issue and a relatively small amount, but I would still recognize it as income either in 2013 by amending the return or else in 2014 by adding it to gross revenues.

[David]

I would like to report it as additional income in 2014. However, since the transaction(s) was recorded in 2013 wouldn't I need to amend 2013 so that in the case of an audit the 2013 and 2014 numbers agree with the tax returns?

It would be easier to report the additional income in 2014 with an internal note that explains why the P&L per the tax return doesn't match the P&L in the client's 2014 financial statements.

I'm wondering if that would be acceptable if there were an audit.

Thanks. 

[kcjenkins]

I would like to report it as additional income in 2014. However, since the transaction(s) was recorded in 2013 wouldn't I need to amend 2013 so that in the case of an audit the 2013 and 2014 numbers agree with the tax returns?

It would be easier to report the additional income in 2014 with an internal note that explains why the P&L per the tax return doesn't match the P&L in the client's 2014 financial statements.

I'm wondering if that would be acceptable if there were an audit.

Thanks. 

​Actually, the entry was most likely recorded to 2013 in error, a simple typo, since it was made after the 2013 books were closed.