Significant errors in the tax return of the acquired business

[Naveen Mohan from New York]

I recently purchased a small accounting practice because the owner said that he was retiring. I am finding significant preparer errors which appears to be either lack of thouroghness in the preparation of return, lack of paying attention to details or forgetfulness. Half the errors are in favor of clients (Deduction given to clients who were not entitled to it, thus understating the tax due,  half were missing clients deductions so client ended up paying extra tax.)a 

He is 76 years old and he has been in town practicing for over 20 years. It is a small town and he had a good reputation. He is telling me that he is suffering from short-term memory loss. While I sympathize with his medical condition My problem is how do I deal with the clients when 2-3 years down the line they will start getting balance due notices or get audited. giving him the returnback to him to amend is not an option because I don't think he is competent to do it any longer.

I don't mind doing the work, I am just worried what to say to those clients.

Thanks for any advice you can give me in this matter.

 

Naveen Mohan 

[Abby Normal]

It's kind of a delicate situation. You don't want a blast email/letter saying the old preparer made significant errors. The clients might think you're doing it wrong.

I would first look at materiality and then handle the more significant errors individually when you meet with the client. Explain what you think the error was and ask the client if they want you to amend the return. You can't make them amend the return, and some preparers would fire clients who refuse to amend, but the ones who are getting refunds will see you as a hero.

I actually had a somewhat similar situation and got a fair amount of amended work out of it, and it impressed the new clients that I knew what I was doing and I was thorough.

[RitaB]

Totally agree with Abby.  I normally do.  (See what I did there?)

For sure, you want to be respectful of previous preparer; nobody wins trying to outshine somebody else.  This will be a great opportunity for you, and I'll betcha many of the clients won't be surprised at the errors.  Be gracious, and yes, it will seem you are spending twice as much time as you should.  Just part of it; they're gonna love you, Naveen.

[Catherine]

9 minutes ago, RitaB said:

(See what I did there?)

Yes, dear!

As for Naveen - I agree with Abby and RitaB.  Be respectful, make it sound like this is not usual but you've seen one or two, not surprising at his age, good for him for recognizing and stopping, but you're one of the "lucky" few and (for those who owe) we should fix this else you may well get a letter.   Of course those owed refunds will be eager to amend.  They will all think you walk on water, the refund people will be pleased as punch, the tax-owed folks will be glad to avoid the nasty-gram from Uncle Sam's tax boys, and no one will disparage the old preparer.

[Pacun]

Are you liable for the mistakes of the previous preparer if you "purchase" a business?

I ask people to bring their previous year tax return just to glance at it. I don't wear my auditor hat when looking at those returns. All I tell my clients is, "you have hired me to do your taxes for this year. I will do it right, I don't audit your previous years return and I will not interview regarding the taxes you have already prepared."

I am glad you have had time to interview all those clients and therefore you have made a determination that those expenses were not for personal use or that didn't qualify last year for those credits. I hope you had expressed written authorization to contact those clients from the previous preparer in order to avoid him to be sued for sharing their files with you.

I wish you luck and as Jennin or Mr. Pencil used to say "I would pay 0 for each client if I purchase a tax business from another preparer.

[RitaB]

1 hour ago, Pacun said:

I ask people to bring their previous year tax return just to glance at it. I don't wear my auditor hat when looking at those returns. All I tell my clients is, "you have hired me to do your taxes for this year. I will do it right, I don't audit your previous years return and I will not interview regarding the taxes you have already prepared."

Two kinds of people, I guess.  I pick that thing apart.  No just glancing for me.  That's no fun.  CSI over here. 

[Gail in Virginia]

I usually at least look to see if I can tell what they were charged for tax preparation the year before.  Just for information, not necessarily to decide what to charge this year. 

[RitaB]

1 hour ago, Gail in Virginia said:

I usually at least look to see if I can tell what they were charged for tax preparation the year before.  Just for information, not necessarily to decide what to charge this year. 

Me, too!

.

[OldJack]

It is not your obligation to advise the clients of your opinion of previous errors on previous tax years.  Therefore it's not your obligation to amend any previous years unless the client requests it.  My advice would be to deal with any problems if and when they occur.  You make waves in a small town and you lose. 

[Richcpaman]

Naveen:

When I bought a practice a few years back, I had to teach the new employee how to use the new tax software.

I had her reinput the returns into the new software.  During this process, a couple of errors were found.  In one case, about a $12k refund to one client.  (PAL Issue and incorrect prior year coding...)

When you find an issue with one of your new clients, you just let them know what you found and how you found it.  We would have never found the above listed error except by redoing the return completely.  Offer to amend for free, welcome to the NEW firm for example.  Try not to smear the former preparer to bad. 

I was pretty explicit with any clients I spoke about with issues that I found.  "I do not think I would like someone to go thru *each* of my returns from scratch like I just did to former preparers returns, which I used as a training exercise, and then find various issues."

I believe I have fairly good protocols to make sure that the right numbers get into the right places.  But we ain't perfect.

Rich

 

[DANRVAN]

On ‎12‎/‎07‎/‎2016 at 10:41 AM, Naveen Mohan from New York said:

I don't mind doing the work, I am just worried what to say to those clients.

Your clients need to know if they are due a refund or face a potential tax liability. You are looking out for the interest of your new clients. If you are straight forward with them and sensitive to the situation (which you obviously are),  they will respect you for it.

[Pacun]

On ‎12‎/‎12‎/‎2016 at 6:13 PM, DANRVAN said:

Your clients need to know if they are due a refund or face a potential tax liability. You are looking out for the interest of your new clients. If you are straight forward with them and sensitive to the situation (which you obviously are),  they will respect you for it.

"your clients"??? they are not her clients. She doesn't know if they are coming back next year. As a matter of fact, I think, they might not even have signed a release form for the original poster to know about their tax situation. As I said before, I normally don't audit tax returns because 100% of my clients hire me to prepare their taxes not to audit previous years returns. In any event, I am just an EA, I am not an auditor or CPA.

[Lion EA]

If you look at prior year returns for a new client (I require them) you have a Circular 230 responsibility to inform your new client of errors and of the consequences of amending or not amending.  You do not have to amend.  The client does not have to file an amendment.  (Depending on the errors &/or the potential client's attitude, I might or might not accept a new client who does not amend.)  And, yes, you can charge for amendments.  You do not have to audit (as an EA, I can NOT audit).  You do have to notify if you know.  Our standard is Know or Should Have Known.

[RitaB]

11 hours ago, Pacun said:

"your clients"??? they are not her clients. She doesn't know if they are coming back next year.

 

On ‎12‎/‎7‎/‎2016 at 0:41 PM, Naveen Mohan from New York said:

My problem is how do I deal with the clients when 2-3 years down the line they will start getting balance due notices or get audited. giving him the return back to him to amend is not an option because I don't think he is competent to do it any longer.

I don't mind doing the work, I am just worried what to say to those clients.

It seemed obvious to me that Naveen is talking about people who will be his clients.  The question of "how do I deal with the clients" when they get letters presupposes that the clients are going to be bringing the letters to Naveen because he is their preparer now.  I don't think he is just calling all these people before they come in to see him.  He mentions that he can't "give back" the returns to the seemingly incompetent and now retired preparer.  My take on this is that Naveen is asking for our advice about what to do when these folks come in for tax prep in a few weeks.  Tell them about suspected errors or no?  I do believe Naveen has a duty to discuss suspected errors, and sure, he may find out things are not as dire as he thinks.

[Terry D EA]

Lion I do agree with your statement regarding informing the client of the errors and consequences of amending or not amending. While we may not be required to amend a return we didn't prepare, we should at all costs advise the client of their responsibility to file an accurate tax return. The client it ultimately responsible for every line on the tax return. I do this out of respect for my clients as well as my circular 230 responsibility and do document to CYA at all times. I have never acquired another practice so I may be talking out of line here. But... I would assume that the transaction would have a required notification to the current clients of the transfer of their private and personal information to another. It would be interesting to know whether that would be in the form of a request that would allow the client to decline and seek other services. All of our private information is either sold by banks through mortgage buy outs and other transactions. Do we get a choice then??? Just my 2 cents worth.

[DANRVAN]

On ‎12‎/‎15‎/‎2016 at 8:33 PM, Pacun said:

 I normally don't audit tax returns because 100% of my clients hire me to prepare their taxes not to audit previous years returns.

I don't audit my new clients, but try to review their open year tax returns as part of my service to them.  It gives me a better understanding of their situation and sometimes end up amending for a refund, most commonly in business returns. Omitted expenses are one example. If you put three year's of schedule C's side by side you can quickly see patterns and obvious omissions. 

Several years ago I amended a return for a rancher from Idaho who sold out and bought a smaller place nearby. The CPA in Idaho incorrectly calculated a multi asset 1031. He also failed to take section 179 in the year the client was in a high tax bracket due to the sale of his ranch.  My guess was the CPA did not know that 1245 gains count as business income for the section 179 limits.

He also overlooked the fact the client had omitted some obvious expenses on his quick books and their were miles of fence on the new property to write off. The 1040X netted a refund of $20,000 plus. Client had no problem paying me to "audit" his return.

 

 

 

 

 

[Catherine]

27 minutes ago, DANRVAN said:

I normally don't audit tax returns because 100% of my clients hire me to prepare their taxes not to audit previous years returns.

(Snipped quote actually from Pacun) I don't audit but I *always* look over new clients' prior-year returns.  How else do you find state tax owed and paid for the current Sch a, capital loss carryforward amounts, sometimes charity carryforward amounts, and other items?  If I see something egregious - or even if the return I do looks vastly different from the prior year's results, I look more deeply.  If only to reassure myself that I have not done a stupid!

[Pacun]

To file an accurate tax return, you have to interview your client and ask all the questions and see if they qualify for any credit or to deduct an expense. I have hard times getting answers for the year at hand (I guess I am the only one). Imagine how hard it will be to get the answers from the "open years".  In order for me to accurate decide if the preparer made a mistake in previous years, I will have to ask all the questions and after the interview, I will see if amending is in order. 

I have had people telling me, "but my previous preparer gave that credit last year"... my answer is "I am not preparing your previous year's taxes, I am preparing this year's taxes and this year, based on what you have told and the documents you have shown me, you don't qualify for the credit". I also tell them... "if you want me check the return to see if you qualified for the credit your requested on the previous year, I will have to interview you again and check all the documents... you will have to pay me X amount for that and if we have to amend, this is my fee.  If they accept my fees, I interview them and ask for documentation. I also explain to them that just because they qualify one year for a credit, it doesn't mean that they qualify the following year. A lot of people ask for their papers back and I am very happy to return their documents and wish them luck. Some of them offer me to pay for my time and I say "don't worry about it... but if you decide to come back this year or next year, please do so and at that point I will prepare your taxes and charge you"

One time, I was nosy and I told a client "your previous preparer didn't file married filing separate on the same return for Washington DC and you lost $300 on your refund". Client told me let's amend. Client received his money and about two month later a bill for the same amount. I went to DC and they couldn't find the amended return. We filed again the amended return again and the client got again a bill. I went back to the DC office about 4 times and finally they told me "the client is now married and they have a profile as married on our system, but the main taxpayer on the joint return was single before and the first amended return went to his other profile and now we have check every profile to make sure everything is corrected. The client was taking to collection, I continued going back to the DC office for about 4 more times and finally I lost a client.

Now, when I get someone else's work I tell my client, I don't what your previous preparer's put on your return and why he did it because I was not there when he interviewed you and I didn't see all the documents you presented.

When I change doctors, the new doctor examines me and gives me a prescription based on my current situation. He never talks bad about my previous doctor and questions why he prescribed that medicine. I guess they have been in school more time than me and that's why they learn not to criticize other members of the profession when they get a new client.

 

[Pacun]

On ‎12‎/‎16‎/‎2016 at 6:59 PM, Terry D said:

Lion I do agree with your statement regarding informing the client of the errors and consequences of amending or not amending. While we may not be required to amend a return we didn't prepare, we should at all costs advise the client of their responsibility to file an accurate tax return. The client it ultimately responsible for every line on the tax return. I do this out of respect for my clients as well as my circular 230 responsibility and do document to CYA at all times. I have never acquired another practice so I may be talking out of line here. But... I would assume that the transaction would have a required notification to the current clients of the transfer of their private and personal information to another. It would be interesting to know whether that would be in the form of a request that would allow the client to decline and seek other services. All of our private information is either sold by banks through mortgage buy outs and other transactions. Do we get a choice then??? Just my 2 cents worth.

 

I like your comparison with the bank. There is a big difference... when you sign with a bank, I guarantee you that you sign a document that if they bank sell your loan or if the bank is sold, you authorize them to use your info as they deem necessary.

Now that brings another good question... do you have an engagement letter for your simple 1040 clients? Does your engagement letter state that you will be checking your open years for errors? Does your engagement letter states that if you sell your practice the new owner will get all your information and will be digging to your tax returns for mistake that you might have made?  I just curious.

[Gail in Virginia]

Pacun, I don't think any of us recommend talking bad about the previous preparer.   But anyone, no matter how knowledgeable or careful can make a mistake, and the best of us are preparing returns based on the information that we have at the time.  I don't check the prior year's return for errors as such, but I do like to review the prior year return for information purposes.  And if I see something on the prior year return that does not fit with what I understand to be the case on the current year return, I feel that I have an obligation to ask questions.  And in the course of asking those questions, I sometimes determine that a mistake was made on a previous return. Once I know that, I feel obligated to explain the error to the client and let them decide what they want to do from that point.

[RitaB]

Gail is absolutely correct.  Nobody here is advocating trying to make another preparer look bad. 

And Pacun, Catherine raised an excellent point.  My new clients with loss carryovers frequently don't even know they have them.  Let alone how much.    Forget getting depreciations details out of client.  It's impossible.  Are you not concerned that you are missing deductions?

[Richcpaman]

Just had a new client drop off their return from the prior preparer.  Who had been paid $100 to prepare a return with a $260k gross Schedule C (truck driver) and Avon Sch C for the spouse.  Office in Home, Sch A and EITC!

There is no depreciation for the over the road truck, but $145k in truck expenses.   The Sch C's netted out to about $14k.

The Office in home form?  6.25% use of home, but all the entries went into the "Direct Expense" column and not the "Indirect Expense".  That generated a 12k OIH deduction, instead of the actual $750.

Between the mortgage, the MIP and the RE Taxes, the client paid about $23k to just live in the house.  Good thing they got over $5k back in EITC.  Had to buy the food for the two kiddos somehow..

During the initial interview, the said they needed $10-12K a month in cash to live their "lifestyle".   And now, the old return....

Sheesh.

Rich

 

 

[Pacun]

OK. These people will go from receiving 5K to paying more than 10K, correct? Do you really think they will stay with you or they will go back to the old preparer because they have been doing it the same way for 5 years and they never had a problem?

When I see issues like this, I suggest them to go back to their preparer to amend because I am busy. Or I suggest them in May or when the IRS send them a letter, whichever happens first. I explained to them that in order to amend, I have to recreate the form exactly the way it is and they make my chopping.

[SaraEA]

You want them to go back to their old preparer!  I wouldn't touch this one.  First anyone who needs $10k a month for their lifestyle ain't eligible for EITC.  Second, a return like this is worth $800-$1k, but they're going to expect to pay $100.  Not worth it.

Long-distance truckers do have a lot of expenses.  The rigs depreciate over 3 years only, so that may be why you're not seeing depreciation.  Fuel is of course a huge expense, plus fuel surcharges and over-the-road taxes.  Tires alone can be a mortgage payment.  My trucker clients have something on almost every line of Sch C, and for this I charge them.  Heck, I wouldn't even do an Avon Sch C for $100.

[RitaB]

18 hours ago, Richcpaman said:

...The Sch C's netted out to about $14k....

Between the mortgage, the MIP and the RE Taxes, the client paid about $23k to just live in the house.  Good thing they got over $5k back in EITC.  Had to buy the food for the two kiddos somehow...

During the initial interview, the said they needed $10-12K a month in cash to live their "lifestyle".  

Rich (can I call you Rich?) is one of the most knowledgeable posters on this board, and I'm sure he thought of all the headaches that may come up with these [soon to be] taxpayers before he posted.  I also think he's had the "how the hell could you live off $14,000 and the windfall refundable credits" talk with them, since they admitted they spend $120,000 -$144,000 a year on personal expenses.  And since there is no mention of living off savings, credit, gifts, or personal savings, I'm thinking these folks made, well, six figures. 

Unless the tax pro retired, died, became incarcerated, or the [soon to be] taxpayers moved, they either fired the tax pro or the tax pro fired THEM.  That's what I'm coming up with.

I suspect the [soon to be] taxpayers are at LEAST as much to blame for the inaccurate returns as the tax pro.  I also think they knew their last tax return was horrifically incorrect before they came to Rich, and they're ready to get off the public dole and pay their taxes.  They spend $120,000 a year and can cough up my tax prep fee or Rich's tax prep fee for an accurate return without whining, too. 

This is a success story!  One fraudulent EITC that won't happen in 2017.  That's one down.  Good for you, Rich, and good for the rest of us people paying taxes.