Prior year IRS audit adjustments

[ILLMAS]

This is not directly my client, but this client was audited for 2006 and 2007 and the IRS found they were not consistant with the life of a couple of assets. IRS proposed an adjustment to reduce depreciation by around 200K, 100K for 2006 and another 100K for 2007, client since now has paid the additional tax + interest. I had the client adjust their depreciation schedule to match the auditors finding, now the retain earnings is going to be off because depreciation and accumulated depreciation have been adjusted. The 2008 tax return has not been prepared yet, because we were waiting for the IRS to finish the prior year audit and for him not to look at 2008. We know the 2008 is next, but my associate is going to appeal it becuase they have now been audited 2004 - 2007. Anyway, I need to think of a way to adjust retain earnings in a way we don't pay taxes again for the depreciation finding. Here is what I am working with:

2006

Retain Earings before audit $500,000

Retain Earings after audit 600,000

Diff 100,000 Change in depreciation and accumulated depreciation

2007

Retain Earings before audit $200,000

Retain Earings after audit 300,000

Diff 100,000 Change in depreciation and accumulated depreciation

2008

Retain Earnings $300,000

Plus audit adjustment 200,000

Ending Retain Earnings 500,000

My question is, how can I adjust retain earnings and not cause additional tax (adjustment for books and tax)?

Any help will be greatly appreciated

Thanks in advance

[BulldogTom]

Are you trying to do this in some software for the books, or just on the tax return?

The retained earnings account is normally adjusted when the year is closed. Your software will do this for you. If you go back and open the year and make the debit to accumulated depreciation and the credit to depreciation expense and re-close the year, the adjustment will be made to retained earnings automatically. Then do the same thing for the next year. Everything will roll forward.

If you are just doing this for the 2008 year on the tax return, ajdust your beginning retained earnings and beginning accumulated depreciation and you are good to go.

I am not sure that this is what you needed. If not, post again and I will try to explain better.

Tom

Lodi, CA

[ILLMAS]

Are you trying to do this in some software for the books, or just on the tax return?

The retained earnings account is normally adjusted when the year is closed. Your software will do this for you. If you go back and open the year and make the debit to accumulated depreciation and the credit to depreciation expense and re-close the year, the adjustment will be made to retained earnings automatically. Then do the same thing for the next year. Everything will roll forward.

If you are just doing this for the 2008 year on the tax return, ajdust your beginning retained earnings and beginning accumulated depreciation and you are good to go.

I am not sure that this is what you needed. If not, post again and I will try to explain better.

Tom

Lodi, CA

Thanks Tom, your entry would solve the problem, however I forgot to mention that I am working with audited financial statements for each year. So making that entry would require to reissue audited F/S, client won't be too happy sending out over 60 copies to different entities per year. The goal is to make the adjustment in 2009 on the books to reflect the correct R/E. On the 2008 tax return I am going to adjust the beginning R/E and I am going to have difference in my depreciation between books and tax, but that would be adjust on the M-1.

So my concern for 2009 is proposing an adjustment to the books to reduce A/D and depreciation by debiting A/D and crediting depreciation, then making another adjustment to debit depreciation and crediting an income account. But by doing this I over state the income by 200k, unless I create an opening equity account credit it instead of the income account, does this sound correct?

Thanks

[BulldogTom]

<<So my concern for 2009 is proposing an adjustment to the books to reduce A/D and depreciation by debiting A/D and crediting depreciation, then making another adjustment to debit depreciation and crediting an income account. But by doing this I over state the income by 200k, unless I create an opening equity account credit it instead of the income account, does this sound correct?>>>

NO NO NO

You need to make one entry (well, two if you count the income tax liability). On 1/1/09 adjust ONLY the Retained Earnings and the Accumulated Depreciation. Debit Accum. Deprec. and Credit Retained Earnings. Explain it as a prior year adjustment. Do not touch depreciation expense or income. Those accounts were not affected in 2009. By hitting retained earnings, you are accounting for the additional income already.

When the CPA audits the financial statements this year, they will go back and restate the prior year(s) and footnote the clients activity.

My next question is why the CPA is not doing this? If they are aware of the audit and they know there is a material change to the audited financial statements they put out, I would think they would be providing the accounting entries. Something sounds like there is an issue with the financial audit. Just speculating, but it don't add up to me.

Tom

Lodi, CA

[ILLMAS]

Tom I appreciate your help, I am working with the CPA, however he is not to familiar with the clients accounting software, we previously had attempted to credit retained earnings but no budge, system does not allow that to prevent any manipulation, that is why we were trying to go around retained earnings. But now it's been resolved, I spoke with the accounting system engineer and he changed the security temporary, so we are ok now. The CPA is going to disclose the change in the 2009 audit, we were waiting for the IRS auditor to finish before the 2008 audit was completed, but this client is regulated by different states, banks etc... and needed the audited financial statments by the end of the 1st quarter of every year. The IRS audit started in December 2008 and didn't finish to July 2009.

Thanks

[BulldogTom]

That makes more sense. Many accounting software packages lock out postings to retained earnings. But usually, if they are locking out retained earnings, they will provide for opening prior periods for audit adjustments (the software I work with does). I am glad you got it all worked out.

Tom

Lodi, CA