tax preparation – is this how it's being done out there?
February 16, 2017 at 1:04 pm #1479348
I am reviewing last year S-Corp tax return of a client to prepare for this year return. This is a single member S-Corp, taxpayer own 100% of stock. Does this look right to you?
the owner was not on payroll of this S-Corp, thus no W-2, this business is in servicing industry, thus, no 1125A needed
Questionable items are listed below
1120S gross income —————- 800k
deduction on supplies only ————– 300k
on 1120S line 14 Depreciation ———————– $0
on 1120S line 7 Compensation of officers ——– $20,000
this 20,000 flowed to 1040 personal tax line 17 Rental real estate,royalties,partnerships,S corporations. No schedule SE on 1040
on 1120S line 21 Ordinary business income ———– $20861
this $20861 could not be found on 1040 personal tax return
1120S schedule L balance sheet
Cash ————- Beginning balance $18000 Ending balance $ 15000
Loan from shareholders ——— Beginning balance $20000 Ending balance $20861
Retained earnings ————– Beginning balance $ -2000 Ending balance $ -5861
Does this look right? It appears whoever prepared this return had no idea was going on and just fudge the number to make it work.
I have reasonable of tax knowledge but I do not have a lot of experience preparing Corporation tax returns. It seems like at least some depreciable assets were 100% deducted as supplies. Income on personal tax return was understated for $20861, and numbers were pulled from thin air to make 1120S schedule L balance…. Could someone confirm this?
I am new to tax preparation business, is this how it's being done out there? just fudge the numbers to create lowest tax liability, and hope the IRS will not audit, even if they do, just pay penalty and interest or give the client “we will review and get back to you” until the clients tired of chasing after you and pay the IRS.February 16, 2017 at 1:15 pm #1479357
1. If there is officer compensation on line 7 than a W-2 has to be issued. Distributions aren't expenses and they aren't reported under officer compensation. It then gets reported as wage income on the 1040 and not line 17.
2. Not sure what the type of business is, but it's hard for me to imagine it has 800K in revenue and 0 depreciation. My guess is the expensed all supplies and repairs and didn't capitalize anything.
3. Why does the ordinary business income exactly match the loans from shareholders?
4. Ordinary business income from S-Corp flows through to Schedule E on 1040 as pass-through income.
5. Why the 3,000 dollar decrease in RE? My guess is there was an adjustment made to RE to reconcile RE to a prior year. You need to review that and probably adjust it to an expense/income account(s).
6. Where are the other expenses for the business? It looks like the profit should be near 500K and not 20,861…
Need much more information, but one thing is clear, whoever prepared the return obviously has no idea what he/she is doing.February 16, 2017 at 1:39 pm #1479370
thank you tcheney3 for second opinion, I thought this preparer had an “inside knowledge” from years of experience. He has RTRP and Tax professional on his business card. Tcheney3, I totally agree with your questions and confusion. For question 6, I didn't list all deductions to arrive at NI, just questionable ones. After reviewing this tax return, I told this client to go back to this preparer as he would OWE and pay back a lot filing his return with me. Many of business owner clients just packed up and ran after I gave them an estimate. I just feel this is the way it is out there – CPA and EA holders get less business than PTIN holders in term of tax preparation.February 16, 2017 at 1:59 pm #1479388
Ryan – Just Another DollarParticipant
Yikes, it's stories like this that caused me to find a job with a firm rather than start out on my own. I want to be very confident in what I'm doing before I do a hack-job on someone's return. I've found the general public doesn't understand that their tax preparer isn't the one who will be paying back all the taxes and penalties (as long as they asked all the right questions before filing). I've seen some sketchy stuff even working for a reputable firm, but I think our clients understand that it's cheaper in the long run to pay a firm who knows what they're doing to file their taxes correctly.February 16, 2017 at 3:13 pm #1479456
“I want to be very confident in what I’m doing before I do a hack-job on someone’s return”
Speaking of confident, I was not confident to tell this client that he would have to pay back 20k+ for this year tax return while he received 15k refund last year for the same gross income.
“I’ve found the general public doesn’t understand that their tax preparer isn’t the one who will be paying back all the taxes and penalties (as long as they asked all the right questions before filing).”
Ha ha, you got that right. When I told him that if he ever get audit, this preparer will have to pay only interest and penalty at most and he will pay all unpaid tax liability. I could literally see his eyes got smaller due to surprise.
However, the fact is that IRS audit rate is currently less than 1% and it appears to me that most preparers are using this to their advantages. As long as the preparers are not outright lying; claiming American Opportunity credit on a 5 years old, claiming 10 dependents for EIC, the IRS is mostly likely to leave them alone.February 16, 2017 at 4:25 pm #1479514
I would be interested to see what happens with this S corp. I think it will be hard to argue that $20,000 is “reasonable wages” for the owner of this company. Definitely looks like somebody is trying to skirt their way around paying SE income on the earnings…tisk, tisk. This seems minor to the fact that the return is an abomination. Smart person to not accept this guy or girl as a client.February 17, 2017 at 9:07 am #1480003
Unfortunately, lots of tax return preparers (including CPAs) don't really have the knowledge and experience to prepare entity returns.
BTW, there are a variety of ways to view this… but one way is to say “hey lots of opportunity for me as a CPA if I learn this stuff well…”
FWIW, the opportunities in tax are not to do 1040s for regular folk… the opportunities are to do the complicated stuff that amateurs and dabblers don't do right.February 17, 2017 at 11:07 am #1480171
“FWIW, the opportunities in tax are not to do 1040s for regular folk… the opportunities are to do the complicated stuff that amateurs and dabblers don’t do right.”
This I agree. But the question is how to do the returns right and stop the clients from leaving? the fact that they are not staying around paying thousands of tax liability while they get a big refund filing elsewhere and I am pretty sure that “elsewhere” place isn't worry about getting CPA/EA license suspended since they have none.February 17, 2017 at 11:36 am #1480191
@seattlecpa you seem to be a very successful CPA. How would you treat this potential client? I agree with @forgottenone that it is tough to compete against paid preparers that hack up tax returns and get taxpayers huge refunds. I don't know if it is worth eating the billable hours if the taxpayer isn't worried about the consequences of being audited.February 17, 2017 at 6:07 pm #1489138
How would you treat this potential client? I agree with @forgottenone that it is tough to compete against paid preparers that hack up tax returns and get taxpayers huge refunds.
This is a great set of questions and issues, so let me share some thoughts.
1. There is always going to be that once-in-a-blue-moon client who pushes their CPA to do unethical or illegal stuff. What do you do with those folks? You fire them. Plain and simple. Seriously, good CPAS are in such short supply that they can't even serve all the good clients. There is no reason to put up with bad clients.
2. You aren't competing on the basis of price. You want to get that out of your head. Leave that thin-margin, sweat-shop segment of the market to the retail chains or the guys working out of their basements. You are competing either on the basis of a higher quality product… or on the basis a specialized solution.
3. Lots of good clever, “more-likely-than-not-to-prevail” ways exist to save money for taxpayers where you aren't breaking the law. You want to learn how to do that stuff. E.g., we've done a lot of work with Software-as-a-service firms so they can take the Sec. 199 deduction and get gigantic refunds (see link below.) The low-quality guys can't do that… They simply don't have the expertise or the tools or the accounting skills.
4. Keep in mind that no client will respect you for helping them break the law or skirt the rules or let yourself be pushed around.
Hope that helps. If there's a background theme to the above, it's that running a successful CPA firm is about more than the technical stuff. You've got management issues, client service issues, marketing, etc., etc., You've got to do most of that stuff right in order to make a “partner-level” income.February 17, 2017 at 8:53 pm #1491834
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