Installment Note: Big Problem-Need Help

[Bird Legs]

Client sold property, installment note, in 1999. Everything went fine, I thought, until I called him this afternoon asking if he received the regular monthly payments. Client said
yes except in August,2005 when they paid off the note. Asked client what the payoff amount was, including interest. Client said $4510. Problem, my amortization schedule showed
a principal balance of $12,848. When I asked the client why the difference in the principal
balance, he replied that an additional payment of $7,246. was made in Nov. 2003.
YOU DID NOT TELL ME ABOUT THIS, I responded. Said the reason was because he
did not actually receive the money. The person just paid off a note at the bank for me.
Question: Is there a way I can make all adjustments on the 2005 return or will I need to
amend the 2003 & 2004 returns? Additional complication is client and his wife have
been separated since 2004 and rarely speak to each other.

Principal payments reported through Dec. 2004 $9,907. Correct Amount $17,905.

Interest payments reported through Dec. 2004 $9,257. Correct Amount $ 7,786.
HELP; Thanks everyone.

[veritas]

Sorry but you need to amend 2003 & 2004. The good news is you can finish 2005 correctly and after 4-17 amend the two tax returns and charge them for it.

[Black Bart]

I agree

you can't change '03 and '04 in '05. You have to figure '05 correctly as if priors had been done right. But...if you'd rather not fool with priors because of the marital complication, etc,.then that may be the end of it. Your responsibility is to inform the client that there's been an understatement of income in '03 and '04. He'll most likely ask you what it's going to cost and you can tell him--$2K or whatever plus interest, penalties, and your 1040X fees. There's a 50-50 chance he'll say something to the effect of "I'll think it over and get back to you" which means, of course, that he's not going to do it. You've done your duty by giving him the facts--you don't have the power to make him amend. After he's been advised what he needs to do, it's up to him.