Cash Basis question

[DMICPA]

Have a cash basis client that seems to have a never ending December 31 check register. Continued to write checks way in excess of the checkbook balance.

1. Since the client now has a whopping unusable loss, can I add back checks written dated 12/31 but never mailed out? That way the overdraft goes away and the size of the loss is decreased?

Since income is based on constructive receipt, would checks written but not mailed until later in 2009 be eligible to be added back to the check book balance and deducted in 2009?

On cash basis, an overdraft is not really supossed to be deducted in the first place. We are talking over $200,000 overdraft here.

[BHoffman]

Have a cash basis client that seems to have a never ending December 31 check register. Continued to write checks way in excess of the checkbook balance.

1. Since the client now has a whopping unusable loss, can I add back checks written dated 12/31 but never mailed out? That way the overdraft goes away and the size of the loss is decreased?

Since income is based on constructive receipt, would checks written but not mailed until later in 2009 be eligible to be added back to the check book balance and deducted in 2009?

On cash basis, an overdraft is not really supossed to be deducted in the first place. We are talking over $200,000 overdraft here.

Oh, what a tangled web we weave....

IMHO: The client should be told to correctly date the checks and resubmit financial statements to you. The unmailed checks would be dated and deducted in 2009. What accounting software do they use? Do you prepare the monthly accounting?

[Snaggletooth]

Due Diligence

I'm not wild about auditing client records, but I believe a situation like this calls for Due Diligence.

I would look for:

1) Checks out-of-sequence. If I encountered a check # written in 2009, I would not
allow a deduction for any checks written with a check # greater than this.
2) A "block" of sequenced checks obviously missing such that 2009 checks could
be written and not give rise to the situation described in 1) above.

As repulsive as it sounds, I believe it is an allowable practice to write checks and create an overdraft. The deduction is between the client and the IRS. The overdraft is between the client and his bank. Also, I certainly would not want to use financial statements that showed a $200,000 overdraft.

[DMICPA]

Cash basis tangled web

The client uses QB Pro. I have the backup installed on my computer. The checks in question are all in sequence and the last three written would be the ones the date would be changed on to reflect when they were mailed. No gap in sequences, just aggressive check writing.

I may have the client send me a letter telling me that the certain checks in questions were not made or acted upon until January and that the writing of the checks was a convenience for the taxpayer and not to be used as a tax deduction for 2008.