Corp Return - Opening Bal Sheet Numbers

[JohnH]

Maybe this will come to me while I'm posting, but I'm trying to decide what figures to use for the opening balance sheet amounts for a corp which was audited in 2008. The original audit was for 2005, but it expanded into 2006 & 2007 (don't ask - it was ugly). Audit was completed in May 2009, well after the 2007 return had been filed

So do I use the 2007 ending figures per the original return for the opening balance sheet on the 2008 return and make all adjustments through retained earnings adjustments on the M1 & M2 schedules, or do I use the balance sheet as it would look after the 2007 audit adjustments as my opening balance sheet for 2008?

At the end of the day it really doesn't matter, but I'm wondering if there's a rule about this.

[ChEAr$]

I would use the correct figures, no matter what they are.

The instructions somewhere, I think, say to explain any differences between last figures used on a return and beginning figures on present return.
Looks like a long statement is required.

[Gretel]

Harlan, Do you think instead of providing a long statement, a reference to the audit results would suffice?

[Uncle Sam]

Corp Return

So long as the audit is winding down, why not ask the auditor the more appropriate way to update the audited changes on the current return?

[JohnH]

I thought about asking the auditor at the time the audit was winding down, but we were engaged in some other more pressing issues at the time (penalty negotiations).

I never could find anything definite, although Harlan's idea made the most sense. I thought about a statement the the effect that "You guys couldn't be happy with what my poor client originally paid so you hassled him for his last dollar, and now you left it to me to clean up the mess." Somehow that just didn't seem to be a productive thing to do.

I decided to just start with the numbers which resulted after the audit adustment, but with no statement. They won't match the prior return as originally filed, but they will tie back to the post-audit adjustments if IRS cares to ask. It is interesting that the auditor's report only addresses the income/expense items, so I assume they really don't care very much about the balance sheet unless another audit pops up.

I began thinking about how we're told to use the most recent numbers if there are multiple changes to a return and you're about to amend again, so I just followed that general rule, even though it is designed to apply to income/deductions rather than a balance sheet.

I do intend to keep researching this, and I'll post anything I find. If anyone else runs across anything in writing, I'd appreciate knowing for future reference.

[ChEAr$]

According to 1120 instructions, the balance sheet from opening to closing balances should agree with comany's books and not dependent on any "tax" balance sheets.

Therefore if all the action of the auditor took place in, say 2008, the balance sheet, schedule L beginning will be same as ending on 2007. Any adjustments by auditor resulting in
different retained earnings will be shown in M2.

So I retract my statement about showing different begining figurres and attaching a statement. Everything happens, or happened, between Jan 1st and Dec 31 anyway.

I must have been thinking about differences in beginning inventories.

[Corduroy Frog]

Book Balances

The Schedule L Balance Sheet should be "Book" numbers.

Invading the world of GAAP, the question would revolve around whether the audit adjustments were considered "Prior Period Adjustments" on the books. Note: under GAAP, just any old adjustment pertaining to past years does not qualify as a Prior Period Adjustment. In particular, it cannot be an error correction, or something that the company wishes to "hide" in prior periods. It has to be substantial and meet several other qualifications. Any CPA who posts should be familiar with the qualifications.

Additionally, I believe a Prior Period Adjustment must be so prodigious that it requires "book" financials from the prior year to be re-issued. Not entirely sure of this, but I think at one point this was the case.

Assuming that the corporation does not report a "Prior Period Adjustment" for these audit changes, the balance sheet should be the same to begin 2008 as to end 2007. If this is the case, schedule M-1 should be "loaded up" with all manner of adjustments.

My two cents.

[JohnH]

Thanks to all of you for this continued input. Maybe a little more of an explanation is in order.

This is a closely-held corp with two shareholders - one is actively running the corp and the other is simply a parent who invested some seed money years ago. The corp doesn't provide financial statements to outside parties for any reason - all accounting is done strictly to meet tax reporting requirements.

A glaring issue in the audit was the matter of some personal withdrawals from the corp by the active shareholder which had been treated as "Shareholder Loans" over the past 6-7 years. The loans had been booked as such and interest was being accrued by reissuing and updating a promissory note each year.

Naturally the auditor disagreed with the treatment and required that a large part of the amount booked should have been treated as constructive dividends. After a significant amount of back & forth negotiating, the final numbers for all years were agreed upon in May, 2009. Basically the auditor accepted everything through 2005 but made a large adjustment for the years which remained open at the time - 2006 & 2007. Consequently, we had an adjustment to "Shareholder Loans" and a corresponding adjustment to Retained Earnings for the amount of the constructive dividends for those two years.

There were some other adjustments as well, but this was the major issue I was dealing with. We know that prior-period adjustments are almost always netted through Retained Earnings, but the issue for me continues to be how much disclosure is required by the IRS and where should it show up. Looks like the M-1 is getting its own attachment schedule for this client.

[JG EA]

Looks like the M-1 is getting its own attachment schedule for this client.

I agree. Books are books and should go on the tax return balance sheet as they are. There are exceptions. I've changed the balance sheet to match the adjustments that the TP's will make after everything is done. I've changed the balance sheet when the taxpayer has something totallly unrelated to what a balance sheet should be on there. e.g. Computer parts - Expense items in and out because they wanted a list of them everytime they printed the balance sheet. Odd things like that. But basically if it is on the Balance Sheet that's what goes on the return.

[JohnH]

Funny how unrelated issues can pop up when least expected. After having run through this very interesting and helpful discussion, I ran across something this morning I'd never noticed before.

I use ATX for all my tax prep, and was making some entries on the ATX worksheet which feeds into page 4 of the 1120S. All the way down at the bottom of the screen is a section entitled "Balance Sheet Discrepancy Statement". It's just a free-text space which prints a separate attachment when data is entered on it. I guess you just can't make it more clear that that. Obviously, ATX put it there because that's what's expected to be filled in and attached to the return when there's a discrepancy. I guess I'd never scrolled down that far, or else hadn't done so when a balance sheet discrepanacy was on my mind.

Sometimes I run across something like this and I begin to question how many other things I may be missing. One just can't get too much continuing ed, and frequent visits to this forum are well worth the investment in time. Iron definitely does sharpen iron.