S-Corp, Messed Up Books

[geekgirldany]

I have a new client that has a pretty messed up set of books and S-Corp returns.

I have tax years 2006-2010 with 2008 return missing. The Schedule L/Balance Sheet is only filled out on 2006 & 2007 returns. The AAA account is showing a negative balance each year with distributions withdrawn on Schedule M-3 but not on Page 3. Return is marked Accrual basis but I am sure bookkeeping was done on Cash Basis.

His QuickBooks file is not even close to what was reported on the tax return. Anyone who has dealt with QBs knows how messed up it can get.
Previous preparer did his bookkeeping. She would take his bank statements and create the P&L in a separate QBs file. I assume she got some info off his QBs file as she has A/P, A/R, and other accounts listed on the tax return balance sheet.

Client said these are the only returns he has. Is there anyway I could get transcripts from the IRS starting from 1994? I really feel like I need to start at the beginning.

I have my doubts as to the Retained Earnings being negative as they were taking distributions each year. There had to be some RE or they were running the company off credit cards. I can not really tell. Since AAA was negative the distributions should not even be showing except on their personal returns as taxable capital gains. Which it is not.

This is probably one of the more difficult returns I have had in that everything is so off. I would appreciate any help.

Thank you
D

[JohnH]

You could always try and construct a current-year balance sheet based on known assets & liabilities and then work backward from there. At least by doing that first step, you might be ale to determine the magnitude of the problem. It might be that they just stripped out the earnings each year and their basis is pretty close to zero. If you could determine that with reasonable certainty, then trying to reconcile those prior years might be a waste of time.

If you are missing a prior year return and also working with a QB mess, at some point you're going to have to make some assumptions. May as well see at the outset whether some simple assumptions can get you close to where you are going to wind up anyhow.

[JG EA]

This may help with some of your problem. Unless the S Corp was a C, you don't need to do the AAA account. It isn't necessary. On your program somewhere you can check a box to leave it off.

Also, if the shareholders take distributions and the payroll is low and the credit card balance keeps going up then you could have negative RE.

What are the major differences with the P&L and the tax return? Are the books cash and the return accrual? That could account for the preparer changes of the tax return.

I got a return once where the AAA was incomprehensible, but the tax return looked fine, the depreciation schedule matched the assets the S Corp had. After many hours I concluded just take the AAA off and move ahead.

[outwest]

I'm with John on this one.

Get note balances, credit card balances from the banks, reconcile the checking, etc. And create a balance sheet. As far as I am concerned, every corp should have that done anyway.

As far as a the books being done in a separate write up file by the preparer: Guilty of that this very afternoon.

When you get a QB file that is a mess, it's sometimes just better to journal the client trial balance into a new file, reclassify the personal expenses to distributions, owner draws, whatever, adjust the note balances and interest to the third party statements, match the depreciation schedule, add new assets, journal out the sold assets. etc, etc,

In short, act like a financial auditor to get to the truth.

In the end, all those entries in the writeup QBooks file document how you got from the mess to the tax return. When I am done, the adjusted trial balance goes into the client folder to document the return along with the third party statements. And I charge for this.

No they don't get a balance sheet and income statement unless they pay the extra to finish up the compliation requirements I have to follow.

I'm not with JG that you can dispense with the AAA if you always been a S Corp. Many times it true it won't be different, but those times it's not will burn you. You don't need the PTI column if they've never been a C, but the IRS didn't just make up the AAA to fill up the bottom margin of the form.

[geekgirldany]

Thank you all for responding.
Sandy, you are right about the AAA account. I suppose I am use to the returns I prepare. The AAA account almost always matches up to the Shareholders Basis. So when I see a negative number (it is around $100,000) I am thinking their basis is also probably zero. I don't know a negative AAA just has never set right with me. I do believe the business has a line of credit... so that may also account for the negative number.

I believe one of the biggest problems is how QuickBooks was set up by the Client. I too have done separate bookkeeping in the past for a client that had his own QBs file. He would not listen to what I had to say on how to code, do the invoicing, the inventory, etc. so I just did it each month on a separate file.

I have not confirmed this with the client but the QBs file has inventory items in it. So COGS on QBs is very very off from COGS on tax return. There is no ending inventory on Page 2 but for one year there was inventory listed on Schedule L. Income is off by a few thousand. I did find loan payments as expenses in the QBs file. That would make up the difference in expenses.

I think the return was prepared correctly at least on a P&L cash basis. The balance sheet not sure. From my previous conversation with the client I am sure the tax return was prepared on a Cash Basis. The prior preparer took the bank statements each month and had her own QBs file.

John & West, I believe my best bet is to do as you suggest. The client is really wanting his QBs file cleaned up so he can see his financials. I believe I can get the P&L cleaned up for him but his balance sheet on the QBs file will just have to be off. I will get up with him and get all the info on loans, cc, etc and do the balance sheet myself.

I appreciate all the help.

[JohnH]

You might want to consider having him set up a new company in QB with your numbers and just freeze what has been done in the past in his old QB file. The ability to import vendors, customers, items, etc makes this relatively easy to do, and much simpler than trying to straighten out an existing mess - which really can't be done effectively anyhow.

There are lots of things to consider when taking this approach, but sometimes it's the best. And not any different conceptually than taking an existing client who is doing things manually or using cheap software, and setting them up on QB for the first time.