New client, Waaay to much depreciation taken, Now what???

[death&taxes]

New client brought in prior 3 years of returns with a rental property she owns outright. She used solo preparer for many years. I spoke to the nice, clueless fellow who is "trying to retire". When I asked him for prior depreciation worksheet, he sent AMT depreciation. Call #2 got me the 2012 regular depreciation worksheet. This showed he was generously depreciating all major improvements as 15 year leasehold property using 150 DB. (He didn't even do that correctly as many items were shown as having been fully depreciated before the full 15 years were up.) (The rental house itself seems to be fully depreciated but who knows for how much based on over 30 years of rental use and not listed on worksheet)

2012 - for some reason he had about 8000 of depreciation when it should have been about 900 on one asset placed in service 1998
- he did not include SSA-1099 income with 700 of withholding, and also had client qualifying for Sch R. credit for the elderly (because SS was not entered)

So, Advise client of all the 2012 and back problems, offer to do amended return (using correct method of depreciation and TT Book page 9-21 "Depreciation Claimed more than the correct amount" and Form 3115 Change in Accounting)

Just go forward with 2013 return with the tiny bit of depreciation left, on balance of undepreciated basis, using correct methods????

So folks what would you do? Thanks for any input. Your posts are invaluable!

[JohnH]

I'd probably go forward with the correct figures and tell the client she needs to have the prior accountant make corrections and amend those prior year returns. Tell her there could be interest and penalties if that doesn't happen.

What she does with that information is up to her.

[joanmcq]

Improper depreciation requires 3115. And if the prior preparer messed things up this bad, I'd be loathe to send a client back for corrections.

[Steve Stang]

Improper depreciation requires 3115. And if the prior preparer messed things up this bad, I'd be loathe to send a client back for corrections.

I'm not an expert or an EA so I'm not one to throw stones. I've made mistakes - some I know about and others I don't. But I agree that if this guy is trying to retire and messed things up badly that I'd just tell the client that we're redoing the returns to avoid possible penalties that will hurt her much more later. And I would not do it for free - maybe a reduced rate for an amended return if you want to keep the client. Just my two cents.

[JON]

3115

works for correcting methods. Does it work for errors in calculation or cost set up???

[joanmcq]

Those are all considered incorrect methods of depreciation.

[death&taxes]

Natp answer

So I finally took my question as to how to proceed to NATP and here's what I sent and their reply FYI: Thank you for using NATP’s research services. I have summarized your question below and provided an answer based on the facts you presented.

Your question was:

Problem: Single, 65+, new client, AGI of about $17,000 without extra income read on…I spoke extensively with very old, confused, kitchen table prior preparer requesting his depreciation schedule for client’s residential rental and rental garages. (I’m a family room preparer, EA, with 32 years of experience & a former H&R Block franchisee.) Depreciation for all house improvements and new garage 1990’s and forward has 15 YR 150 DB HY. (Guessing he thought “Leasehold Improvements” pertained to the client because she leases the house, she owns, to tenants.) In addition on the 2012 return he missed her SS with $700 withholding, gave her a Sch R. credit (because of missed SS) and took an $8000 depreciation deduction when it should have been about $900 using his methods. (I guess he forced something.) I did a spreadsheet showing about $31,932 of excess depreciation taken. (Using MACRS for 27.5 years on house improvements and 39.5 years on the new garage (rented to individuals not her tenants in the house)). My solution: Do 2012 1040-X correcting SS, SS withholding and Sch. R and not adjusting the $8,000 wrong depreciation. Prepare Form 3115 to change accounting method to correct excess depreciation. Sch 3115 is to go with the 2013 return rather than doing it with 2012. (Thought you can’t go backwards with 3115.) On 2013 SCH E report as “Other Income IRS Section 481 adjustment” 25% of the excess depreciation with the balance, being added 25% each year for the next 3 years. Procedure described in “The Tax Book” pg. 9-21. 2013 return e-filed with 3115 sent along with Form 8453. So, am I on the right track or should this be handled differently? Thank you for slogging through this. Have a great day! Anne

Here is the answer:

You are headed 100% in the right direction. The Form 3115 would have to be done for the year of change.

For NATP members, the first answer of each calendar year is free. After that, members are invoiced at $31.00 per answer. Nonmembers are billed at the time of the call.