2011 Payroll nightmare

[Gretel]

Longstanding client had a bad flood incident with his restaurant and was scrambling ever since to get back on his feet. We are almost ready for the filing of the 2011 tax return. I started to do his books in 2012 but have been doing his tax return for much longer.

On the weekend I discovered that payroll checks were written on 12/31/11. Since the bookkeeping firm only entered checks that cleared the bank in December, these checks were omitted. I need to explain here that the owner used to do his own payroll check calculations and these checks were entered after the fact.

What would you do?

I think the other bookkeeping firm should take responsibility for this and create correct reports and pay the penalties. Since it is so late already and the Statute of Limitations will run out for the 1040 tax returns for the employees next year, I tend to wait until then.

What a nightmare, and of course everything has to be done manually.

Thanks.

[JohnH]

So are you saying that the 12/31/11 payroll was not reported in 2011 or 2012?
Approximately how much was the gross payroll and the withholding taxes?
How many employees were affected?

[Golden Rocket]

Taxpayer is responsible

I think the other bookkeeping firm should take responsibility for this and create correct reports and pay the penalties. Since it is so late already and the Statute of Limitations will run out for the 1040 tax returns for the employees next year, I tend to wait until then.
Thanks.

If we stop and think about it, the only reason the other bookkeeper would enter from cancelled checks is because this is the only information she(he) had. From your discussion, I don't think the taxpayer had been providing a payroll journal to the bookkeeper or else they would have entered the complete payroll information. That moves into the discussion of "who did the W-2s for this taxpayer and who filed 941s etc?" The old bookkeeper? The taxpayer? You?

It may be better to not open Pandora's box on this kind of train wreck unless someone else has opened it, or your own liability is called into question for whatever services you provided to the taxpayer that year. If this mess has already been exposed to the light of day and you are liable for your part of it, then jump in and clean up the mess.

Although they don't admit it, even the IRS does not really want massive refiling to do, if the only effect is peanuts.

[Gretel]

Thanks, guys. Total net payroll is a little over $4,000 divided by 16 employees, so, yes peanuts for each single employee, they have a little more income but also more withholding. I think I most worry about the trust funds that were not passed on to the IRS.

The other bookkeeping did also the payroll, these check stubs in question were in the same envelope everything else was, when the taxpayer and eventually I got it. When I started the 2012 file for bookkeeping I just treated these checks as old outstanding checks along with all the other uncleared checks. Believe me, I didn't know what I was seeing when I found out.