Action for Prior Events

[Nashville]

There is a response below (regarding cash payments to employees) which states "if this occurred during the time he was my customer, I wouldn't continue with him."

All well and good. The post does not say what the preparer would do if it occurred during a time prior to him being a client.

Just what do we do when we have a new client, and we find horrible practices and occurrences which the client did (or prior accountant did) during a taxable year prior to us? This happens quite frequently, and I am inclined to define my responsibility to current engagement if possible.

[Lion]

If under Circ 230, then you are required to notify client of any errors you find/know about no matter which year and tell him what he should do and the consequences of not doing that. The decision to amend returns is the client's.

As far as from the time he comes to you, I'd request prior year returns. And, do what I said above. And, explain how I will report 2014. And, teach him what he needs to do. And, yes, I would probably decline the engagement if he does not agree to dealing with 2014 and forward in a manner appropriate to his business entity and personal reporting. Certainly, I would not keep him long if he failed to follow my instructions. I have kept some clients when they were dissolving the entity anyway or when one spouse is on board or for a few other reasons. But, I've turned some away from the start when I saw how they reported in prior years and heard that they were not going to change. Or when the way they talked in the initial interview told me they expected me to go outside the rules for them.

[geekgirldany]

You can not help what happened in the past but you can for the future. You can not continue to enable people's bad judgements because it will come back to bite you.

My experience with many who will not change their ways often blame their prior accountants. Now some people, I do believe them. Others blame everyone else except themselves.

The whole S-Corp no wages... did not know, etc. I believe the prior accountant more than likely tried to get them to change their ways but could not so just kept on filing. I had one last year that was in this situation. At first I believed them because the prior accountant did make several mistakes but after this year not sure on the wages part. I told them either they pay a wage or I will no longer prepare their tax returns. They have been filing since.

I told two others that.... they just disappear.

Just a side note on S-Corps, I've done Loan to Shareholders myself, but geez some of these new clients the amounts are huge in this account. 6 figures big.

[Nashville]

Loans to Shareholders

Geekgirl for years there was rumor (if not fact) among tax preparers that if a Loan to Shareholder exceeded $10,000 it would trigger an audit.

I don't know whether that was true or not, but it sure kept some of my clients from doing it.

If the IRS reclassifies a large such loan as dividends, it is usually catastrophic for the shareholder and corporation alike. Also in many cases, there is no evidence of a "loan" but the balance is simply the result of distributions that the owner doesn't want to pay tax on. This makes the situation, already bad enough, impossible to defend.

[geekgirldany]

Yes that is what I always heard myself on the $10,000. What amazes me is that these are CPAs doing this... they should know better. I am still trying to get a Loan To Shareholder off a S-Corp return that has been a client for several years. The LTS was around $300,000.... I've tried to take it down little by little. When I explain the situation to the client and I mention "red flag" or "audit" they want it cleared off asap.

[TXEA]

A loan to a shareholder does not trigger an audit whether it is above or below $10,000. It is important to understand that there is nothing inherently wrong with a loan to shareholder as long as it is completely documented with a written loan agreement, stated interest rate, payment terms (with payments actually made), collateral...etc.. The IRS will generally respect well documented loans to shareholder where the documentation requirements are met and the shareholder is paying him/her self a reasonable compensation.

If you have a client that comes to you with a loan to shareholder amount on the balance sheet. Simply request they get in compliance with the documentation requirements, make actual monthly payments, and continue such until the loan is paid in full. If they refuse to do so, then you can decide whether to continue with the engagement.

As for prior period errors, the past is the past. The only problem I generally have is where the client refuses to amend what needs to be amended and where they do not want to change the past practices. In these instances, I will most likely refuse to do the work if the prior period errors impact future returns. While I understand it is the client's responsibility to decide to amend, I have to consider the possibility that the client refusing to amend obvious errors is a client that will be a problem for me in the future.

All preparers make mistakes (everyone of us). It seems to be inherent in this profession that the prior preparer did not know what they were doing. Part of this blame lies with some clients that seem to make it impossible to prepare an accurate tax return, part is with truly bad preparers, and part of it is the workload required of a tax preparer with a large practice. An old preparer once told me that most tax preparation mistakes take place in the last 2-3 weeks of tax season. I think he is right, and it is the reason that I extend all but the most simple returns that come in during the last few weeks of the season.

I had a new client once that came in with several material errors on the tax return. While in the office, I told them I needed a copy of the trial balance, depreciation schedule, and a few workpapers from the prior preparer. The prior preparer promptly provided the information I needed along with a couple of other items he thought would be helpful (this preparer also requested a disclosure authorization from his form client). I knew when he asked for that I was probably dealing with a good preparer. As it turned out, the client had not furnished pertinent information to this preparer and such omission was not the preparer's responsibility but the clients. Now, whether this was information the preparer should have known to ask for (which I did) is a point subject to debate.

My point in all this is to try and avoid passing blame to other preparers. Some are truly incompetent; however, make the focus getting the client in compliance. The profession does not need to disparage itself, and in many cases, it is not the preparer's fault. It is the client's fault. Finally, remember what happens when you point the finger of blame.