C Corporation Error

[Tax Sleuth]

I have discovered an error on a Form 1120 Schedule L. This taxpayer had a few thousand dollars in a company bank account that had been accidentally omitted from his balance sheet during the preparation of his tax returns in the past. The money had already been taxed, and I have analyzed his books and records and prior year returns and have confirmed this fact. The taxpayer does not want to amend prior year returns in this case. I understand that I need to increase his cash asset account on the Schedule L in order to correct for the error. However, what should be the corresponding entry? Should the Schedule M-2 be adjusted? We want to avoid the IRS stating the taxpayer owes money and starting an audit. I have prepared the entire tax return already and have discovered no other outstanding errors.

[ToledoEd]

If the Cash account was in error, then there was another account that is also in error. Either a capital account or a liability account. Possibly a different cash account was overstated to account for the cash on the balance sheet.

[Tax Sleuth]

C Corporation Error - Continued

I have determined that no error was made with a liability account; therefore, it must be a capital account. This brings me back to my original questions. How do you make the corresponding adjustment? Should Schedule M-2 be modified? In other words, should retained earnings be changed to account for this difference or should this money be considered additional paid in capital despite the fact that it has been in the business for years already?

[Snaggletooth]

Retained Earnings

Toledo says at least one other account is in error, or else the balance sheet won't balance. Looking for that other account is the first thing to do.

If no other Sch L account is in error, then the difference will be forced into Retained Earnings. If your customer doesn't want an amended return, then Sch M-2 is kabluberated.

Sometimes the practical solution is less than perfect, and I might ignore the error if the amount is small, and report your beginning balance the same as last year's ending balance. I would not be complicitous to such a thing if it were such a thing that the IRS would care about or taxes were understated. If the error is small, this is probably the case.

GAAP even recognizes that errors in bookkeeping are discovered in a subsequent year, and the preference is to force the effect into the year of discovery rather than to create a prior period adjustment.

[Roland Slugg]

The money had already been taxed, and I have analyzed his books and records and prior year returns and have confirmed this fact.

I'm wondering how you managed to make that determination, yet not know how the account got omitted from the Schedule L in that year's tax return.

If for the year the account was omitted from the tax return's Schedule L, yet the account WAS included in the accounting records, then how, pray tell, did Schedule L, along with Schedules M-1 and M-2, ever reconcile?