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    How to handle incorrectly prepared returns...

    I had a new client come to me this year who had a husband and wife partnership business for many years. Their personally owned real estate was depreciated within the partnership on the form 1065 , including their principal residence. They didn't like the tax scenario I painted for them and they took their papers and went elsewhere (leaving an unpaid bill for my time).

    So what would you do if an asset had been mislisted for 17 years as partnership property, when in fact it was personal?

    This isn't my problem anymore but I'm curious what the best approach would be? It's not like we can amend 17 years of returns.




    #2
    Let the person go - forfeit the unpaid bill - chalk up to experience. Perhaps go to small claims court.
    I had a similar situation last year - new client calls - MFJ return - clients hadn't filed for 2 years. I look at the returns previously prepared. Husband gifted/inherited a rental property years ago. No depreciation calculation ever shown on Schedule E and no depreciation schedule included on tax returns. Husband has no idea of basis, let alone segregation of building vs land. Gave them over a month to get it determined by any filings done - gift taxes filed, assessor's records, legal documents, etc. No cooperation. Finally I sent them a letter - "good bye".
    Uncle Sam, CPA, EA. ARA, NTPI Fellow

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      #3
      Originally posted by equinecpa View Post
      So what would you do if an asset had been mislisted for 17 years as partnership property, when in fact it was personal?

      Your responsibility would be to prepare the current year tax return correctly, and advise the client what to do if they want to correct the past.

      For correcting the past, I suppose you could probably file Form 3115 to correct the depreciation (pay back all of the impermissible depreciation taken) and you could amend the 'open' years to take off any other improper deductions. But again, your responsibility would just be to advise them of what to do to correct the past. You can't force them to do it.

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        #4
        Originally posted by TaxGuyBill View Post

        For correcting the past, I suppose you could probably file Form 3115 to correct the depreciation (pay back all of the impermissible depreciation taken) and you could amend the 'open' years to take off any other improper deductions. But again, your responsibility would just be to advise them of what to do to correct the past. You can't force them to do it.
        So how would one prepare the current year correctly? The couple should have been leasing the facility to the partnership, so depreciation would have been taken at the personal level (except not on residence). Would you transfer the assets at basis to their personal return and go from there? Use depreciated basis for figuring out principal residence sale?

        In some ways I'm happy they walked, this would have been a big mess.

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          #5
          I would send them an invoice for my consulting time (fully expecting that they will not pay voluntarily), but put it on the record. I have been burnt once before with a prospect that I wasted over 2 or 3 hours and then they walked away without paying me. Since then I give a "complimentary" 30 minute review before they would have to sign an engagement letter for me to move forward and payment is expected whether they like the results or not. This keeps folks who out out to kick the tires at a minimum.
          Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDR

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            #6
            Originally posted by ATSMAN View Post
            I would send them an invoice for my consulting time (fully expecting that they will not pay voluntarily), but put it on the record. I have been burnt once before with a prospect that I wasted over 2 or 3 hours and then they walked away without paying me. Since then I give a "complimentary" 30 minute review before they would have to sign an engagement letter for me to move forward and payment is expected whether they like the results or not. This keeps folks who out out to kick the tires at a minimum.
            I'm not worried about time and money at this point, I'm just curious what the correct way to prepare the 2019 returns is considering the fact they hadn't been prepared correctly for years? Somehow one needs to undo years of depreciation/interest claimed in the wrong entity.

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              #7
              Originally posted by equinecpa View Post

              I'm not worried about time and money at this point, I'm just curious what the correct way to prepare the 2019 returns is considering the fact they hadn't been prepared correctly for years? Somehow one needs to undo years of depreciation/interest claimed in the wrong entity.
              In addition to other reply posts, you might consider looking at TTB 9-15 Correcting Depreciation Errors as it applies to your scenario.
              Last edited by TAXNJ; 08-13-2020, 01:54 PM.
              Always cite your source for support to defend your opinion

              Comment


                #8
                Originally posted by equinecpa View Post
                I had a new client come to me this year who had a husband and wife partnership business for many years. Their personally owned real estate was depreciated within the partnership on the form 1065 , including their principal residence.
                You never explained why their personal residence was being depreciated (whether it was considered a partnership asset or not).

                Since it was a husband/wife partnership, assuming they file MFJ on Form 1040, does the other depreciation make much difference in the end? Was it rental property which would have been subject to passive loss limits if listed on page 1 of Schedule E instead of Page 2?

                To try to answer the question that no one else has answered -- if the taxpayer wants you to prepare a correct return for the current year, what do you do?

                I see two possible approaches: one, assert that a properly prepared current year return must include Form 3115 and the Sec. 481 adjustment. If they won't do it, then you can't prepare the return. (This sounds more or less like what you did).

                The other approach, would be to carry forward the assets at their currently adjusted basis, but associate them with the correct activity - and then disclose the position, probably using Form 8275-R (the red flag one). The taxpayer probably won't like it, but I could see signing off on such a return, again if the position is fully disclosed on the proper version of Form 8275.

                I'm guessing there are two possible issues: losses taken that should have been passive, and you mention a potential sale of the personal residence. Under no circumstances would I prepare a return that would give them a "double dip" going forward, you must recognize the depreciation taken, whether it was improper or not. Selling the residence with the adjusted (reduced) basis, combined with Sec 1250 gain treatment, would be a form of "rough justice" in that the correct tax would mostly be paid, just in the wrong year(s). Ditto for passive vs non-passive losses.

                "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard

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                  #9
                  What I would do is to tell them of the error. I would tell them that they need to correct the error in the past and I would be happy to do that for them. If they choose to do that or not would be up to them. I would have them sign a document that states that I recommended that they correct all those open years.

                  For the current year I would put all assets on the appropriate forms. If the asset was depreciated I would enter in the same information that was used on the wrong form if they were not going to correct the prior years.

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