1065 Balance Sheet

[peggysioux]

Partnership had balance sheet for 2020 on form 1065 showing an asset of over $30,000 for which the partnership has no asset. Previous tax preparer passed away and unable to access any previous notes. Spoke with partners and they have no idea what that asset is. How would other tax preparers handle? Would you make an adjustment to capital account being there is no $30,000 asset? I have five years of back tax returns and the ending balance on the asset has increased in most years. Any input is appreciated.

Peggy Sioux

[Rapid Robert]

"balance sheet for 2020 on form 1065"

What does the balance sheet in the actual company books show? (assuming they keep any books separate from the tax return). How much was the annual increase you refer to? What specific line of the Form 1065 balance sheet is the asset listed on? I'm trying to think of what kind of asset would increase each year -- accounts receivable? Loans to shareholder?

"How would other tax preparers handle?"

I would continue making an effort to identify the item, using info such as just asked. It doesn't seem likely that a tax preparer would for years carry a bogus asset on the tax return and even increase it in recent years, so there is probably some actual economic or tax meaning behind it.

"Would you make an adjustment to capital account being there is no $30,000 asset?"

That's the least of your worries if the balance sheet is out of balance by $30K. If the balance sheet per books is considered accurate, then you will have to make a one time book-to-tax adjustment on Form 1065 Schedule M-1, which should take care of any capital account discrepancies.

[Uncle Sam]

What type of asset was the $ 30,000 listed as?
In the earliest tax return you do have available - did the $ 30,000 asset exist then?
Was there a Quickbooks or other accounting file available where year end bookkeeping entries were posted to for tracing where the increments were posted to?

I had a situation years ago - where an S Corp - that was originally owned solely by a father, then upon his death the stock was transferred to 3 sons, had a loan payable balance showing for years that no one knew how it came into existence. There were no legal documents available for reference. Father was deceased, all prior accountants were gone, and I was handed this to close out the corporation as the brothers didn't want the business anymore. No creditors during the time the sons operated the business ever came knocking to get paid, so I advised them to increase the additional paid-in-capital to wipe it off, then dissolve the corporation. It's been about 10-15 years since it took place, never heard from any of the brothers again. I was not their accountant personally, just involved to dissolve S corp.

[peggysioux]

There is no actual company accounting. Two-partner partnership with rental apartments that has been in existence since the 1980's. There is very little to the balance sheet - assets - checking account, building, and land and the only liability account is security deposits. That is it......balance sheet had other errors besides the building account in previous years as I was able to verify some information with the management company. There is no summary of expenses for some of the previous years that I have so it is difficult to determine where the issue lies without spending major time, for which partners do not want to pay me to review. I agree, that it would not seem likely that a tax preparer would carry a bogus asset on tax return, but I am at a loss to what it might be after speaking with partners and management company. I do not think it is accurate to continue to reflect an asset that seems to not exist. The asset was listed as "other asset" with a title of "building account". At first, I thought the amount might be what management company reflected at year-end that had not been paid out to partners, but have determined that is not the case.

Peggy Sioux

[Uncle Sam]

Since it appears that it's related to "building" are you able to get any information from the insurance policy as to when major assets were purchased where there would have been an increase in premium due to either purchase of an asset, or asset improvement? I am surprised that if something was related to "building" it would or should have been listed on a depreciation schedule. Don't the clients have copies of prior returns prepared by prior accountant? Ask partners if they increased rents due to any major increases in building costs?

[peggysioux]

I have a depreciation schedule for the 2020 tax year and tax returns (and bank registers) show insurance payments made each year for tax returns that I have and there were no major increases. One of the problems is that the previous tax preparer provided only the basic schedules with tax returns and no worksheets/statements. I only have depreciation schedules for the 2020 tax year. There were no major increases in rent in the last few years. How would an increase in rents affect a "building account"? I could see if they increased rents to cover a large improvement and placed funds in a "building account" rather than bank account; however, partners advised me they have only ever had the checking account where funds were placed; no separate account. I really appreciate your input to figure out how to handle as I am at a loss.......

Peggy Sioux

[ttbtaxes]

Where is the $30,000 reported on the B/S? Current assets, other assets, fixed assets?

Did the prior preparer's firm provide workpapers or notes from each year that the asset was increasing? He/she had to be have some rationale for including it each year. It's hard to believe there isn't something in the workpapers that would indicate what was occurring. I'd push the accounting firm to see their files.

If there was an increase to that asset account, there had to be a corresponding credit somewhere each year. I'd review prior partnership tax returns to determine the year that the account first appeared on the balance sheet. I'd then review bank statements for that year to see if something was paid from bank account. If not paid from the business bank account maybe someone that was paid from a personal account.

[Uncle Sam]

TTB - it's obvious you haven't thoroughly read the prior posts that have asked the same questions you asked/addressed.
The OP mentioned the prior accountants are unavailable, there's no formal general ledger to review, and answered where the asset was shown on the balance sheet.