Ethics

[Kram BergGold]

I am an unenrolled preparer.
My client is going to get a K-1 from a Trust that sold a house. He wanted to know in advance what he would owe. I asked him for some documents. The trust started in 1993. It had two senior center accountants doing the 1041 over this 13 year period. The first preparer made many errors re depreciation and passive losses and the second contined making depreciation errors. At some point I thought I was taking over the preparer role. Now I find out that I won't be. However I have unearthered all these errors which should make it impossible to do a correct 1041 unless they are reconciled. My guess is, if the preparer of record does the return the taxes will be way understated. My feeling is if I am handed a K-1 form, that I absolutely know is incorrect that I can't just blindly use it. Do you agree?

[jainen]

the corrections you seek

>>if I am handed a K-1 form, that I absolutely know is incorrect that I can't just blindly use it. Do you agree?<<

No, I don't agree. I don't even agree with your subject line, and your first sentence is irrelevant.

The trust is not your client, so don't make a big fuss about what you think they should be doing. If you are truly convinced that the K-1 is wrong you can use Form 8275 to identify the items you are changing. Bear in mind that, right or wrong, the trust has established accounting methods for all those issues and is not even allowed to make the corrections you seek.

[OldJack]

You would not be able to prepare the clients 1040 tax return if you knew, for a fact, that the information on the k-1 is incorrect for the current year amounts. You probably don't know "for a fact" as you may not know all the facts, so you probably could go ahead and prepare the 1040 with the suspect K-1. You probably should not have stuck your nose into the trust tax returns as it really was none of your business. There is a procedure for you to prepare his taxes if the client agreed to properly disclose the facts on his tax return. I think there is an IRS form for such disclosures. However, if you still think you can't prepare the 1040, the simple thing would be to have the client get the K-1 corrected to show proper current year amounts. You should not be concerned (other than maybe informing the client) about prior year k-1 amounts or the overall accuracy of the 1041 as such, since you have nothing to do with the trust.

[Kram BergGold]

Old Jack

Thanks for your thoughts. I want to clarify one thing. The client made it my business by asking me how much would he owe. To figure this out I had to know the basis. To know the basis I had to look at the depreciation schedules. The first one did not include any depreciation from the first 8 years the assets were in service. The second accountant dropped the first accoutant's schedules. Then I thought he told me that I would be taking over this mess. Which turned out not to be true. Of course I wished my client never involved me in this but what can you do!

[Davc]

Sometimes you do know that a K-1 is wrong. I had a TP bring in one from a 2 member partnership that had purchased land and was in the process of subdividing it and constructing houses to sell. The other partner had done the 1065. My client had a copy of the full 1065. Everything but principle payments on the land was being taken as a current expense and nothing had been sold.

[OldJack]

To know the basis I had to look at the depreciation schedules.

Kram, I did not intend to criticize you as we all have to look at what we think we need in order to do the tax return. If what I said offended you I apologize.

You said the trust sold the house which means the basis and gain would be determined by the trust and only the taxable gain would show on the k1. There should be no reason for you to determine the basis if the taxpayer actually has a k1. The gain and numbers reported on the k1 should be all that you would need to prepare the tax return. If the taxpayer did not have a k1, then I would understand you would need to know basis.