Accrual used but Cash method checked

[Anarchrist]

New client hires me to prepare 2006 & 2007 1120S.

Quickbooks doesn't correspond to the 2004 or 2005 tax returns, but the accrual basis reports seem to be closer than the cash basis. When the accrual basis differs from the cash, the accrual matches the tax return or is closer. However the cash method of accounting is checked on page 2 on both the 2004 & 2005 1120S.

Should I use the cash basis reports and check cash or something else?

Won't matter for her individual return because of at risk limits, but the bankruptcy trustee wants to see the returns.

[Edsel]

LuLu

Anticrist, down south we would call this situation a "LuLu." In suburban Detroit, you're free to call it a "Yugo."

One possibility is to calculate the cumulative effect of going "back" to the cash basis. Appears the efforts of prior preparers have been to simply clone the question, and then blindly rely on QuikBooks. You could calculate the effect of proper reporting in the years affected and then approach the customer about amended returns. Not sure all of the years are even within the statute of limitations.

Who is the customer? The taxpayer or the court-appointed administrator?

There's is also the mathematical possibility of rolling the cumulative effect of the differences into the most recent year. This is so flagrant that you would probably deserve a penalty for shifting income and in essence concurring with the prior faulty practice. However, I just wonder if an IRS agent penalized you, how he would approach the problem himself??

[JG EA]

Don't forget that the preparers may have had the correct cash printouts but made other adjustments for Mileage, Meals, non-deductible and a whole host of other things.

[Anarchrist]

Thanks for the replies.

The taxpayer is the client. I wish the bankruptcy trustee was the client.

Yes I realize there are adjustments from the QBs file to the tax return. There are about a dozen items on the 2004 Accrual financial statements that are different than the Cash basis financial statements. Out of those dozen items, about nine of them on the Accrual statements correspond directly to the 1120S. That's why I believe the accrual method was actually used.

Tax wise it will end up having no affect. She has an at-risk loss limitation carryover of $600,000. If there's a profit, the carryover will wipe it out. If there's a loss, she doesn't any any equity left in the company to take it.

I don't want to check cash and then use the accrual statements just for consistency. Yet I'm afraid checking accrual will cause a problem with the irs. It looks like accrual was actually used so it technically isn't a change in accounting method if I check accrual.

The company is bankrupt and out of business as of May 2007. I assume the cumulative effect is zero at this point. There is no interest in amending prior returns.

I'm considering checking the Accrual box and explain it as a simple error on previous returns if ever questioned.