Horror Stories about Delinquent Taxes, Self-Prepared Tax Returns and Mishandled Taxes

In this age of computer immersion everybody can do their own tax returns and keep their business records on Quick Books. We can also do our own brain surgery and design our own atomic bomb. For basic tax returns and bookkeeping, a smart educated person can perform well. Everybody can be a novice until it gets complicated. A person can get trapped in the complicated stuff without being aware there is a problem. The software usually proves more complex than the individual can effectively manage without experience and education. Clients rarely want to pay for close supervision on a month-to-month basis so they are usually left alone to their own solutions and results. Best tax preparers and professional tax preparer.

Good Horror Story: A new client was working with their bank to produce their own financial statements as part of an ongoing relationship deal with expanded banking service. Problem is that nobody understands balance sheets. The bank plugged the software in and left the client alone. The balance sheet is the most complicated part of financial statements and that is where help is usually needed. The full-time bookkeeper at this business was smart and busy, but was over a million dollars out of balance. The key to balancing the financials is not to lose sight of the bank balancing to the financial statement. If the two do not reconcile there are also problems with the Profit & Loss Statement. She was smart enough to listen to some good advice from me and found her mistakes. After several months of training she was in balance and could logically maintain her own books. A true success story.

Terrible Horror Story. A new client came to us because the IRS field auditor was asking the wrong questions. He prepared his own financial statements on Quick Books and was very happy with the results which always produced huge losses which offset other income. At year-end he would take it to his tax preparer who would work up the depreciation and complete the 1120S tax returns. The bells rang in the IRS computer and an audit was ordered up. Problem was that his statements didn’t match the real world of double-entry accounting whereas the income goes to the bank and expenses came out of it. The auditor completely disallowed the two-years he was auditing. Accordingly, the client came to us to completely reconstruct his statements. His work was so bad that we had to prepare financials backwards working strictly from his bank statements income deposits and checks cleared. It was a very time consuming and expensive forensic audit for the client. Naturally, the client disagreed with corrected new results and is now defending himself in Tax Court Appeals.

Happy Ending Horror Story. New retired client had received letters from the IRS showing taxes owed. She had only Social Security income and rented out her back acre to a trucking company for parking. She went to a national tax service and they prepared three-years returns for a huge sum because they were past due. They had her owing taxes each year because of Self-Employment tax from the 1099. She came to me with tears in her eyes. She didn’t have the money to pay the tax service and she didn’t have the payment for the IRS either. I talked to her about the rental situation and found that she had received 1099 miscellaneous forms from the renter. This is subject to SE tax for self-employment income. It was the wrong form which should have been the 1099 Rental form. With only Social Security income and the rent she didn’t need to even file tax returns. I sent her back to the guy who did the erroneous forms and he corrected them. Then she brought her copies to the IRS office in San Berdoo and was at peace for the first time in years. No charge for this one.

Bad Ending Horror Story. A new client was being audited. He had sold a residence and the IRS was billing him thousands for not reporting the income. Problem was that the escrow company prepared the 1099 for the wrong year. His tax preparer accounted for the sale in the correct year [the sale had been near year-end] but did not advise the client to get the escrow company to correct the 1099 form they issued. Accordingly, the sale was now in two years taxes. We had a difficult auditor who was just keeping his seat warm for a paycheck and there was no resolution. Off to Tax Court Appeals where we were able to present the proper data and win the case. The whole thing could have been avoided if the tax preparer had advised the client to get the 1099 corrected.

A Lousy Horror Story. A client had rental properties which produced a lot of income. One day she got a notice that her bank account had been drained by an IRs lien. This lady had a bad habit of losing paperwork and it was impossible to find the problem. She went round and round in circles until I contacted the IRS to get a transcript. Like a doctor’s X-ray, there it was, a tenant had issued a 1099 miscellaneous which made the rental income subject to Self-Employment tax. She got the tenant to correct his forms and got a refund.

We have seen much bad work done by store-front tax preparers who have advised corporate client officers that they don’t need to go on payroll-just file 1099 returns on themselves, not filing partnership LLC returns and putting the data on Schedule C, ignoring erroneous 1099 forms [there are many errors on these things] instead of advising clients to get them corrected but going ahead with erroneous tax returns, and a huge litany of errors of every kind. Everybody makes mistakes but these can prove costly both to clients and the preparers.

Although it is contrary to accounting principles, I have avoided trying to reconstruct or correct client prepared balance sheets when they come in for their business taxes. I simply review and correct the P/L statement the best I can and go with it. Corporations and partnerships require balance sheet information in the returns which makes it difficult. The self-prepared financials are a real problem for our business but one cannot reconstruct every financial statement presented. Because of this problem I have not seen any recent IRS Quick Book audits, other than the egregious example above, because there is no easy solution.

Delinquent taxes and mishandled taxes can be addressed successfully.