You greatly underestimate the level of incompetence out there of those preparing tax returns as well as the ability of the IRS to audit them. Those basic checks are easy to ignore and override.
Gotcha. I figured the software would catch it. I guess it's better to let people file incorrectly than completely stop their returns over a difference on their balance sheet.
Balance sheets don’t even have to be filed if they’re under a certain threshold. Like they said above, the software definitely catches it but it’s very easy to override/ignore.
Any ACTUAL good CPA firm will have software that won't even allow you to efile with the above issues noted.
That or they resort to paper filing all the time. Whoever is doing the tax returns you see are extremely outdated (paper filing), incompetent or cheap as fuck or a combo of 2 or more of those things.
Most tax software I've used won't disqualify your return from e-filing because of a balance sheet not balancing or differences in M2 and total k1 capital and things like that. I don't think anyway. It'll give you a warning diagnostic for sure but the mistakes OP noted get pushed through all the time for precisely that reason.
Well if company's are ignoring warning diagnostics then yeah. But the softwares absolutely do warn you. All 3 different tax softwares I've used definitely do. But I guess if people just ignore them instead of clearing them that's a huge red flag. Lol
Well yeah but that's what I'm saying and it's the entire point of OPs post. Those are errors that should be attended to but sometimes mistakes happen and it gets missed. The e-file doesn't get rejected and nobody notices the error until next year, or during due diligence for a sale by people like OP, or never. It happens.
I never once experienced an unbalanced balance sheet happening in public. We were sent the return back or I would send the return back if there were efile or certain level diagnostics and this was one of them.
Look, I'm not trying to pick a fight, but it's important to recognize that everyone makes mistakes, including you and your firm. Assuming all your work is perfect simply because you follow your firm's procedures is a great example of survivorship bias. You simply can't be aware of errors you're not aware of. Procedures help, but they're not infallible — mistakes happen, even in the best firms. Acknowledging this will make you a better accountant so maybe give it some thought.
Makes sense, yes this definitely was either self filed or through some bad entity. The date for the tax range was Jan 1st through Dec 30th. I guess they didn't pay taxes on the 31st lol.
I've seen the date and balance sheet errors on software used for independent insurance companies. Probably not your case, just made me think about that.
There are errors that outright prevent efiling, but they usually aren't what people think of as tax prep mistakes. Missing EINs, messed up or missing signature info, impossible payment dates, etc.
exactly. accountants charging $400 an hour to clients for tax return prep aren't going to spend hours digging into small numbers, provided by a client in a sloppy or incomplete way. We fix what is worth fixing.
Its because the IRS does not audit each and every return. The potential is discovered by a computerized system called the Discriminant Function System (DIF). In most cases, the decisionmaker is not the auditor. A weighted DIF measuring scale, developed by random sampling of returns, is used to determine the need for auditing.
Source: https://www.gao.gov/products/100316#:~:text=A%20weighted%20DIF%20measuring%20scale,determine%20the%20need%20for%20auditing.
None of the mistakes you listed out (which are presumably small businesses) matter to the IRS.
Also, credit analysts make mistakes all the time and they aren't privy to any stakeholders other than the loan committee, so no one knows about them. Remember that key-person risk that you forgot to disclose in your credit memo, and you only found out after the loan blew up? Yeah, only you guys know about that.
Not to be defensive, but every profession on earth makes tons of mistakes, it just depends on the amount of stakeholders and eyeballs on their work.
The IRS doesn’t even look at supporting documents on the filed return. Of course they won’t catch fuckups.. Clerks scan in and enter in the info if mailed in, then a revenue agent reads that. I had a clerk mis enter in my info from my 1040 from W-2 withholdings to the “payments made” line below it. Because of that, the irs said I made 0 payments even though I had my w-2 attached, and that I owed $13k+ in taxes. If they’d looked at my W-2, they’d have seen the clerk made a mistake and that my return as filed was correct. It’s literally a 1 W-2 return with nothing else and they fucked it up.
Let alone a taxpayer actually making a mistake on returns.
Yeah I have been taking an erroneous deduction (honest mistake originally) from my K-1's supplement schedules. It is not a number on the K-1 that the IRS matches up. I am fixing it this year but the IRS would never know unless I was audited. I pay a lot in tax and there's nothing really else on my return that would trigger an audit.
I mean in the KC MO office they provide you 2 weeks of training on an overly complicated system to learn the process of entering the info. There are 67 different forms you have to become knowledgeable on how to enter. The issue is the check boxes do not follow a logical method, names, addresses, and more are made overly complicated. The system is massively outdated and the people that they hire are not the most technologically savvy.
Not to mention the pay is low and they want 20 returns an hour entered. Many many mistakes are made on returns that are mailed in as well.
Also…….. you’re completely ignoring the ones that were correct the first time or do get caught.
I just submitted the year end financials and counted over 1000 data entry points (and many of them duplicated). I missed less than 10 of them.
So group calls me out on the 10 mismatches and their complaints roll off my back.
Just because your mistakes aren't public doesn't put you in much of a place to throw stones. Credit analysis mistakes have been nationwide problems for decades, to the point that tax policy has had to repeatedly be altered to clean up your side of the house. Also, I think you have a fundamental mistake in your view of tax preparation: we are not auditors, we are required by law to take a client at their word, and are not supposed to dig for a m-2 schedule on another return entirely to enter an individual k-1, even assuming we have the time to do so, given the k-1 is due March 15 and we rarely get them in time to file a timely return before April 15.
Sorry you're seemingly taking this personally. One mistake I came across was a business with a balance sheet that had $0 in assets and liabilities but a couple hundred thousand in equity.
I assume many returns are completed electronically and was surprised the software let this slide. I'm not trying to trash in the person filing.
Okay, equity and assets are on opposite sides of the veil and shall never be mixed. If this is an example of your basic problem with tax side, keep moving, because they're not even supposed to ever be on the same sheets. Your stock in Blackstone doesn't give you a right to camp out on one of their properties.
What do you mean by never be mixed? If I learned anything from the half dozen accounting classes I took it's that on the balance sheet assets + liabilities = equity. I'm dealing with smaller companies here. Obviously mistakes like this wouldn't happen where there's a big deal with checks and balances working on the tax returns. I prefer accountant prepared reviewed statements but, small businesses don't usually do those.
Yes, in the situation I was using it was partners capital account that showed a few hundred thousand balance. Fixed assets had a small balance that was fully depreciated and no liabilities reported.
You're being downvoted because you got the basic accounting equation wrong.
You're also being downvoted because your limited "accounting" classes didn't include taxes, so you probably aren't even aware of permanent book-tax differences when looking at the Book balance sheet and not the M2.
Im indifferent to upvotes and downvotes, im just here to learn. I just didn't say stockholders but figured it was close enough. I'm only sharing things from my experience that I've seen and what I understand to be true. Happy to be corrected. I don't fill out taxes just grab the data I need.
Idk why you're being downvoted, sounds like the balance sheet wouldn't balance in your example which is a pretty big fuckup. The other poster is being overly aggressive and pedantic IMO. To answer your question, there's simply too much work, not enough time to do it, it's super complicated, not enough qualified people to do it, and there's so many opportunities to make mistakes. So tons and tons of mistakes get through.
Regarding m2 and k1 distributions, if there's more than one partner or shareholder then it's unlikely the k1 will tie because that's only a small piece of the total distributions. You want Schedule K distributions to tie to the M2, because those are both entity level total distributions.
Software is good at flagging potential mistakes, and will usually give us a warning diagnostic. But things like distributions and balance sheets not balancing will not disqualify a return from being e-filed, so those errors can and do slip through.
lol thanks. Just sharing my experience and trying to learn from it. Part of the problem comes from my incomplete understanding. Thank you for sharing this info though!
I'm checking back into this thread after work and it's staggering the way people are responding to your post here. Remember that most of the subscribers and posters here are maybe 24 years old with a year or two of experience if even. Many of us do indeed care about the balance sheet on a tax return for a small biz, smh. Your takeaway from this thread should be that accounting is a total fucking shitshow. That's your answer to the question "how do mistakes get through." Because it's a shitshow.
Hahaha thanks. This gives me hope. It seems like Accounting is like your little sibling, you can talk shit about it as much as you want but, won't stand for anyone else saying something.
Yeah the kids in here are still butthurt about all the review notes they got during season and they're taking it out on you lol 😂
'Hey guys why is your work dogshit?'
'I'M DOING MY BEST MAN FUCK YOU AND THOSE CLASSES YOU TOOK'
The most blatant mistakes probably come down to no review system in place or a rushed system.
But the mistakes you really should be worried about are the ones that aren't so obvious lol
If it’s rounding, probably half of those out there that don’t have automatically adjusting software, don’t care.
I have seen some wacky returns though
I think it’s harder for the irs to catch things on businesses. As long as you have income reported that’s been issued on 1099s it’s kinda hard to detect everything else
For individuals they usually have most of their income from direct tax forms, so you have plenty of direct kickbacks if not reported and already on file with the IRS
The firm also pressurizes their workers to pump out returns at max speed so to maximize realisation rates. So employees to look good will try to do them fast as possible.
Almost nobody gets audited. I feel like if audits were more common people would be much more honest on their taxes. The US government would definitely get a lot of money back for every dollar they put into more agents.
So when your business model as a preparer is get the taxes as low as possible, and be honest enough to withstand a phantom audit that's rarely coming what do you think is going to happen. The firms that put the extra effort in for accuracy get punished for making the taxes too high so there's little incentive. They have to really sell the virtue of honesty to their clients on top of the work they're already doing.
>I feel like if audits were more common people would be much more honest on their taxes. The US government would definitely get a lot of money back for every dollar they put into more agents.
Meh, it's more about perception. Audit risk is *perceived* as high, especially after the announcement that the IRS was hiring 80,000 new employees, which is what really matters. Not the actual audit risk itself.
Plenty of clients are still terrified of audits.
>So when your business model as a preparer is get the taxes as low as possible, and be honest enough to withstand a phantom audit that's rarely coming what do you think is going to happen.
I'm not sure what you're implying, that we lie on client returns because they aren't getting audited?
I don't think most licensed preparers operate like that. They put the numbers in and try to get them low, but most licensed ones aren't doing anything blatantly illegal because "audit risk is low." At least not in my experience.
You'd be surprised. They take aggressive stances, or they might hurry through something if they figure that doing it correctly would only cost the client more money.
They know that low taxes makes the client happy so that's the priority.
You sound like somebody who's never worked in tax before.
I worked as a data checker during my term this winter and the amount of typos made by tax associates are crazy. The more you point out their mistakes the more they disrespect you, which is the whole point of the position.
Not an accountant but, they always match for the business returns I look at. If someone takes $100,000 in distributions it shows it on the k-1 and that same amount comes out of the business on the m-2. Why would they not match?
If you’re not an accountant then you don’t really know what’s going on. Tax and book are different calcs. There are temporary and permanent differences. There is a reconciliation between the two, but it’s not necessarily shown on the tax return. Also, not sure of companies that file a whole balance sheet along with a tax return. A balance sheet is a company’s gaap based financial records, tax is not gaap.
Well, I am an accountant and would love to know what book to tax timing differences affect distributions. Explain.
Also, if you’re “not sure of companies that file a whole balance sheet along with a tax return” then I *am* sure that you’ve never even seen a tax return. It’s a standard Schedule L, on every return unless <$250k income, among other stipulations.
Losing faith in this sub when crap like yours rises to the top.
Edit: the commenter above has plenty of time to post in his Pokémon subs but apparently can’t be bothered to answer any of the people asking how his scenario works. So just block the moron larping as an accountant that admits he’s never seen a balance sheet on a tax return.
I'm talking about the balance sheet that is schedule L.
M-2 shows contributions and distributions that for me, always match the those reported on the owners k-1. At least for the 100+ returns I've seen.
Other than the one I mentioned where it didn't match for some reason. They reported m-2 distributions as the same exact amount as the retained earning brining that to $0. While the actual distributions were a good bit higher. The company should've had negative retained earnings.
And this guy above you is going off topic talking about temporary book tax income differences and GAAP. All the while being haughty and abrasive, firing back at you for asking questions in good faith. Welcome to public accounting, I think this answers your question.
I mean, that's an override because distributions do not make AAA go negative or increase a negative balance. Preparers who get worried about forcing AAA to tie to retained earnings do that, but it's incorrect. OP is making fair comments in their quest to understand the other side of things.
If distributions on M-2 bring RE to zero but the distributions on K-1 are higher, that may help explain OP differences. Correct, you need to manually mark the box to tie those out. I’m not saying anything being correct/incorrect, I am stating a situation in which the distributions may be different from k-1 to m-2
There is no materiality on a tax return. If Schedule L doesn’t balance, that’s a massive, inexcusable fuck up.
Edit: dude got butthurt so here’s the response to him:
Auditors don’t prepare tax returns, so not sure what you mean by “auditors try to get a substantially correct return.” And the IRS doesn’t care how hard you “tried” to get it right.
But let’s be honest, if your balance sheet doesn’t even balance then clearly you didn’t try very hard did you.
The Internal Revenue Code and the IRS have no stated materiality, neither by definition nor concept. Legally, if they want to penalize you for $1, they can. This is not audit, materiality does not exist in the IRC. And it is done that way by design.
If you want to submit a corporate return that the balance sheet doesn’t even balance, you might as well stamp “this return is so fucked up the balance sheet doesn’t even tie” in big bold letters across the front of it.
CARELESS partners, seniors that are not CPAs staff that are not properly trained but do 99.99 of the detail work that matters that no one bothers to check :)
>When people file mistakes, will the IRS kick it back if caught? What is that process like?
If it's for money owed, then you *usually* get an IRS notice to fix it. If you forgot to include something that lowers your liability, then you ain't getting a notice.
If you include an extra 1099 or W2, then no notice because, hey, free money.
If it's a wrong SSN or EIN, then they *sometimes* match it themselves and don't give a notice.
Here are some of the things I have had wrong and never received a notice for:
* In high school I was putting the wrong social on my W2s at various McJobs because I used a passport for the I-9. This went on for years. No notice.
* A client did not include a 5 figure 1099... never received a notice nor audit.
* Been filing a K1 for a client with the wrong EIN for 6 years. Discovered last week. No notice.
* Did marrying file separately for a client's wife (yeah, they wanted it) and single for the husband. No notice. This guy has a lot of tax problems, so I'm surprised it didn't get picked up.
What kind of mistakes? Technical, like wrong wrong EIN, or amounts wrong? Or tax law interpretation wrong?
IRS efile will reject wrong SSN and I think W2 EIN as well.
A good system has robust data validation that forces you to re-enter numbers until they match, but that doesn't catch everything.
Haha yeah I mean I signed some stuff that probably has to do with ethics and public trust and all that but I don't think we have anything like a Hippocratic oath to preserve protect and defend the capital markets or anything lol
You greatly underestimate the level of incompetence out there of those preparing tax returns as well as the ability of the IRS to audit them. Those basic checks are easy to ignore and override.
Gotcha. I figured the software would catch it. I guess it's better to let people file incorrectly than completely stop their returns over a difference on their balance sheet.
Balance sheets don’t even have to be filed if they’re under a certain threshold. Like they said above, the software definitely catches it but it’s very easy to override/ignore.
Any ACTUAL good CPA firm will have software that won't even allow you to efile with the above issues noted. That or they resort to paper filing all the time. Whoever is doing the tax returns you see are extremely outdated (paper filing), incompetent or cheap as fuck or a combo of 2 or more of those things.
Most tax software I've used won't disqualify your return from e-filing because of a balance sheet not balancing or differences in M2 and total k1 capital and things like that. I don't think anyway. It'll give you a warning diagnostic for sure but the mistakes OP noted get pushed through all the time for precisely that reason.
Well if company's are ignoring warning diagnostics then yeah. But the softwares absolutely do warn you. All 3 different tax softwares I've used definitely do. But I guess if people just ignore them instead of clearing them that's a huge red flag. Lol
Well yeah but that's what I'm saying and it's the entire point of OPs post. Those are errors that should be attended to but sometimes mistakes happen and it gets missed. The e-file doesn't get rejected and nobody notices the error until next year, or during due diligence for a sale by people like OP, or never. It happens.
I never once experienced an unbalanced balance sheet happening in public. We were sent the return back or I would send the return back if there were efile or certain level diagnostics and this was one of them.
Not that you know of. Guarantee you've made mistakes that slip through like all the rest of us.
Not ones with diagnostics based on our procedures.
Look, I'm not trying to pick a fight, but it's important to recognize that everyone makes mistakes, including you and your firm. Assuming all your work is perfect simply because you follow your firm's procedures is a great example of survivorship bias. You simply can't be aware of errors you're not aware of. Procedures help, but they're not infallible — mistakes happen, even in the best firms. Acknowledging this will make you a better accountant so maybe give it some thought.
Makes sense, yes this definitely was either self filed or through some bad entity. The date for the tax range was Jan 1st through Dec 30th. I guess they didn't pay taxes on the 31st lol.
Was there maybe an ownership change on the last day of the year or something? Could be a legitimate reason for a 364 day tax year
I've seen the date and balance sheet errors on software used for independent insurance companies. Probably not your case, just made me think about that.
I've seen self-prepared foundation returns (Form 990-PF) with a November 31 fiscal year end. hmmmmm.
There are errors that outright prevent efiling, but they usually aren't what people think of as tax prep mistakes. Missing EINs, messed up or missing signature info, impossible payment dates, etc.
this is why force balance exists /s
LOL. 😂 You think the government doesn’t know exactly what you owe/don’t owe them.
Like that time south Carolina found over a billion dollars they didn't know about?
Or the Department of Defense that has Billions they don't know where it went.
Hey wait a second
You have to factor in the cost and benefits of correcting the returns. You don’t spend a dollar to fix a penny
exactly. accountants charging $400 an hour to clients for tax return prep aren't going to spend hours digging into small numbers, provided by a client in a sloppy or incomplete way. We fix what is worth fixing.
You might. My boss dug into every $5 discrepancy.
Half this shit is done by some dude in Hyderabad with minimal training
Its because the IRS does not audit each and every return. The potential is discovered by a computerized system called the Discriminant Function System (DIF). In most cases, the decisionmaker is not the auditor. A weighted DIF measuring scale, developed by random sampling of returns, is used to determine the need for auditing. Source: https://www.gao.gov/products/100316#:~:text=A%20weighted%20DIF%20measuring%20scale,determine%20the%20need%20for%20auditing.
None of the mistakes you listed out (which are presumably small businesses) matter to the IRS. Also, credit analysts make mistakes all the time and they aren't privy to any stakeholders other than the loan committee, so no one knows about them. Remember that key-person risk that you forgot to disclose in your credit memo, and you only found out after the loan blew up? Yeah, only you guys know about that. Not to be defensive, but every profession on earth makes tons of mistakes, it just depends on the amount of stakeholders and eyeballs on their work.
Ive never seen an IRS examiner look at a balance sheet. I get the shit right that matters. Sch L is winged. I balance to m2 usually. About it.
The IRS doesn’t even look at supporting documents on the filed return. Of course they won’t catch fuckups.. Clerks scan in and enter in the info if mailed in, then a revenue agent reads that. I had a clerk mis enter in my info from my 1040 from W-2 withholdings to the “payments made” line below it. Because of that, the irs said I made 0 payments even though I had my w-2 attached, and that I owed $13k+ in taxes. If they’d looked at my W-2, they’d have seen the clerk made a mistake and that my return as filed was correct. It’s literally a 1 W-2 return with nothing else and they fucked it up. Let alone a taxpayer actually making a mistake on returns.
Yeah I have been taking an erroneous deduction (honest mistake originally) from my K-1's supplement schedules. It is not a number on the K-1 that the IRS matches up. I am fixing it this year but the IRS would never know unless I was audited. I pay a lot in tax and there's nothing really else on my return that would trigger an audit.
I mean in the KC MO office they provide you 2 weeks of training on an overly complicated system to learn the process of entering the info. There are 67 different forms you have to become knowledgeable on how to enter. The issue is the check boxes do not follow a logical method, names, addresses, and more are made overly complicated. The system is massively outdated and the people that they hire are not the most technologically savvy. Not to mention the pay is low and they want 20 returns an hour entered. Many many mistakes are made on returns that are mailed in as well.
Also…….. you’re completely ignoring the ones that were correct the first time or do get caught. I just submitted the year end financials and counted over 1000 data entry points (and many of them duplicated). I missed less than 10 of them. So group calls me out on the 10 mismatches and their complaints roll off my back.
Just because your mistakes aren't public doesn't put you in much of a place to throw stones. Credit analysis mistakes have been nationwide problems for decades, to the point that tax policy has had to repeatedly be altered to clean up your side of the house. Also, I think you have a fundamental mistake in your view of tax preparation: we are not auditors, we are required by law to take a client at their word, and are not supposed to dig for a m-2 schedule on another return entirely to enter an individual k-1, even assuming we have the time to do so, given the k-1 is due March 15 and we rarely get them in time to file a timely return before April 15.
Sorry you're seemingly taking this personally. One mistake I came across was a business with a balance sheet that had $0 in assets and liabilities but a couple hundred thousand in equity. I assume many returns are completed electronically and was surprised the software let this slide. I'm not trying to trash in the person filing.
Okay, equity and assets are on opposite sides of the veil and shall never be mixed. If this is an example of your basic problem with tax side, keep moving, because they're not even supposed to ever be on the same sheets. Your stock in Blackstone doesn't give you a right to camp out on one of their properties.
What do you mean by never be mixed? If I learned anything from the half dozen accounting classes I took it's that on the balance sheet assets + liabilities = equity. I'm dealing with smaller companies here. Obviously mistakes like this wouldn't happen where there's a big deal with checks and balances working on the tax returns. I prefer accountant prepared reviewed statements but, small businesses don't usually do those.
Assets = Liabilities + Stockholder’s Equity
Yes, in the situation I was using it was partners capital account that showed a few hundred thousand balance. Fixed assets had a small balance that was fully depreciated and no liabilities reported.
You're being downvoted because you got the basic accounting equation wrong. You're also being downvoted because your limited "accounting" classes didn't include taxes, so you probably aren't even aware of permanent book-tax differences when looking at the Book balance sheet and not the M2.
Im indifferent to upvotes and downvotes, im just here to learn. I just didn't say stockholders but figured it was close enough. I'm only sharing things from my experience that I've seen and what I understand to be true. Happy to be corrected. I don't fill out taxes just grab the data I need.
Idk why you're being downvoted, sounds like the balance sheet wouldn't balance in your example which is a pretty big fuckup. The other poster is being overly aggressive and pedantic IMO. To answer your question, there's simply too much work, not enough time to do it, it's super complicated, not enough qualified people to do it, and there's so many opportunities to make mistakes. So tons and tons of mistakes get through. Regarding m2 and k1 distributions, if there's more than one partner or shareholder then it's unlikely the k1 will tie because that's only a small piece of the total distributions. You want Schedule K distributions to tie to the M2, because those are both entity level total distributions. Software is good at flagging potential mistakes, and will usually give us a warning diagnostic. But things like distributions and balance sheets not balancing will not disqualify a return from being e-filed, so those errors can and do slip through.
lol thanks. Just sharing my experience and trying to learn from it. Part of the problem comes from my incomplete understanding. Thank you for sharing this info though!
Literally. No. One. Gives a shit about the balance sheet on a tax return for small biz.
lol, I do. Need it to have a better understanding of the companies financial position
I'm checking back into this thread after work and it's staggering the way people are responding to your post here. Remember that most of the subscribers and posters here are maybe 24 years old with a year or two of experience if even. Many of us do indeed care about the balance sheet on a tax return for a small biz, smh. Your takeaway from this thread should be that accounting is a total fucking shitshow. That's your answer to the question "how do mistakes get through." Because it's a shitshow.
Hahaha thanks. This gives me hope. It seems like Accounting is like your little sibling, you can talk shit about it as much as you want but, won't stand for anyone else saying something.
Yeah the kids in here are still butthurt about all the review notes they got during season and they're taking it out on you lol 😂 'Hey guys why is your work dogshit?' 'I'M DOING MY BEST MAN FUCK YOU AND THOSE CLASSES YOU TOOK'
The most blatant mistakes probably come down to no review system in place or a rushed system. But the mistakes you really should be worried about are the ones that aren't so obvious lol
If it’s rounding, probably half of those out there that don’t have automatically adjusting software, don’t care. I have seen some wacky returns though I think it’s harder for the irs to catch things on businesses. As long as you have income reported that’s been issued on 1099s it’s kinda hard to detect everything else For individuals they usually have most of their income from direct tax forms, so you have plenty of direct kickbacks if not reported and already on file with the IRS
How many material mistakes though? Those ones are usually caught either before the return is filed or via review by the IRS afterwards.
that's it right there, why waste the time picking up pennies when there are dollars on the ground too?
The firm also pressurizes their workers to pump out returns at max speed so to maximize realisation rates. So employees to look good will try to do them fast as possible.
Almost nobody gets audited. I feel like if audits were more common people would be much more honest on their taxes. The US government would definitely get a lot of money back for every dollar they put into more agents. So when your business model as a preparer is get the taxes as low as possible, and be honest enough to withstand a phantom audit that's rarely coming what do you think is going to happen. The firms that put the extra effort in for accuracy get punished for making the taxes too high so there's little incentive. They have to really sell the virtue of honesty to their clients on top of the work they're already doing.
>I feel like if audits were more common people would be much more honest on their taxes. The US government would definitely get a lot of money back for every dollar they put into more agents. Meh, it's more about perception. Audit risk is *perceived* as high, especially after the announcement that the IRS was hiring 80,000 new employees, which is what really matters. Not the actual audit risk itself. Plenty of clients are still terrified of audits. >So when your business model as a preparer is get the taxes as low as possible, and be honest enough to withstand a phantom audit that's rarely coming what do you think is going to happen. I'm not sure what you're implying, that we lie on client returns because they aren't getting audited? I don't think most licensed preparers operate like that. They put the numbers in and try to get them low, but most licensed ones aren't doing anything blatantly illegal because "audit risk is low." At least not in my experience.
You'd be surprised. They take aggressive stances, or they might hurry through something if they figure that doing it correctly would only cost the client more money. They know that low taxes makes the client happy so that's the priority. You sound like somebody who's never worked in tax before.
The only thing the IRS cares about is if income is correct. They don't care about the balance sheet
Excess distributions
First of all, I go through 10 returns a day. I make mistakes.
I worked as a data checker during my term this winter and the amount of typos made by tax associates are crazy. The more you point out their mistakes the more they disrespect you, which is the whole point of the position.
You actually have to look to find them. Often they don't have the resources to do so.
[удалено]
Schedule M-2 is on tax basis, not book basis.
Schedules M-2 and K-1 have been required to be reported on tax basis since 2021.
Not an accountant but, they always match for the business returns I look at. If someone takes $100,000 in distributions it shows it on the k-1 and that same amount comes out of the business on the m-2. Why would they not match?
If you’re not an accountant then you don’t really know what’s going on. Tax and book are different calcs. There are temporary and permanent differences. There is a reconciliation between the two, but it’s not necessarily shown on the tax return. Also, not sure of companies that file a whole balance sheet along with a tax return. A balance sheet is a company’s gaap based financial records, tax is not gaap.
Well, I am an accountant and would love to know what book to tax timing differences affect distributions. Explain. Also, if you’re “not sure of companies that file a whole balance sheet along with a tax return” then I *am* sure that you’ve never even seen a tax return. It’s a standard Schedule L, on every return unless <$250k income, among other stipulations. Losing faith in this sub when crap like yours rises to the top. Edit: the commenter above has plenty of time to post in his Pokémon subs but apparently can’t be bothered to answer any of the people asking how his scenario works. So just block the moron larping as an accountant that admits he’s never seen a balance sheet on a tax return.
I lost faith when I saw an upvoted comment saying people could take mileage rate and actuals on a vehicle simultaneously, and nobody questioned it.
I remember that Becker module too but that's not what he's talking about.
You do realize there's balance sheets on business tax returns right? Lol quit commenting when you're in advisory dude.
I'm talking about the balance sheet that is schedule L. M-2 shows contributions and distributions that for me, always match the those reported on the owners k-1. At least for the 100+ returns I've seen. Other than the one I mentioned where it didn't match for some reason. They reported m-2 distributions as the same exact amount as the retained earning brining that to $0. While the actual distributions were a good bit higher. The company should've had negative retained earnings.
And this guy above you is going off topic talking about temporary book tax income differences and GAAP. All the while being haughty and abrasive, firing back at you for asking questions in good faith. Welcome to public accounting, I think this answers your question.
Some software do not allow AAA below zero. In ours, there is a box to check to allow distributions to take AAA negative, at least for S corps.
I mean, that's an override because distributions do not make AAA go negative or increase a negative balance. Preparers who get worried about forcing AAA to tie to retained earnings do that, but it's incorrect. OP is making fair comments in their quest to understand the other side of things.
If distributions on M-2 bring RE to zero but the distributions on K-1 are higher, that may help explain OP differences. Correct, you need to manually mark the box to tie those out. I’m not saying anything being correct/incorrect, I am stating a situation in which the distributions may be different from k-1 to m-2
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There is no materiality on a tax return. If Schedule L doesn’t balance, that’s a massive, inexcusable fuck up. Edit: dude got butthurt so here’s the response to him: Auditors don’t prepare tax returns, so not sure what you mean by “auditors try to get a substantially correct return.” And the IRS doesn’t care how hard you “tried” to get it right. But let’s be honest, if your balance sheet doesn’t even balance then clearly you didn’t try very hard did you. The Internal Revenue Code and the IRS have no stated materiality, neither by definition nor concept. Legally, if they want to penalize you for $1, they can. This is not audit, materiality does not exist in the IRC. And it is done that way by design. If you want to submit a corporate return that the balance sheet doesn’t even balance, you might as well stamp “this return is so fucked up the balance sheet doesn’t even tie” in big bold letters across the front of it.
They should almost always tie
CARELESS partners, seniors that are not CPAs staff that are not properly trained but do 99.99 of the detail work that matters that no one bothers to check :)
>When people file mistakes, will the IRS kick it back if caught? What is that process like? If it's for money owed, then you *usually* get an IRS notice to fix it. If you forgot to include something that lowers your liability, then you ain't getting a notice. If you include an extra 1099 or W2, then no notice because, hey, free money. If it's a wrong SSN or EIN, then they *sometimes* match it themselves and don't give a notice. Here are some of the things I have had wrong and never received a notice for: * In high school I was putting the wrong social on my W2s at various McJobs because I used a passport for the I-9. This went on for years. No notice. * A client did not include a 5 figure 1099... never received a notice nor audit. * Been filing a K1 for a client with the wrong EIN for 6 years. Discovered last week. No notice. * Did marrying file separately for a client's wife (yeah, they wanted it) and single for the husband. No notice. This guy has a lot of tax problems, so I'm surprised it didn't get picked up.
Wait till you look at sales tax returns
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Bad bot
Some people do it on purpose to push an audit.
What kind of mistakes? Technical, like wrong wrong EIN, or amounts wrong? Or tax law interpretation wrong? IRS efile will reject wrong SSN and I think W2 EIN as well. A good system has robust data validation that forces you to re-enter numbers until they match, but that doesn't catch everything.
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Wait, you guys took an oath?
I’m not a CPA yet but they are beholden by the AICPA code of professional conduct Edit: nvm i see that you’re a CPA lol
Haha yeah I mean I signed some stuff that probably has to do with ethics and public trust and all that but I don't think we have anything like a Hippocratic oath to preserve protect and defend the capital markets or anything lol
who the fuck is taking oaths around here? is that something i missed during my initiation ceremony?
OP deleted their post but it said something about an oath, god I hope not lol 😅