Your clients are surely not unique, unfortunately. I understand your issues and concerns I will address them for you as best I can.
As a RTRP or EA if you suspect or are knowledgeable of a miss-reporting of income, it is your responsibility to report that to the IRS. Now here are a lot of big ifs. IF the IRS audits 2010 income, and IF they request the QB file, and IF at somewhere through the audit the IRS finds that you knew about it, you “could” be fined for failure to report it. Not to mention the Partnership being in a pickle as well, along with the shareholders.
What I would have done and recommend:
In cases involving a business/partnership you need the last three years returns prior to working on a current return. This allows you to review. I assume when you receive the QuickBooks Data it was all one file out of the software, thus giving you access to previous years. In your situation I would at the point of realizing the problem with 2010 stopped all work and advised the client. Then if the client refused to repairing the problem and amending 2010 prior to completing 2011. If they said to me that they didn’t want to amend 2010 just fix the problem and prep a 2011 return, I would tell the client that it is impossible to do so at this would without a doubt result in an audit baring situation for them. Meaning if you send in 2011 as is without correcting 2010, they will most certainly be reviewed. As will each partner. And to drive the point home to the client, I would let them know, that as a RTRP ( I assume you are or will be) you are required to inform the IRS if you come across a situation where someone is willfully understating their income. At that point the client either wakes up or is very angry, and for that reason, I try to sugarcoat it as best I can. If the client still refuses to correct 2010 at that point, I hand their information (mail or what have you) back to them and bid them good day.
In your situation where you have already completed the 2011 return and turned that over to the partnership…. I would continue to do as you stated, complete what you need to on 2010 and the books. Turn that information over (This covers you, showing that you advised the client accordingly and made the corrections for the client, thus if the client refuses to send the amended return in, it doesn’t fall on you but them) to them and inform them that IRS stipulates that taxpayers are required to accurately report their income. Advise them that that The IRS will most likely investigate their information if it doesn’t flow correctly from one year to the next. Advise them that the IRS now has the authority to request a copy of QuickBooks files during an Audit. You might also advise them that in such cases your QB file needs to match the return (Joshua Wilson just wrote a great post article about this – QUICKBOOKS FILE SHOULD MATCH YOUR TAX RETURN FILED).
Then at that point if you feel they still are not going to amend let them know professionally that you feel that you can no longer serve their tax preparing needs. Just explain to them that new rules and regulations require you to do things aboveboard, and that failure to do so could cause you to lose your ability to preparer returns, not to mention fines.
You have a situation, but one that is workable….. I hope I have been of assistance to you, let me know if I can be of more help. Or if I was unclear here then please feel free to inquire more. I am happy to help.
So That is what I responded with…. Within an hour I received this:
Thank you so much for your quick and thorough response. This entire situation completely confirms my choice to focus on offering QuickBooks services and stay away from tax, referring to others in the future. I will take your advice and send them the information and recommendations, hopefully they will see the light and I won’t have to deal with my responsibility to report to the IRS.
I read that article the other day, it was good and it made me aware that I have much to learn about the mindset of others, silly me, I thought it was common sense that QB should match tax returns. Being the only person who used QB’s and completed the taxes for the small business I have worked with, I never had that issue. It appears it is an issue that regularly occurs.
Thanks again for your help!
If you have any thoughts for “Joe”, Please let us know, we will let her know that you have other ideas and where she can find them.
© 2012, Bruce McFarland. All rights reserved.