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Archive for July 7th, 2010

Income shifting needs to be properly accounted for

Posted by taxguru on July 7, 2010

CPA Disbarred for Failure to Exercise Due Diligence and Compliance Problems –  This IRS announcement is an important reminder that the numbers need to match when shifting income between a corporation and its owners. 

I don’t know all of the details of this case, but it seems obvious that some taxpayers were audited and it was discovered that they hadn’t reported all of the income they had taken out of their corp.  Of course, their response was to blame their tax preparer, Gainesville Florida CPA Tim Kaskey.  Kaskey might have been able to claim innocence in this case if someone else had prepared the corp income tax returns.  However he had prepared the corp tax returns and could very easily see how much money the owners had taken out of the corp as deductible compensation.  I can therefore see how IRS would have a good case in holding him partially responsible for the erroneous 1040 and hit him with preparer penalties.  Disbarring him from practice seems a bit extreme of a punishment, unless they also discovered a pattern of similar situations with other clients he worked on. 

I have no idea whether this was an intentional attempt to defraud by the shareholders or the accidental consequence of sloppy bookkeeping.  It is a perfect example of why I have always insisted that every corp client I work with has its accounting kept with QuickBooks so that we have detailed records of all payments made to the owners.  It is one of my normal procedures when preparing the owners’ 1040s to examine the corp payments for the calendar year and make sure we are reporting the exact same totals on the 1040.  I do often find differences between the figures on the corp and personal books and have to scold the clients to be more careful with their postings.  I always adjust the personal figures to match what was reported on the corp tax returns and then we have no problems with IRS.  

 

TaxCoach Software: Are you giving your clients what they really want?

 

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