Help with IRS adjustment

[ILLMAS]

IRS disallowed $15,000 (1/2 of meals) in meals on the tax return, do I make an adjustment for the $15K or the $30K, to remove the whole amount from tax return and books to match the retained earnings calculated by the IRS?  

[Lee B]

Since you mention retained earnings, I assume you are referring to a C or S Corp?

What you have is a Book - Tax Difference which is a Schedule M-1 adjustment for an expense recorded on the books which is not a tax deduction.

There is no book entry needed.

[Sara EA]

Does anyone here question a client when they submit some huge figure like $30k for meals or 62k in mileage, especially if their gross doesn't seem to warrant such expenditures?  I know we're not required to audit clients, but I wonder how others approach seemingly unreasonable figures.

[Margaret CPA in OH]

Well, I question odd amounts or expenses 'for clarification.'  I do very few businesses now, just a handful of Sch. C's but when I did others, if the client survived my first tax prep year, I felt reasonably confident in subsequent years.  I lost a few clients along the way and did not regret it.  After all, I had to sign the return, too.

When folks tried to claim deductions for 'bags' of used clothing, I refused to provide the value.  I also would point out that the work valuing the donation could be a further contribution and ask about the true reason for the donation - charity or tax deduction?  Typically the deduction would end up not being worth their valuable time to value it.

[RitaB]

2 hours ago, Sara EA said:

Does anyone here question a client when they submit some huge figure like $30k for meals or 62k in mileage, especially if their gross doesn't seem to warrant such expenditures? 

 

  I do.  

 

 

 

 

 

[ILLMAS]

17 hours ago, cbslee said:

Since you mention retained earnings, I assume you are referring to a C or S Corp?

What you have is a Book - Tax Difference which is a Schedule M-1 adjustment for an expense recorded on the books which is not a tax deduction.

There is no book entry needed.

Thank you 

[ILLMAS]

11 hours ago, Sara EA said:

Does anyone here question a client when they submit some huge figure like $30k for meals or 62k in mileage, especially if their gross doesn't seem to warrant such expenditures?  I know we're not required to audit clients, but I wonder how others approach seemingly unreasonable figures.

Seem like it’s a big about but it actually about .001% of the gross income and the auto expense exceeds $100K

[Catherine]

On 8/4/2020 at 9:10 PM, Sara EA said:

Does anyone here question a client when they submit some huge figure like $30k for meals or 62k in mileage, especially if their gross doesn't seem to warrant such expenditures? 

Absolutely I question them.  I don't question what looks in-line with prior years.  I do question when something is suddenly out of whack, or a new client, and every one of them are told that while I don't need to see the logbook or the receipts, if they are audited they will be required to provide them to the IRS, and these amounts are high enough to be a red flag. 

Now that you know this, client, is this still the correct figure?

And I document that I have asked them (usually by email, and I print the email and response to pdf in the folder for the correct year).

[Terry D EA]

I always question them and advise them as Catherine has said. I tell them I don't want any surprises in an audit. Also, if it is a new client, they get questioned a bit harder and if I think I smell a rat, then I set them free. Agree, document. I use Drake and keep notes in the client file. I add the date and time along with the details. I show it to the client for their approval.

[RitaB]

1 hour ago, Terry D said:

... Also, if it is a new client, they get questioned a bit harder and if I think I smell a rat, then I set them free...

I like to say, "If you drive at 60 mph, and work seven days a week, you're driving 2 hours and 45 minutes a day for your work.  Imagine how much money you'd make if you found a job where you didn't have this excessive travel burden."  If they don't recheck their log, I'm with Terry, it's a catch and release.

[Gail in Virginia]

I don't look good in jumpsuits, and I worked too hard to get my EA certification.  Some clients just are not a good fit.  Better to figure it out sooner rather than later.