Opinions Please

[Terry D EA]

I prepared amended returns and a current 2023 form 1120 S for a client who received the ERC. The client did not like the tax bill associated with the amended returns. The client had talked to a CPA friend who told them not to amend and to report the wage reduction in the current year because the ERC refund was received in 2023. The S Corp experienced a huge loss for 2023 which the majority of the loss would be absorbed by the disallowed wage deduction adjustments. I researched forever trying to find a citation, article, ruling or whatever to support that position and could not find anything. I even enlisted the advice of a former IRS agent, professor who can normally cite any code that is available who told said the CPA friend was giving very poor advice. His research did not turn up anything more than mine. I advised the client the language was very clear that an amended return(s) are required to be filed showing the disallowed wage deduction for the period and year the ERC was calculated. Client has chosen to terminate my services and presumably follow the CPA friends advice. Client paid 85% of my invoice which is ok with me to cut my losses and move on. 

Questions are, should I send a letter to the client citing the date of the termination of my engagement? If so, should that letter contain a statement holding me harmless of any future tax filings? I think I should at least revoke the 2848 that is on the CAF. What documents, worksheets or other information that I have should I turn over to them? They have been provided copies of their tax returns, depreciation schedules; etc. every year. This is kind a sad really as I served this client for 20+ years. 

[Lee B]

Yes, I would send a letter confirming the termination of your services.

If you have not already done so in writing, I would advise your former client to file the 2023 Form 1120 S and the amended tax returns that you prepared.

In addition I would make sure that all original documents have been returned.

Yes situations like this are depressing.

I am currently in the midst of ending my relationship with my third largest business client which started in July 1993.

[Medlin Software, Dennis]

Yuck. This is an issue with opinion-based services (with little chance of bad or dark gray opinions getting caught). Same with a tax preparer helping get withholding to the liability amount, say to make their net meet expenses every month, and then getting fired for not getting a "fat" refund.

I have been fired so many times I have lost count! I still, to this day, get into it with CPA types who do incorrectly tell my customers something. The most common examples are owner/shareholder who are also employees. CPA or other "expert" says to pay themselves wages once a quarter/year (the expert later cleans up all the "draws"), or report >2% S Corp health insurance once a year. The former do get caught "tax shifting" from time to time, the latter never get caught because it is a tax wash, but still improper.

I remember doing the math for ERC to present it, and some would look at me sideways when I pointed out the ERC $ was not what the net would be. Funny, I am still ticked at the after the fact claw back of the last ERC quarter to help fund the recovery act money. Catch-22, some of the money went to rehab two race tracks I like to watch, those tracks are not going to give me a discount to cover the ERC I lost to help pay for their "gift". I thought I would personally get at least some via recovery act credits for solar and electrical upgrades, but CA has made solar a non-starter for me, given my age, roof size, and ability to shift loads to off peak.

[Medlin Software, Dennis]

I would spend the time to make internal note outlining the situation, what you did on termination, and what possible complications (and if known, solutions) for the future. All while fresh, in case something comes back a couple years later.