Working interest reported incorrectly

[NECPA in NEBRASKA]

I received a call from a bookkeeper for a small oil producer. She is new and discovered that the old bookkeeper had been reporting working interest payments in the royalty box. She says that there are around 10 investors that receive 1099's. This has been going on for many years. I don't see how she can go back a long time and change the 1099's. Should I tell her to go back three years and amend them? Any suggestions are welcome.

Thanks!

[jainen]

>>Should I tell her to go back three years and amend them?<<

Do you have an engagement letter from this company to handle their bookkeeping or tax matters?

If so, follow Circular 230 instructions (including instructions concerning written advice, if applicable) to advise her of the need to correct all past errors and the potential penalties involved. If not, a generic comment about tax rules, with a disclaimer that you are not offering specific advice, should be enough.

[NECPA in NEBRASKA]

I don't have the engagement letter yet. I did read her the rules and told her that there would be probably be penalties when she amended them.

[OldJack]

>>working interest payments in the royalty box. <<

The royalty box was the method of reporting for many, many, years until the IRS made such a fuss about it a few years ago. Most of my clients had very small numbers to report under either method and the result didn't have much, if any, change in the 1040 tax. Amending those prior returns would result in all the owners having to file amended 1040 returns for little if any change in tax. YOU would be very unpopular with everyone! And, its not really your responsibility to amend those returns since you did not prepare them, so why not advice the client of any future problems it might cause and let that dead dog lie.

[NECPA in NEBRASKA]

Thanks, Jack. I informed them of the correct way to do it and the penalties for incorrect filing.

Bonnie

[kcjenkins]

I certainly would not go back more than two years. If the new [about to be confirmed] head of the IRS can get audited for 03 and 04 and have to pay up for unreported SE tax for those years, yet not have to pay for 01 and 02 when he did the very same thing, that standard ought to apply across the board, IMHO. That is what they are saying, he did not HAVE to pay up for those years, he only did it to try to avoid embarrassing the new President who appointed him. [Yeah, that worked out well......]

[NECPA in NEBRASKA]

Thanks, KC. Maybe the new guy should declare an amnesty period so that everybody in the country that screwed up could pay their taxes. They could just say that it was a mistake. It would probably bring in a lot of money.

Bonnie

[Mel in Hawaii]

From the sounds of it, California should declare that amnesty program as if I remember what I read correctly they actually came out ahead the last time they tried that (receipts were higher than if they had the penalties tacked on minus the enforcement costs). But my memory doesn't work as well as it used to unfortunately...