New client, individual, owns interests in a couple of LLCs. The investments are about 10 years old. Apparently, operating agreement required losses to be allocated first to positive capital accounts, but there have been several preparers over the years, and losses were not allocated correctly in several years. It looks like my client got short-changed about $350k over the years. Of course, that means that his basis is higher than it should be, and if he walks away, what would have been operating losses become capital.
The CPA who now prepares these returns asked me how to handle this issue. I said that this is way above my pay grade and I cannot advise. I said that I think they have a serious issue to discuss with a tax attorney.
How does an entity rectify this sort of situation? I am asking because I am curious - I am not going to get involved with these entities. What a mess.