Adjusting Books to Match the Tax Return

Hello,

Some clients insist on adjusting transactions after the tax return is prepared and filed.

Others could totally care less or don't even know about it.

many of my small business retail clients don't even use QB or other software, and they just present a simple spreadsheet (some of these are really detailed and good, actually).

My question is..... how important are these adjusting transactions?

Are the clients that don't do this putting themselves in a bad position somehow?

Per Circular 230, please note the following:

§ 10.21 Knowledge of client’s omission.
A practitioner who, having been retained by a
client with respect to a matter administered by the
Internal Revenue Service, knows that the client has
not complied with the revenue laws of the United
States or has made an error in or omission from any
return, document, affidavit, or other paper which
the client submitted or executed under the revenue
laws of the United States, must advise the client
promptly of the fact of such noncompliance, error,
or omission. The practitioner must advise the client
of the consequences as provided under the Code
and regulations of such noncompliance, error, or
omission.

Accordingly, as a tax professional, all you can really do is advise the client regarding the possible implications of these errors ("errors" assumes that these post-filing changes are not being made with nefarious intent). However, moving forward, I would request that the client confirm in writing that financial statements have been finalized prior to the filing of tax returns. Furthermore, I would make clear that a pattern of subsequent adjustments to tax return amounts will result in disengagement.

How are you going to handle next year's tax returns if they have changed 2019 books? RE won't tie.
My clients get "yelled at" for doing this.
If there truly were errors, then we amend. Otherwise they are to be hands off and/or call me to discuss.

My apologies, I did a poor job of explaining the situation.

Client provides completed and accurate books.

Tax preparer completes and files the tax returns.

Client then asks the tax preparer for the adjusting transactions to make the BOOKS "match" the tax return. Things like depreciation, gifts over $25, and meals (etc) that were reported slightly differently due to the way these things are deducted on the tax return.

Every once in a while, clients ask me to go into their QB, or provide a summary, as to adjustments they THEY should make to help match their books to the tax return we filed.

They don't want me to change the tax return. They want to now change the books so it matches the return.

We always give the clients AJEs.
We don't have them record book/tax differences.

Ditto.

We use their QB data file as our internal trial balance. Or in case of QBO, we adjust it live.

Last year, I was honest with the (retail tax preparation only) client and I told her that, as an EA, I don't have any formal education or experience with providing the required adjusted entries. But proceeded with us anyway and I gave her some simple adjustments so that the balance sheet matches the depreciation I took on the tax return. I'm not an accountant, but I've learned some simple bookkeeping fundamentals over the years.

This year she is back and asking for services again, as she is happy with us as her tax preparer and does not wish to go elsewhere.

Again, I disclaimed my lack of experience with adjusting entries, and admitted that if she wants these, she's definitely better off with a CPA.

She came back with, "well, how important is it if we don't do it, or if it's not right? What kind of problems would I be looking at down the road?"

I don't know the answer. I can sort of provide them, but I don't know if it's correct.

I kind of feel like, in an audit, "it doesn't matter that much". If the income and expenses are categorized and accurate, and if the equity flow to and from the business is accurately accounted for, that's all they really care about.

I picture my (surprisingly smart and tax compliant) body shop guy who gives me a simple spreadsheet, his payroll reports, and an ending business bank balance (no software or bookkeeper). He's very accurate and compliant and he does not co-mingle anything. There are no entries to make anywhere - and he's just fine and legitimate.

But then my spider sense asks, "well then why does everybody do these entries? I must be ignorant of something here."

We always give the clients AJEs.
We don't have them record book/tax differences.

This. I give them AJEs, including for depreciation if maintained on tax basis (and all of my clients do this). Some have such sloppy bookkeeping that there is a very long list of AJEs but I typically have access to do them myself. Other clients are clean and have only a few AJEs.

I do not provide anything for permanent book/tax differences, such as meals, income and/or expenses on one but not the other, charitable contributions, etc. Strictly anything that needs to be adjusted or recorded for correct financial reporting.

Thanks for all of the answers.

I guess what I'm asking is, "How necessary is this step? What are the negative consequences if it is skipped?"

Thanks!

Thanks for all of the answers.

I guess what I'm asking is, "How necessary is this step? What are the negative consequences if it is skipped?"

Thanks!

The biggest issue is if the taxpayer switches tax preparers, and the new tax preparer is not aware of what should be recorded on the books. Also, in some cases, not providing AJEs can make the financials misleading.

If taxpayer stays with same preparer, and preparer is on top of things, then realistically there is not much consequence from a tax standpoint. And unless you are also involved in the books, no consequence if taxpayer fails to record necessary adjustments for financials to be accurate to third parties.

At least, that is my simple opinion based on various experiences.

For my business clients, I want them to take their bookkeeping serious. This is an important part of their business. I want them to read and understand their financials. This will help them manage their business and I believe this can help them be more successful.

"Forcing" them to adjust their books gives more formality where formality is necessary. They look to their accountant to hold them accountable for their bookkeeping.

… Or maybe I am just full of myself.

You're not definitely not full of yourself. There's certainly nothing wrong with doing things with integrity and doing it thoroughly.

Plus if you are introspective enough to consider if you are full of yourself or not, then you couldn't be full of yourself.

But anyway, thanks for the help to everyone.

I thought the IRS requires a set of "books and records" and those must match the tax return otherwise a bridging document is required detailed with the differences identified. I don't think the books have to be accounting software, a spreadsheet would suffice. And if the clients have a very simple operation, sole proprietor, smllc, etc., then adjustments would be minimal. As an accountant I want everything reconciled and want to tie one balance to another, it's just what I do. It also can make for an easier time should there be an audit, if source documents match up, etc.

Tax return and books need to match in our practice. Most clients hire us for bookkeeping and AJEs. If they have a third party bookkeeper, then we ask for the QB accountant's transfer file, make the AJEs, and bookkeeper imports them. In the past, not all bookkeepers were diligent with putting in the AJEs resulting in books that were off.