- If your client is commingling personal and business transactions, advise your client to stop immediately. Emphasize the need to separate finances and inform your client that commingling transactions increases his or her risk in an audit. Commingling also creates complicated accounting for the business that costs your client in taxes and preparation fees.
- Determine your loss limitations. Document your basis calculations and at-risk limitations for losses taken on your client's personal return.
- Check your client's income. You may want to "audit" your client. Review your client's bank deposits and do a quick test to reconcile the deposits back to the return. Watch out for cash receipts. If they are not deposited and/or recorded, look closer to determine whether your client's income is reported in full.
- If your client's S corporation has income, little or no salary paid, and distributions to the officer, be prepared to provide an explanation. Ensure that your client has paid a reasonable wage to the officer. Failing to do so could result in increased scrutiny and recharacterization of distributions to wages, resulting in employment taxes owed, as well as other issues.
In recent years, the IRS has increasingly focused on tax preparer registration and due diligence requirements. As the IRS prepares to conduct more audits on partnerships and S corporations, the IRS will focus on the accuracy of your clients' returns and whether you took the proper steps to help your clients comply. Follow the simple tips outlined above to guide your clients toward compliance and avoid audit adjustments and penalties.
Jim Buttonow, CPA, CITP is Vice President of Product Development and Cofounder of the tax technology company New River Innovation. Jim's professional mission is to apply emerging technology to problems faced by tax professionals after they file.
Jim is a CPA and former IRS Large Case Team Audit Coordinator. He worked at the IRS for 19 years. Since leaving the IRS, Jim has represented many clients before the IRS. At New River Innovation, Jim is the chief architect of Beyond415 (Beyond415.com), an award-winning technology for tax practitioners to efficiently handle IRS issues, notices and audits. Through Beyond415, Jim also develops and presents CPE series on IRS practice and procedure for issues that arise after filing, such as audits, notices and discrepancies. Jim regularly speaks on compliance trends and post-filing practice efficiency strategies for CPA and accounting firms.