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Discussion:LONG! Unpaid fees - request for work product, what to do?

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Discussion Forum Index --> Basic Tax Questions --> LONG! Unpaid fees - request for work product, what to do?


Discussion Forum Index --> Tax Questions --> LONG! Unpaid fees - request for work product, what to do?

Aatop (talk|edits) said:

22 February 2014
This is a very long story, but I will keep as concise as possible unless more info is requested.

Corporate client is requesting 2012 depreciation schedule, my guess is they are moving on to another accountant . I have no problem giving the other accountant a depreciation schedule as I would hope to be extended the same courtesy. However, the client owes me over $7,000 in fees. The hitch to that is that I have a feeling I may never get them.

The client is a franchise that opened its 3rd location during 2012. The majority shareholder ran the operations and also took care of the "bookkeeping" for almost 3 years. As each location was added, the books were less complete, penalties incurred due to missing payroll and sales tax deadlines nearly every month, personal charges on credit cards paid with corporate funds....a true disaster. By 2013, when I was given the "books" for the year 2012, I was pretty much recording and/or cleaning up a few thousand transactions. During 2013, another shareholder (all shareholders are family members) came on board to take care of the bookkeeping, actually doing a fabulous job. After the 2012 return was completed, the new bookkeeper came to me to get their books to match the tax return. In the process, we discovered a few minor errors in my work and a MAJOR error. This resulted in amending the corporate return as well as the individual returns for all shareholders. The original returns reflected overpayments on all shareholder returns which were applied to 2013. And you guessed it, MAJOR balances due on the amendments.

So now the horror story unfolds.

When I filed the original corporate return, it was rejected stating that the "Return Header" did not match IRS records, i.e. the IRS did not show their s-election back in 2010. Everything I could find at the time said the return just needed to be submitted on paper OR call the IRS help desk (I read that as either would be acceptable.) My assumption was when it was processed, it would be either processed as it had been the past 2 years or they would receive a letter at which point we would respond. The response would state that they met the conditions for late election and we would move on. Next came the discovery of the errors that resulted in the amendments. Then a notice to the shareholder with the simplest return. They owe an additional $11K. Why? Oh, because the 2012 overpayment on the original return was applied to 2013. I did not know at the time that when you amend, your amended return will not and cannot change the original election to apply the payment to a certain year's return. (Talked to 6 other CPAs and a 30 year veteran of tax prep, no one had heard of this either. Of course, I discovered that you knowledgeable folks did once I delved into researching the problem.) The other 3 shareholders have not received their notices yet but in total we are talking about about $44K between them all. I have agreed to eat the penalties and interest they are incurring because of this (as I had on the penalties and interest from the original return date to the amended return date.) Those penalties, however, in my quick and dirty calculations, may amount to around max $1,500. And now, the letter I was expecting on the non s-corp status has arrived. The incorporating attorney says he hasn't prepared 2553s since before he incorporated them. I worked for a firm at the time the business was started and was graciously given their file with all workpapers once I ventured out on my own. I have a note with the numbers 2553 on it but nothing stating what was done. The attorney told the client that our firm should have verified that we were an s-corp before ever filing the first return and that this is a HUGE problem. Yes, we should have done it but with the lack of notes, I have nothing to go on and a lot of life has gone on since then. I just do not know. I will say that the original shareholder taking care of it all missed a lot of things, hence the thousands in penalties that were paid. It could have not been mailed by the shareholder or I could have missed preparing it. Again, I do not know.

I put my own nail in the coffin when without looking at the 2553 instructions or form (which I have not in several years) I told one of the shareholders (mother of 2 of the shareholders) we needed to recreate one (I wasn't thinking , it just came out of my mouth before my mind caught up with it and I could not put it back in.)and write a letter stating they met the requirements for late election. I sent them a sample letter so they could see what was being requested. Now they have hired a tax attorney to get the problem resolved and apparently moved on. The attorney has asked for my program's reject code, which I have provided.

So given all the problems, should I even bring up the unpaid fees and acquiesce to everything they request (they are quite demanding and expect an answer to each and every request quickly)? I desperately need this money or at least a good portion of it. I have already called my professional liability insurance company and will be speaking with an attorney on Monday to discuss the matter but I'd love to hear your thoughts as well.

Since this site is pretty much all over the world, there is a possibility that one of you could be their new accountant. If you are and recognize the facts here, just understand, I am a professional and at the same time, I am human. To any of you who respond, I came here for the advice of colleagues. Please do not attack or belittle me. The past 7 months have held loads of professional and personal challenges and have been the absolute WORST of my life. I am paying for it dearly. I accept responsibility for my errors here; I just need to find a way to resolve this situation and move forward. And honestly, after tax season this year, I believe I am leaving this place behind. I do not think I will ever recover from this and I will second guess ever single piece of advice or decision I make.

Ckenefick (talk|edits) said:

23 February 2014
What was the major mistake?

Coddington (talk|edits) said:

23 February 2014
Venting can be cathartic, but please save it for the attorney, which is probably what the attorney would say. Since I use my real name here, I'll say only this: I've known practitioners make far bigger mistakes and recover. Unfortunately, it takes time. Sometimes years. Sometimes you have to step back, change your job, your level of responsibility, everything. And definitely seek professional help. Good luck.

Aatop (talk|edits) said:

23 February 2014
New bookkeeper had worked on 2012 in her spare time and attempted to get it correct. She threw up her hands and gave it to me to fix when she couldn't get it going. I missed correcting some of her entries which resulted in an overstatement of COGS. I looked and looked at it but the extended deadline was upon us. I couldn't see the forest for the trees.

Ckenefick (talk|edits) said:

23 February 2014
Don't let Coddington scare you. What was the mistake?

Ckenefick (talk|edits) said:

23 February 2014
Tell us more. What about ending inventory? Are we talking about simple inventory accounting or about Sec 263A stuff?

Aatop (talk|edits) said:

23 February 2014
Simple inventory accounting. Basically 3 transactions were recorded twice. Easily spotted outside the push of the deadline.

Ckenefick (talk|edits) said:

23 February 2014
Did they get the stuff to you late in the year, shortly before the filing deadline?

And, what was the master entry to correct these 3 transactions, that was ultimately made on the amended return?

Aatop (talk|edits) said:

23 February 2014
They started getting me stuff in February but we agreed to an extension given the volume of work to be done. After tax season, we went back and forth with questions, seemingly every question resulted in another. I believe we finally stopped the back and forth in early September.

Debit cash Credit COGS

Aatop (talk|edits) said:

23 February 2014
FYI, cash at YE was a few hundred thousand.

Ckenefick (talk|edits) said:

23 February 2014
Debit cash Credit COGS

Now what about the bank rec? Tell us about that...

Or, just tell us if you feel you're at fault here. If you don't feel you're at fault, then tell them you want your money first.

JAD (talk|edits) said:

23 February 2014
Ok, in summary, it sounds like horrid disorganization and one concerning comment about recreating documentation. I would tell the client that I have a call in to my atty and will release the documents if he instructs me to do so. I would also ask Kevin about getting this thread off of this - as you put it - pretty much all over the world - website. You have put a lot of detail out there before determining how much trouble you might be in. That is not in your best interest. Anyone can find this. If you do have a problem, you don't do yourself or your insurance company any favors speaking out of school. A blown S corp election going back to 2010 is a huge problem, and on top of it all, you've put out information about recreating documentation.

Kevinh5 (talk|edits) said:

23 February 2014
Jessica, I've actually had to restore this thread because AAtop removed all of it, including other's comments, which is a violation of the terms of service. That also forced my hand to have to block Aatop for a short period.

In reading the discussion myself, I see no identifying info of the client, and yes, we have all made mistakes in our professional lives and done our best to make the clients whole again afterwards. That's what ethical people do, and by and large, accounting and tax folk are generally among the most ethical out there.

JAD (talk|edits) said:

24 February 2014
My concern is that he implicates himself in ways that he may not have intended - suggesting recreating documents and giving up too much information considering that he has a call in to his liability insurance carrier. I was not suggesting that he unilaterally remove the whole thread but that he talk to you about doing so. He did not use great discretion here, and if I were in charge, I'd let him delete the thread. No harm no foul, and it would be the nice thing to do for him.

Ckenefick (talk|edits) said:

24 February 2014
First, I don't see it as his responsibility to file the S-election, especially if an attorney was involved in the set-up. There's 4 parties involved here: attorney, AAtop's former firm, AAtop and client. Four people that didn't communicate. Four people that can spread the blame. And, the S-election communication should have been spear-headed by the guy that set the corp up: The attorney. (But, I will also say, I NEVER file an 1120S unless I have the acceptance letter on file).

If they can get out of the C-corp/S-corp issue, client has not paid any more taxes than client otherwise would have paid. AAtop didn't make the mistake, in my view, that caused this mess. It is just that AAtop failed to totally clean up the mess created by the client. Aatop has, however, admitted fault, by agreeing to pay the p&i. I myself wouldn't have agreed to that. But what's done is done.

Look at the facts: someone (majority shareholder) keeping the books...and it sounds like, with very little accounting experience. Unsurprising. Everyone thinks its easy, "I'll just let the Office Manager do it..." Client missed payroll deadlines. Client missed sales tax deadlines. A missed S-election. At what point does the client need to take some responsibility?

The re-creating of the document wasn't a good idea, but it can be explained away. "I believed it had been filed, but couldn't locate a copy of it."

So, here's my take: What does AAtop have to lose by simply asking for his fee? I do not believe client will initiate a suit against AAtop simply because Aatop asked for his fee. Now client might say, "Are you kidding? You caused all of this mess. No way we are paying you a dime." And, if client says that, we now move into a different discussion: Should Aatop actually pursue collection?

Since this site is pretty much all over the world, there is a possibility that one of you could be their new accountant. If you are and recognize the facts here, just understand, I am a professional and at the same time, I am human. To any of you who respond, I came here for the advice of colleagues. Please do not attack or belittle me. The past 7 months have held loads of professional and personal challenges and have been the absolute WORST of my life. I am paying for it dearly. I accept responsibility for my errors here; I just need to find a way to resolve this situation and move forward. And honestly, after tax season this year, I believe I am leaving this place behind. I do not think I will ever recover from this and I will second guess ever single piece of advice or decision I make.

We realize you are upset about this Aatop. But do not worry about it. I think the S-election situation will get squared away. At which point, client has paid the taxes client was required to pay. This means you have not caused any damage to your client. If for some reason S-election doesn't get squared away, your insurance company will fight it and will be able to make a case that it wasn't your responsibility. Going forward, never file an 1120S without first confirming the status of an S-election. In addition, be careful in letting your fee rise to $7k. It's too much to be outstanding. Also, be careful with clients that are as messy as this one. Eventually, something will go wrong because of their messiness and they'll probably try to blame someone else for it, like the outside accountant.

DebP (talk|edits) said:

24 February 2014
I agree with Chris about the insurance company - that's why we have them in case we make errors. It sounds as if it's a huge amount of disorganization. When an attorney sets up an S-Corp for any of my clients, I follow up with an email to just about everyone involved who will be filing the election as everyone always thinks the other person will do it.

However, I am a little more nervous about the fees. About 10 years ago, I had a $5k bill outstanding, and their whole company blew up a few days after I sent in the bill. Closed doors, turned down all communications, etc. When I discussed with my insurance agency that I wanted to take it to collections, they said "no" we cannot represent you with this client if you sue/go through collections them. Why you ask? Because they feel that if you try to sue the client, the client isn't paying their fees because they are upset with you and that may trigger a suit against you. You may already have a suit against you though. But my advice from my insurance was that they won't cover you if you take them to collections. I finally received about $200 three years later through the bankruptcy courts. Ugh. Ever since then I don't let my fees run that high.

Bottom line - your insurance company will help you through this. Good luck.

JAD (talk|edits) said:

24 February 2014
All, if I were a atop and I had posted online that I suggested recreating docs, I would be nervous...not of the client or the insurance carrier...all of that is small potatoes. I would be scared of the IRS. I think the powers that be should be nice and delete this thread.

JAD (talk|edits) said:

24 February 2014
I'm feeling tension on this site. Thank you all for the interesting discussions. I'm taking a break for a while. Good luck for the rest of tax season.

Ckenefick (talk|edits) said:

24 February 2014
I would be scared of the IRS.

Point taken, but, for one thing, we really don't know what happened with the recreated 2553. Aatop also references a letter requesting late relief. So, it sounded like to me, he wasn't necessarily making the argument: "We filed the 2553 for sure. Here's an exact duplicate copy of the 2553 that was filed." It sounded like he was going to put one together, back date it, attach a letter and say, "Here's the 2553, enclosed with this letter, shareholders back dated it to show their intent. We filed all returns as 1120S' since inception and picked up all pass-thru income on their original and amended 1040's consistent with a valid election." Moreover, we don't even know if the "recreated" 2553 was filed with the IRS.

Okay, that's the best case scenario.

Worst case is the 2553 was backdated, was actually submitted to the IRS, was purported to be a duplicate copy of the original filing and a statement was made that the original 2553 was timely filed. In this case, IRS might simply check their database and say, "I'm sorry, we have no record of it. We disagree with you. And, since you've provided no evidence of timely mailing, we reject your 2553." And it ends there.

Or, worse, worse case scenario is that IRS believes the newly submitted document to be a fraudulent document. Ok. But remember, if this is this case, Aatop sounds like he'd readily admit to it and suffer whatever sanction might come of it. And he will, and then he'll get over it, and then he'll move forward. But this worse, worse case scenario is far from clear in the OP.

Lrichards (talk|edits) said:

24 February 2014
I've got to jump in to say two things. First, Kudos for all the great advice to Atop. Second, mistakes happen even when we have the best of intentions. The best insurance is know who you are dealing with, and screen these damn clients out during the initial interview. No money in the world is worth dealing with jerks like this client. Oh, and I guess a third question, does the engagement letter cover fees.

Bushmaster (talk|edits) said:

24 February 2014
I have successfully gotten an S Corp election back dated over 15 years. Facts and circumstances were they filed an S Corp return in year 1 and every subsequent year, shareholders included the income/loss every year for over 15 years. Prior CPA, attorney, etc etc.

Not sure how the regs cover non CPAs, but you don't have a choice but to return the clients records. You are under no obligation to turn over work product that hasn't been paid for, but if you are worried about getting sued, use it as a bargaining chip.

Also, I lost a client thru IRS audit that owed me a bunch of money (ran up during audit). I didn't sue for collections. If she ever sues me, I will bring it up.

Tonymontana (talk|edits) said:

24 February 2014
I have agreed to eat the penalties and interest they are incurring

Why don't you offset your fees by the penalties and interest and bill for the balance. You can also waive the balance if they sign a release and just move on. Is the money really worth the stress and grief. I had an issue with an LLC last year. Insurance paid, they signed a release and we moved on.

Lrichards (talk|edits) said:

24 February 2014
I agree with everything posted so far on this thread, and again excellent advice. One thing I would like to add when Atop is back in, is we work together with clients in there behalf. They have to be part of the team. This reminds me of a trust I had years ago. We had been filing it as a simple trust. One day I looked up something in the trust docs and found out it was a CRT. No idea how I overlooked it, but it scared me that I had missed something. I raised the issue with the trustee and Attorney, and was told it was all ignored based on the way the Estate tax return and trust was funded some fifteen years back. Fine, but the docs indicated otherwise. I got the Attorney and Trustee to put it in writing, they did, and it is in my file in case it ever comes up again. In short the Attorney and Trustee held up there end of the bargain. Atop, your situation with the notes about "2553" being incomplete is the first clue that those you are dealing with are not going to be honorable. I like especially the step by step approach Chris is recommending. Look at it step by step and you may likely find you are not the culprit here. Sure, you may have made mistakes, we all do.

Aatop (talk|edits) said:

1 March 2014
Thanks Kevin for reinstating my posting privileges. My apologies to those in the community for violating the rules. While I misunderstood the workings of a Wiki site a few days ago, I have been "schooled" in such since then and appreciate the opportunity to interact with other professionals such as each of you.

And thank you for the words of encouragement. It's been an eventful week, including 2 deaths in my spouse's family (involving the same family members) within 72 hours of each other.

In the meantime, client contacted my former employer and asked for all electronic files (I did not get these when I was given the paper file) for their corporation. Any emails were unrecoverable because they were never printed or saved and the email address was abandoned 2 years ago when I left. The electronic files however included a password protected 2553. The fact that it was password protected, and what password was used, indicates that it had been emailed to the majority shareholder. So it's a mystery as to what happened after she received it. Attorney seems to think this will resolve itself and I can then move on.

On another note, when I emailed them a few weeks ago, I had realized that they qualified for (I thought) late election of S status and told them that the 2553 would be dated the date they signed it currently.

However, that leads to the issue that I believe really has brought this situation to this point. They are outside the 3 year 75 day window. I still think they have acted as an S the whole time and if necessary could ask for a PLR. I just hate that it got blown up to the point of me having to have a potential claim on my insurance as well as a $1k deductible that will be spent in attorney fees.

I did provide the depreciation schedule and will provide any other docs they request in an effort to keep things amicable.

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