CPA screwed up - Options

[Bob Kontak]

Medical practitioner pal runs an office. Maybe five employees. It's a corporation. Not sure if Subchapter S.

Same CPA cranking out taxes, salaries, financials for him for years.

Let's say his salary is $100k. I did not ask. Normally a 50% bonus is paid into deferred income. The CPA forgot to do this last year.

So the $50k deferred income remained in the corporation and income tax was paid on this. His window of stuffing the 50k in a deferred account has been lost. I suspect he received the net via however corp earnings are distributed to him as sole owner/share-holder.

Anyhoo, the CPA is really sorry. But my pal is out the earnings potential of the taxes paid because of the oversight.

Thoughts on how these situations are handled or can be handled?

Although an oversight, kinda seems some form of liability on the CPA's part could be argued.

[Moses]

Good luck. I think everyone is allowed to screw up except the doctor.

[berettafan]

If you want to look at liability you might consider it was a shared oversight. The CPA, owner and even the owner's financial advisor might all share some guilt here.

I wouldn't throw away a relationship that has lasted 'years' over this. Nor would I seek any sort of reimbursement.

He does get the money either way (less tax as you correctly pointed out) although C or S corp impacts the tax treatment of the distribution.

Lastly consider that while he is out the earnings (or loss) potential of the additional tax dollars paid on the income not contributed to a 401k the math must include any additional FICA he'd have paid on the additional salary/deferral. You might also consider the impact of taking the add'l cash he now has (401k deferral less tax impact of same) and paying down debt he may have that costs more than his invested money earns.

Point being it's possibly arguable that the guy suffered a loss as big as you might initially think...or even at all if you allow for market instability assuming the 401k funds would be invested into public markets.

Full disclosure I am a CPA.

[Bob Kontak]

berettafan - Thank you. This is good insight. My pal is a silent member here and I suggested posting in off topic so he can view the thread.

Good point on the FICA. I don't know the FICA cut-off anymore. It's probably over six figures but depending on personal vs his corp tax structure, his salary may be $20k and the bonus $10k. Don't know. Also, for discussion, if his salary is $200k and bonus $100k, itemized deductions fizzle out as part of the overall equation "calculating" damage.

Regarding market volatility, surely the intended deferred bonus that remained in corporate revenue were not kept in a passbook savings account from the beginning of the last fiscal year. The "bonus" had to have been streamed into financial instruments. Last year was a pretty good market, so some of the tax whammy was clawed back thru financial gain. Had there been a down market, losing a chunk on circa $35k would have been way better than the same percentage chunk on $50k. So for last year, the CPA kinda did a good job screwing up.

Thanks again for your input.

FWIW, I passed the CPA exam first time in the way back (just a couple points away from the "300 club" - I smoked Theory) but operational accounting was my gig.

All the best.

[Tobra]

They have been changing payroll tax rules annually of late it seems

[wdfifteen]

"...stuffing the 50k in a deferred account has been lost." How does one defer paying tax on 1/3 of his income? Everywhere I turn I run into limits that are WAY short of 1/3.

[Joe Bob]

Choot 'em.....

[Bob Kontak]

Originally Posted by wdfifteen

"...stuffing the 50k in a deferred account has been lost." How does one defer paying tax on 1/3 of his income? Everywhere I turn I run into limits that are WAY short of 1/3.

Fair enough. I honestly don't know.

He did refer to it as a bonus. Clearly constructed for tax purposes, though. They do it every year. So the subject to limitations has got to be extremely valid.

Sounds overall that options may be limited to strong-arming the CPA into taking him and his wife out to dinner and the CPA picks up the tab.

Fraud is one thing, an honest oversight is another. My pal may be PO'd but I can't reasonably clarify in my mind what recourse is available except terminating the CPA. Litigation would devour any assessment of subjective damages.

[berettafan]

The market volatility bit is kind of a reach I'll admit

This is exactly the kind of thing people switch cpa's over, no question about that. But I'll tell you from a practitioners perspective when I hear new clients telling me what the last guy missed I often think 'yep I can see how that would happen'. Doesn't excuse it of course.

These kinds of things are why good practitioners in any service industry work hard to provide great all around service. If something gets missed you hope the client still finds value in your service and you keep them.