Capitalized Closing Costs

[Michael Murphy]

I have run into situations with a new bookkeeping client where no prior closing costs were capitalized for property purchases.  Every fee / cost on the closing statement was booked to an expense account.  These transactions go back for multiple years.  There were a myriad of other errors as well (the prior bookkeeping firm was a budget operation located overseas) and we will likely need to file amended returns to address those issues.  The CPA is trying to limit the amendments to 2 years.

I find myself in a delicate situation because the CPA has a close personal relationship with the client, and I am pointing out quite a few errors previously made.  The client was not carefully reviewing the materials getting sent to the CPA and the CPA was taking them at face value.  I haven't seen anything that would make me believe that the client intentionally expensed items that should have been capitalized.  In fact, many of the other errors were expenses that they failed to record (e.g. not reconciling escrow accounts and missing property tax payments).

My question for the tax veterans is how you weigh the cost / benefits of amending returns to correct errors?  Is this a situation where you say amend everything back as long as you need to (probably 5 years in this case) because that is the only way to do it correctly?  Or do you assume that the older returns are water under the bridge and just do a correcting GJE 01/01/2023?

[Michael Plaks]

@Michael Murphy

In your particular position, i.e. a bookkeeper stuck between a client and his CPA (and their  close relationship is really irrelevant for this conversation), the answer appears to be pretty simple.

- you're not responsible for amending anything, this is the CPA's headache
- you're not responsible for correcting bookkeeping errors of your predecessor
- you ARE responsible for maintaining correct books from now forward

So the approach I would have adopted, were I in your shoes, would be:

1. Mr. Client, I noticed a number of mistakes in the way your books were handled in the past. Please discuss it with Mr. CPA and jointly inform me if you want me to make any corrections or adjustments.

2. Please be aware that going forward I will be recording certain transactions differently, specifically: ______

If the CPA and client decide to leave the past as is - not your problem. If the CPA decides to deduct fees that you capitalized on the books - also not your problem. If the CPA insists that you continue to record them incorrectly - only then it is your problem.