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PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4014
Experience:  35 years tax experience, including four years at a Big 4 firm.
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I have discovered my CPA failed to file Schedule E losses in

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I have discovered my CPA failed to file Schedule E losses in 2007 and 2008 that would have carried forward to my 2009 return. He acknowledged that this cost me about $40,000 in taxes. Since it is now 2013 and, with statutes of limitation, can I still correct 2009 Schedule E to properly reflect the losses?

PDtax :

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PDtax :

It sounds like you are aware of the general rule that limits your return amendment to three years from the due date of the original filed return.

PDtax :

to Q & A for more...

Hi Bob,

Sorry you find yourself in this predicament. I sure hope your former pro has errors and omissions insurance.

There is a lesser-known extension of that general rule for the statute on amendment, it is the later of three years from when the return was due or two years from then the tax, interest and penalties are paid. I don't know if this helps you, but if there were balances due that took a while, you might open more years.

What's worse is those losses, if they included depreciation, have to be counted when you sell the property (the rule is claimed or claimable depreciation - just a FYI).

Please advise if this helps, or if I can assist further. Thanks from Just Answer/PDtax.

If you are close on a statute but can't file in time, a protective amendment (enough to keep the statute open) or an agreement with you and IRS can extend an open statute.
Customer: replied 3 years ago.

These were business losses in a sub-S corp. I contributed money to the business while it was a sub-S in 2007, 2008 and early 2009 - most in the earlier years. We converted the sub-S to a C Corp in July 2009, and filed half the year as an S Corp and half as a C Corp. I used a new CPA who did not understand the info from the old CPA. Plus old CPA had not properly recorded my investments in the business in the prior years. New CPA concluded I had no basis left in the S Corp when, in fact, I did.

If I file an amended 2009 now, showing the cumulated losses that were overlooked, how might the IRS treat that? They're accurate losses, but do I violate any laws since the prior years are out of statue and I am unable to amend returns prior to 2009 because of statute?

Ok, so the short period final S was due 3/15/10, wasn't extended, and now you have three years to amend the S returns? And the losses were suspended due to a basis error. Isn't that a 1040 amendment issue?

As such, aren't these losses suspended for use until you have s income or sell the corporate shares? Just thinking out loud here...

It also sounds like you have made contributions or loans to the business in prior years - how were they characterized on the old returns? Loans or equity? You might have a business bad debt claim if they were loans...These loans get ordinary loss treatment...

I'd love to look at the balance sheet to see how they were characterized. Or, if you have the flexibility to properly 'paper' those contributions to justify writeoffs...

Even if those things don't work, the suspended S corp losses are just that, and they don't expire worthless. Converting back to S may just allow them to be deductible in 2013.

It does seem like there may be some ways to salvage the loss value. Let me know if I can offer more from this end...

Customer: replied 3 years ago.

Thank you. This is helpful. The contribution shows on the balance sheet as a loan to me and is still on the balance sheet today. Conversion to S is not an option as the company itself has closed its doors and will either bankrupt or just dissolve with a possible Federal tax liability tied to treating debt write-off as income.


So, if company is effectively defunct and I have a loan to it on the company's books, are you thinking I could write that loan off as an ordinary loss? (Business was started by me and then brought in investors in mid-2009, forcing conversion to a C)



To get ordinary loss treatment, you will need to make sure that the loan has substance (a promissory note) and there has been evidence from you of attempts to collect the debt (your letters to management, mention in company minutes) will support your attempts to collect.

The conversion to S might still make sense if there are suspended losses you can use, but a review of your loans may make business bad debt treatment a better option, especially with the writeoffs of other loans as income. Note that your loan writeoff is income, but it sounds like you have a handle on that as well. You should consider the suspended S period losses as well in the review.

I would review the business bad debt rules, and substantiate the loan and your attempts to collect as best you can. You could turn capital losses into ordinary.

Good luck; I knew there was more to your question than originally asked. The business bad debt idea could be worth its weight in tax refunds.

Thanks again from Just Answer/PDtax. Positive feedback and bonuses tell management you are happy with my work.
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