Tax

Have a tax question? Ask a tax Expert

Ask an Expert,
Get an Answer ASAP!

Here’s the situation: Beginning Inventory and Ending

Customer Question
Here’s the situation:Beginning Inventory and...
Here’s the situation:Beginning Inventory and Ending Inventory have been very significantly understated for years. As a result, Purchases have been forced to be significantly overstated for years. COGS have been estimated and are reasonably accurate. The goal is to fix the Inventory amount moving forward (which would also fix the Purchases amount).Re-balancing out the COGS/Inventory will not work because the Inventory has been so very significantly understated for years, that there simply isn’t enough room to rebalance it out (i.e. lowering COGS and increasing Ending Inventory to re-balance) using the existing numbers. Inventory has been listed way too low to do that and it needs to be stated significantly higher (3x-4x higher!).The two key areas to fix the Inventory amount on is the Balance Sheet (Schedule L) and the 1125-A Form (COGS).The business is a 1120-S and is going to be transferred via an Estate to a Seattle couple automatically for $0. How can the couple fix the incorrect Inventory amount in these two key areas moving forward on the 1120-S?
Submitted: 8 months ago.Category: Tax
Show More
Show Less
Ask Your Own Tax Question
Answered in 11 minutes by:
9/11/2017
Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 8 months ago
taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,067
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
Verified

Hello again!

I don't know why you can't accept my answer from before. It is 100% correct. Even if the reason the inventory is incorrect is because of prior year errors, the errors affected COGS. The ONLY way you will be able to correct this is by adjusting COGS. I don't understand why you refuse to believe this.

Even if you do nothing this year (this is an option, as you did not control the company for the last year) and you correct the ending inventory at the end of 2017, the COGS will be the balancing figure.

Even if you do not like the answer, it is the correct one. I could pull out one of my forensic accounting manuals to show you this is correct, but based on the fee you proposed, it would take too much time.

This is the correct answer. Correct the ending inventory and offset it with the COGS.

Ask Your Own Tax Question
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 8 months ago
PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 5,032
Experience: 35 years tax experience, including four years at a Big 4 firm.
Verified

I'mCustomer A different expert. I'd like to try and assist.

What is the problem with fixing the end of year inventory now and living with the prior year timing differences? All it really does is clean up prior year errors you had nothing to do with. And the balance sheet will be accurate for the first time. And retained earnings will be accurate too.

I guess I don't see the value in getting caught up in the prior year multiple errors. You have been told accurate advice already. My take is that I don't see the cause for prior year concern.

Thanks for asking at just answer. Positive feedback is appreciated. I'mCustomer

Ask Your Own Tax Question
Customer reply replied 8 months ago
I understand what you are saying but it will not work in this case because Inventory is listed way too low to be able to offset COGS. COGS cannot possibly be adjusted enough to fix this issue. Let me give you an example why. For example, let’s say Beginning Inventory is listed at $10K. However, actual inventory is really $80K. Because there is such a big difference, there isn’t enough room to offset it with the COGS.Here’s an example:- Beginning Inventory: $10K
- Purchases: $50K
- COGS: $50K
- Ending Inventory: $10KIf I change Ending Inventory to $80K, that means COGS would actually become negative -$20K.This is what I am trying to explain. I cannot correct ending inventory and offset it with the COGS because Inventory is listed EXTREMELY LOW. If I try to offset with COGS, then the COGS would be extremely NEGATIVE. That's how big the difference is.
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 8 months ago

Got it. The problem is you are trying to fix through cost of goods sold. That's not necessary.

Make the income adjustment you believe you need which is to the 1/1/16 inventory. Treat it as other income on the face of the 1120. That will increase the income to what you believe is the historical understatement. On the other income sheet, describe the adjustment as 1/1/16 beginning inventory understatement, which will support a new, higher 1/1/16 inventory and report the income.

Your 1/1/16 inventory will then be correct, and you can safely report your 2016 activity with the first normalized cost of good sold section.

Thanks again for your persistence in asking, but it was your last description that kicked in for the correcting response. Please rate when satisfied, and a bonus would be appreciated. I'mCustomer

Ask Your Own Tax Question
Customer reply replied 8 months ago
Thank you for understanding the issue. So, you are essentially saying, whatever the understatement in the Inventory is, treat that difference as “Other Income” and adjust Beginning Inventory accordingly, correct? If so, that raises a few issues:1. Since this method raises income, I would essentially be paying tax for increasing my inventory. Paying tax for increasing my inventory doesn’t make sense to me? Especially since the increase would be so big.2. On the 1125-A, the Ending Inventory from 12/31/15 and the Beginning Inventory from 1/1/16 wouldn’t match up. Would I attach another explanation to 1125-A explaining the adjustment?3. How would the adjustment be done on the Schedule L (Balance Sheet)? Something would need to balance out the big jump in inventory on the Balance Sheet. Inventory increases are typically balanced out by either (a) Decrease in Cash or (b) Increase in Accounts Payable. Neither of which apply here.4. Finally, wouldn’t making all of these changes/adjustments and attaching explanations cause a potential audit and other unnecessary issues? Is it a big deal to just leave Inventory low the way it is and use a higher Purchases amount to balance things out. So although Inventory will be listed too low and Purchases will be listed too high, COGS will still be accurate. In the end, it all balances out and the tax liability doesn’t change. The Purchases number just becomes higher then it should be because Inventory is lower then it should be - but COGS would be accurate and the tax liability wouldn’t change either way.5. I see the 4 issues above with the method you have described. The other method (fixing through COGS) obviously won’t work at all. Is there another method that simply allows me to refigure the Inventory amount? There must be another method out there besides these 2 methods? For example, Line F on the 1125-A states “Was there any change in determining quantities, cost, or valuations between opening and closing inventory?” - Would this solve the issue? What other methods are there for for fixing Inventory understatement?I would REALLY appreciate it if you would address all 5 points above. This should be my final follow-up on this question. Thank you in advance for your time. I really value your responses and look forward to reading the next one.
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 8 months ago

Sorry, but I can't address all of this and the original question for the price posted.

Please accept and rate my response, and post these new issues to a new question. Ask for me, and I will respond.

Positive feedback and a bonus are appreciated.

Customer/p>
Ask Your Own Tax Question
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 8 months ago

Hi again.Customerhere.

I was prompted to follow up. Please advise.

Ask Your Own Tax Question
Customer reply replied 8 months ago
Hello - Since the first two exchanges were me just clarifying the actual question, I would appreciate a response to my last message without having to open up a new question. I don't believe its fair to open up a new question when the first two exchanges were just needed for clarity purposes. I hope your will cooperate so we can successfully finish this question and I can rate you, otherwise my only option will be to close this out poorly & refund. I assure you there will be no more questions except which were in my last message. Thanks in advance and I hope we can resolve this.
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 8 months ago

Your follow-up indicates you don't believe my response. The additional time will be needed to defend what I already reported, and expand into audit risk, tax consequences, and your desire for a nontaxable alternative.

I will opt out.

Customer/p>
Ask Your Own Tax Question
Was this answer helpful?
Ask PDtax Your Own Question
PDtax
PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 5,032
5,032 Satisfied Customers
Experience: 35 years tax experience, including four years at a Big 4 firm.

PDtax is online now

A new question is answered every 9 seconds

How JustAnswer works:

  • Ask an ExpertExperts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional AnswerVia email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction GuaranteeRate the answer you receive.

JustAnswer in the News:

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

What Customers are Saying:

I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response...

T.G.WMatteson, IL

I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight.

BonnieChesnee, SC

Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation.

JohnMinneapolis, MN

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with.

OrvilleHesperia, California

Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help.

Mary C.Freshfield, Liverpool, UK

This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!!

AlexLos Angeles, CA

Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult.

GPHesperia, CA

< Previous | Next >

Meet the Experts:

Wallstreet Esq.

Wallstreet Esq.

Tax Attorney

586 satisfied customers

10 years experience

Mark D

Mark D

Enrolled Agent

1,338 satisfied customers

MBA, EA, Specializing in Business and Individual Tax Returns and Issues

Richard

Richard

Tax Attorney

4,495 satisfied customers

29 years of experience as a tax, real estate, and business attorney.

PhillipsEsq.

PhillipsEsq.

Attorney-at-Law

59 satisfied customers

B.A., M.B.A, J.D.

Robin D.

Robin D.

Senior Tax Advisor 4

15,272 satisfied customers

15years with H & R Block. Divisional leader, Instructor

Megan C

Megan C

Certified Public Accountant (CPA)

8,655 satisfied customers

Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

jgordosea

jgordosea

Enrolled Agent

2,885 satisfied customers

I've prepared all types of taxes since 1987.

< Previous | Next >

Related Tax Questions
What is my capital gains tax liability on commercial
what is my capital gains tax liability on commercial property inherited in 1991. assessed value at the time of inheritance was $171,000. Selling price would be $850,000; $200,000 at time of sale - bal… read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
2,199 satisfied customers
I have a tax audit question? I believe I was audited, got a
Okay, I believe I was audited, got a letter from the IRS saying I owe 10 grand. (After taking back the child tax credit) a 1099k from paypal was reported for 20k. I did not make that money. My girlfriend would transfer money from her paypal account to mine to use my cash back card when buying merchandise. I assume i need to amend my return but how do i prove this to the IRS i did not earn that money? … read more
Dr. Fiona Chen
Dr. Fiona Chen
President
Ph.D.
1,026 satisfied customers
If adjustment to income for a contribution to a traditional
Hello. If adjustment to income for a contribution to a traditional IRA is disallowed due to too much gross income and the contribution is not withdrawn by the filing date, can that excess be put on a … read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
15,272 satisfied customers
The state did a estimate on are business sales tax and I
The state did a estimate on are business sales tax and I hadn't sent the amount tat should of been taxable the amount that should of been taxed is way less then what the estimate was what do I do they… read more
Barbara
Barbara
Enrolled Agent, Paralegal
5,113 satisfied customers
VA form asks for adjusted gross income (disability form). We
VA form asks for adjusted gross income (disability form). We file joint; can we separate his income from mine for the form? How? … read more
emc011075
emc011075
Senior Tax Specialist
Bachelor's Degree
16 satisfied customers
If there is no federal tax liability in 2016 because there
If there is no federal tax liability in 2016 because there was no income in 2016, what is the minimum estimated tax that needs to be sent with the extension for 2017 to avoid a penalty?… read more
abci168
abci168
Principal
27 satisfied customers
Looking for estimated tax rate for 500,000 income in 2017.
looking for estimated tax rate for 500,000 income in 2017 … read more
Richard
Richard
Tax Attorney
Doctoral Degree
4,495 satisfied customers
On form 1040 line4 21 other income. is this where i should
on form 1040 line4 21 other income . is this where i should enter an amount shown from my pensiopn payments form 1099R … read more
Cole Parker
Cole Parker
Principal/CPA
Bachelor\u0027s Degree
101 satisfied customers
Community property adjustments, Spouse is negative in income
community property adjustments, Spouse is negative in income after deductions and expenses, how can I input this? … read more
abci168
abci168
Principal
27 satisfied customers
I paid ohio estimated income tax on my llc, which is elected
Second opinion] I paid ohio estimated income tax on my llc, which is elected to be an s-corp. I am a florida resident. don't I get to count that tax paid as a credit on my ohio return? my husband is a… read more
Barbara
Barbara
Enrolled Agent, Paralegal
5,113 satisfied customers
I paid ohio estimated income tax on my llc, which is elected
I paid ohio estimated income tax on my llc, which is elected to be an s-corp. I am a florida resident. don't I get to count that tax paid as a credit on my ohio return? my husband is an ohio resident … read more
abci168
abci168
Principal
27 satisfied customers
I am on SSI and have no other income, go I need to file a
I am on SSI and have no other income , go I need to file a tax return? … read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
15,272 satisfied customers
Maryland S-Corporation is required to pay state estimated
Maryland S-Corporation is required to pay state estimated taxes behalf of out of state shareholder. Does this tax payment a deduction on 1120s? Or should it just deemed as a shareholder distribution?… read more
Barbara
Barbara
Enrolled Agent, Paralegal
5,113 satisfied customers
I have a tax liability with the State of Wisconsin. Can the
I have a tax liability with the State of Wisconsin. … read more
Mark Anderson
Mark Anderson
Attorney
Doctoral Degree
10 satisfied customers
I'm a retired lady with no other income except social Sec.
Hello. I'm a retired lady with no other income except social Sec. I'm 68 yrs. I have a IRA and want to know if I withdraw $2,000. from that account. Do I have to file taxes and pay taxes on that. My s… read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
15,272 satisfied customers
If a resident US citizen has zero earnings or other income
If a resident US citizen has zero earnings or other income for a few years; are they exempt from any requirement to file a tax return during those years? If that same person chooses to sell off artwor… read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
15,272 satisfied customers
Question regarding estimated GA state tax for 2018. GA has a
Question regarding estimated GA state tax for 2018. GA has a 35000 income exclusion for ages 62-65. I will turn 62 first week in April. Should I use 3/4 or 2/3 of that exclusion to calculate my 2018 e… read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
2,199 satisfied customers
Where on Form 1120S is a Sec 481(a) adjustment (from a Form
Where on Form 1120S is a Sec 481(a) adjustment (from a Form 3115 accounting change) reported? Does this affect Sch. M-2? If so, how?… read more
Carter McBride
Carter McBride
LLM
1,046 satisfied customers
Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Show MoreShow Less

Ask Your Question

x