In another unusual situation, the balance sheet per
the 1120 had ending balances but no beginning balances. However, when the books were examined they revealed that all the accounts had beginning balances. In this case, a business which originally had two separate locations and two shareholders had eventually encountered personality problems. The two shareholders split the two locations into two separate businesses via a reorganization. Further analysis by the examiner revealed that during the reorganization shareholder loans where forgiven and will result in a taxable transaction to the shareholder.

In another instance, the taxpayer had maintained a

reserve for doubtful accounts which was still on the

balance sheet. Authorization to use such a reserve was repealed the Internal Revenue Code but was never counted back into income by the taxpayer, in any one year or as an IRC section 481 adjustment.

CASH ACCOUNT

Analysis of the cash account has produced several routine adjustments along with some unusual situations, some of which are described below:

1. Non-cleared checks: Examinations of the bank reconciliations at the end of the year will allow the examiner to determine if some checks are still outstanding after a substantial amount of time has passed since originally issued. This is especially prevalent with payroll checks which for some reason were never cashed or deposited by the payee.

2. Cash Receipts: In one case the taxpayer presented a repair order which had selected receipts "whited out." These receipts were primarily supplemental payments. When the examiner requested an explanation of the white-out amounts, the taxpayer stated that this was an embezzlement situation whereby the former secretary would collect the checks, fraudulently endorse them and embezzle the funds. These amounts were never included as income in the books. Although the taxpayer will be allowed an embezzlement loss in the year of discovery, this nonetheless aroused great suspicion on the part of the examiner.

3. Supplemental Payments: In one case, the taxpayer recorded their sales based on the final repair orders which listed the income to be received from

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Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Glossary