Analyzing a Corporate Tax Return
Errors and Omissions
One of the errors that have been made on the corporate income tax return is that of omission, which is represented by a failure to record an item in the books of accounts. The mistake is not the intention, but it is dues to overlooked instances. For instance, the invoice was paid, but it does not appear in the income tax return. In most instances, that error results from the misplacement of documentation or receipt to the extent that it has not been recorded. In Zeus Inc. corporate tax, there is an error or omission in the recording of the accounts receivable. In the balance sheet, that has been indicated, but they are missing in the corporate income tax return form. That implies that the summation of the taxable income might not be correct. It is important to include the figure in the form so that the tax return outcomes can be accurate and correct to avoid issues with the relevant authority in charge of tax or the external auditor. It is the obligation of the internal auditor to realize the error and make the necessary adjustment before submitting the files.
M-3
The criteria for using schedule M-3 is for any entity or organization that has filled form 1065 in the following requirements have been met. The first one is if the amount of total assets within the organization at the end of the tax period, which have been listed in schedule L line 14, is equal to $10 million or more (IRS, 2020a). The second need to use M-3 is if the amount in the adjusted total assets for the company for the tax years is equal to $10 million or is in excess. More so, the number of total receipts need to exceed $35 million (IRS, 2020a). In this situation, the definition of total receipts encompasses the instructions appertaining to the code for principles and business activities in addition to the services that have been rendered. The last requirement for using the section is if the entity has a reputable partner in connection to the nature of their partnership or in situations where it has been deemed either directly or indirectly with an interest of 50% or more in the relationship (IRS, 2020a). It is more beneficial to the financial statement user because it will reconcile the various financial statement. Additionally, it is possible to see the level of performance of the partner through the consolidation of the group’s financial statement.
IRS Approved Methods
One of the IRS approved methods is the cash method. In this approach, an organization will be required to report their income tax in the period that it was received. The deduction of the expenses will be made in the same tax years in which the payment has been made. It is one of the simplest methods to use, and most business enterprises prefer it compared to other strategies. The second method that IRS has approved is the accrual approach. In the design, two main frameworks are used (IRS, 2020b). The first one is the revenue realization principle, and the other one is the matching principle. In the former, the recording of revenue is done in the period in which it was earned, and it does not depend on the time that the payment was received. In the latter, there is a comparison between income and expenses. The most appropriate method to be used by Zeus Inc. is the accrual method. That is because the organization is big, and there is a need to obtain more accurate results (IRS, 2020b). Using the cash method might be effective since the organization’s operations might not allow payment to be made within the same period. Therefore, there is a need to capitalize on methods to take care of the organization’s needs even if the payments have been postponed.
Relationship of a Corporate Tax Year and Financial Reporting Year
The corporate tax year is the accounting period where there is the keeping of the books of accounts and reporting of the income generated together with the expenses encountered. On the other hand, a financial reporting year is represented by 12 consecutive months, which might be different for various organizations. The connection that exists between the two is on the duration. In most instances, the corporate tax years and financial reporting year might have the same duration, say 12 months. But the period in which each started and ended will differ from one another. One of the complications that might arise between the two is at the intersection. The corporate tax years might end while the financial years are still not over, making it hard for an organization to file tax returns. Another complication is on the reporting. How the outcomes of the corporate tax years are reported differs from those of the financial reporting years, increasing the cost of operation for the company. Key mitigation that can address the complications is to have a calendar year that ensures both the corporate tax years and the financial reporting years run parallel to each other. It will be easy for the organization to prepare the tax return and track their financial statements accordingly.
References
IRS. (2020a). Instructions for Schedule M-3 (Form 1065) (2020). https://www.irs.gov/instructions/i1065sm3.
IRS. (2020b). Publication 538 (01/2019), Accounting Periods and Methods. https://www.irs.gov/publications/p538.
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