The ongoing pandemic has the U.S. bankruptcy system poised to give a fresh start to individuals and businesses impacted by debt. Accountants advising clients through bankruptcy may need guidance to steer their charges from choppy waters to more stable economic shores. This blog offers advice for CPAs on finding better footing with clients, colleagues, and attorneys in all bankruptcy matters.
The importance of accountants in advising bankruptcy clients
According to the International Monetary Fund, the COVID-19 pandemic has plunged the planet into the worst economic downturn since the Great Depression. Defaulting individuals and businesses are a natural outgrowth of pandemic-spurred job and revenue loss. The first step for accountants in advising clients through bankruptcy is to take the responsibility seriously.
In an interview with Reuters, Wake Forest law professor Steve Nickles said busy accounting firms might be tempted to hand off a client’s bankruptcy to a law firm. But Nickels believes CPAs should, in fact, collaborate with legal professionals to provide the best assistance to their bankruptcy clients.
“Bankruptcy is much more about business than law. It’s about the numbers, feasibility. It’s about property valuation. It’s about developing a story on how the business can survive and prosper,” said Nickels. “Accountants have a special value they bring, and you can serve your client best by not solely passing the case off to a lawyer.”
CPAs also offer business expertise that should not be undervalued, added Nickels.
“These issues are business decisions, and that’s where I see accountants bringing their gut instinct and experience to the table to help people with something that is new for them,” Nickels said. “For most clients, they’ve never gone through these issues, and they need a type of emotional support as much as anything else.”
How CPAs help clients with bankruptcy filings
Although accountants don’t prepare bankruptcy petitions directly, they may work as chief accounting officers or other finance-centric leadership positions. CPAs assist clients with bankruptcy filings by:
- Determining eligibility and discharges – Bankruptcy clients need to understand their tax charge eligibility fully. Tax accountants can provide crucial knowledge for clients seeking the largest discharge possible.
- Knowing exactly when clients should file – Not all attorneys understand bankruptcy tax law, an oversight that may result in a significant negative impact on your organization. CPAs are ready to ascertain a client’s discharge eligibility alongside keeping them updated on filing windows.
- Representing you to the IRS – An Enrolled Agent has the same authority before the IRS as an attorney or CPA, meaning they can speak to agency representatives on your behalf. Professional representation can be the difference between a clean slate and continued repayment.
- Performing an offer in compromise – Accountants partner with bankruptcy clients on offers in compromise, an option designed to settle tax liabilities for less than the total amount owed.
Read more: Managing Ethical Dilemmas as an Accountant
Spotting bankruptcy fraud
Since multiple parties vet bankruptcy claims, it’s uncommon for individuals to commit fraud deliberately. More common is for the process to reveal other forms of malfeasance engaged in by individuals or businesses. Some red flags that accountants should beware of include:
- Hidden or undervalued assets – Concealing or misrepresenting assets is one of the most common forms of bankruptcy fraud. While not disclosing a vacation home located in another state is considered fraud, disclosing a property as valued at less than market rate is illegally undervaluing the asset.
- Misleading financial records – When filing for bankruptcy, providing messy or confusing financial statements can put individuals and organizations at risk. For example, failure to disclose income from freelance work could be deemed fraudulent. Businesses paying workers in cash but listing them as employees could also face fraud charges. Read more: File Retention in the Digital Age — What CPAs Should Know
- Recent transfers of cash or high-value assets – Any transfer of money, property, or other big-ticket assets to family or friends will require scrutiny. Depending on the state, transfers made two to six years before a filing are subject to inquiry during the bankruptcy process.
- Departure of important staff – An exodus of finance employees is another potential eyebrow-raiser. Similarly, the departure of key decision-makers such as a company CFO or founder can indicate a possible problematic financial situation.
- Preferential payment to creditors – When filing for bankruptcy, a debtor may try to meet certain financial commitments first, be it to a friend, family member, or former business partner. Bankruptcy law prohibits favoring one creditor over another in individual situations or corporate bankruptcy, where payment to “insiders” – usually people occupying high-level management positions – is considered a red flag.
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