When to Fire Your Bookkeeper: Second Opinion and Switching

When should I fire my bookkeeper?

A bookkeeper may need replacing when the books can no longer support a return, or when a filing has been missed. The duty to keep adequate books is the taxpayer's, not the bookkeeper's: they must be sufficient to establish gross income, deductions and credits (26 CFR 1.6001-1). Publication 583 says to reconcile the checking account every month so the statement, the checkbook and the books agree.

One late close is a reason to write down the scope and dates (engagement letter), not always to fire. A pattern may be a reason to change; so may any signal after the first three rows.

The case is not simple when a payroll, sales tax or business return was filed from these books, when the bookkeeper holds the only copy of the file or is the only administrator, when more than a few months are unreconciled, or when a filing, loan or return date is close. Gather the bank and card statements for the year, the last filed business return with every schedule, and the latest payroll and sales tax reports and notices.

Changing bookkeepers does not change who is responsible for payroll deposits. The IRS says the employer is ultimately responsible for deposits even when a third party makes them, and may also be held personally liable for certain unpaid federal taxes (IRS). In a corporation, partnership or LLC, an officer, partner or other person who controls payments can be personally assessed the trust fund recovery penalty, equal to the unpaid withheld tax, for willfully failing to pay it over (section 6672; IRS). The usual time limit is 3 years from the April 15 after the payroll year, or from the filing date if later: trust fund recovery penalty. Penalties already caused by mistakes: who pays the penalties.

Can someone give me a second opinion on my QuickBooks before I fire anyone?

Yes. A second opinion is a review that tests the file without changing it. If you hold the admin role, you can bring in a reviewer before the change is announced, once your engagement terms allow it: in QuickBooks Online, a primary or company admin invites an accountant user (QuickBooks Online help). That user can usually edit, so agree that the reviewer works from reports and changes nothing. If the bookkeeper is the only admin, the bookkeeper has to add the reviewer: get admin rights first (next section), or ask for the reports and a backup copy.

Any independent bookkeeper or accountant can do this review. Give the reviewer the year's statements and the last filed return. A reviewer tests six things:

1. Whether each bank and card account reconciles to its statements, month by month, and the month where the reconciliations stop.
2. Whether the opening balances tie to the last filed return's balance sheet (Schedule L), or to year-end statements where the return has none.
3. Whether payroll and sales tax liabilities in the books match what the IRS and the state show as filed and paid.
4. Whether suspense, clearing and uncategorized balances (holding accounts for entries not yet placed) are small and recent, or large and old.
5. Whether closed months were edited after the return was filed.
6. Whether payments to contractors are flagged and backed by a W-9.

The result is usually one of three: the file is sound and the habits need fixing, the file can be repaired from a month that ties, or the file should restart from the last filed year-end. That result sets the cutover date. What you can check yourself each month: checking your bookkeeper's work.

Who owns the books, and what access do I need before I say anything?

The duty to keep the books is yours, and control of the file belongs to whoever holds the admin role. In QuickBooks Online only a primary or company admin can invite an accountant user or remove one (invite; remove). If the bookkeeper is the only admin, only the bookkeeper can add you, so get admin rights first.

Before you raise the change, read the engagement letter or contract for the notice period, what the bookkeeper must hand back and the final invoice (no letter: bookkeeping engagement letter). Then confirm that you hold your own owner-level login, not the bookkeeper's, for:

• the accounting file and its subscription: if the bookkeeper's email and card are on it, ask for the admin role to be moved to you first;
• online banking and every card account;
• the payroll provider;
• your IRS online account and your own EFTPS enrollment, the federal electronic tax payment system;
• each state sales tax and payroll account.

If the bookkeeper is a practitioner (a CPA, enrolled agent or attorney, among others), a federal rule requires them to return on request the client records you need for your federal tax obligations, and a fee dispute generally does not excuse it, though a return, schedule or other document they prepared is not a client record while held for unpaid fees on that document (31 CFR 10.28; who is a practitioner). The same duties reach anyone paid to prepare all or a substantial portion of a document for the IRS (31 CFR 10.8). A bookkeeper who prepares nothing for the IRS is bound only by the engagement terms and state law, which is why access comes first. If the bookkeeper has stopped answering: taking over books from a former accountant.

What cutover date works for a mid-year switch?

Use the first day of a month that follows a fully reconciled month. That is the cutover date: the first day the new bookkeeper owns, with reports run as of the month-end before it. This is practice, not a legal rule. A reconciled month-end balance can be agreed to a bank statement, so the new bookkeeper starts from a proved number. A mid-month cutover splits one statement between two people, and neither owns the reconciliation.

If payroll also changes hands, a quarter-end is cleaner: the IRS says to file Form 941 only once for each quarter (IRS). See switching payroll providers.

A restart, the last row above, means rebuilding from the last filed year-end: cleanup or start fresh.

What do I collect from the old bookkeeper before they leave?

Collect everything that lets someone else prove the books as of the cutover date, and take it before access is removed.

Keep the old records after the handover. Records that support a return are kept until the period of limitations ends, generally 3 years after the return is filed or due, whichever is later; employment tax records, at least four years after the tax is due or paid, whichever is later. The period is open-ended when no return was filed or the return was fraudulent, and 6 years when income left off a return is more than 25% of the gross income shown on it. Records on property, such as the fixed asset and depreciation schedules, are kept until the period ends for the year the property is disposed of (IRS; Publication 583). More: how long to keep business records.

How do I lock the closed months so the old work stops changing?

Set a closing date at the cutover once the last month before it is reconciled and you hold the copies. In QuickBooks Online, a primary or company admin sets it, the vendor says to reconcile accounts up to the lock date first, and the vendor describes its password option as the more secure one (QuickBooks Online help). Keep the password yourself.

A lock puts later edits behind a warning or a password. It does not undo edits already made, so compare the year-end reports with the filed return before you set it. Steps and limits: closing date after taxes are filed.

How do I remove the old bookkeeper without missing a payment?

Remove access last, one account at a time, after the new bookkeeper has confirmed that account works under a new login. The exception is missing money: if payments go to payees you cannot trace to an invoice, or the bookkeeper can move money, cut the bookkeeper's bank, card and payroll-funding access first, and copy the reports and backup the same day if you hold admin rights. Do not wait for the cutover date.

1. Copy the reports and the backup.
2. Add the new bookkeeper to each account: the software, the bank where it offers limited users, the payroll provider.
3. List every automatic payment and recurring entry tied to the old login: bill pay, payroll funding, card payments, scheduled tax payments. Confirm each will still run.
4. Check the due dates in the filings table below before anyone is removed.
5. Remove the old user. In QuickBooks Online, a primary or company admin removes the accountant user, and the vendor says the access ends at once (QuickBooks Online help).
6. Change any password the old bookkeeper knew.

Some access sits with the IRS. If the bookkeeper or a payroll company files and deposits for you as a reporting agent (Form 8655), the IRS authorization has to change too, and the IRS advises employers not to change the address of record to a provider's (IRS). Details: switching payroll providers; tax-preparer access: switching accountants. Removing every login: giving a bookkeeper access to your accounts.

Which filings keep their dates when I switch bookkeepers?

Changing bookkeepers does not change any filing date. The IRS says a Form 8655 authorization does not relieve the taxpayer of responsibility to file returns and make deposits on time (Form 8655).

If the handover shows a missed deposit or return, see behind on payroll taxes. Sales tax filing in depth: filing sales tax returns.

How does the new bookkeeper set opening balances and re-reconcile?

The new bookkeeper starts from balances that were proved, then reconciles every month from the cutover. Which balances depend on the review.

• The file is kept. The new bookkeeper continues in the same file. The first month's beginning balance must equal the last reconciled month's closing balance. A gap means an edit or a missing entry: reconciliation beginning balance wrong.
• The file restarts. Open the new file at the last filed year-end from the old file's closing trial balance and reports, once they tie to statements, and keep the old file. The filed return is a check on totals, not the source: its balance sheet should agree with the books (Form 1120-S). Support any balance that does not tie from statements. Each month since is entered from statements and reconciled before the next (opening balances after changing accountants). A Schedule C reports income or loss (IRS), so it gives no balance sheet to tie to, and some partnership, S corporation and C corporation returns skip Schedule L (Form 1065; Form 1120-S; Form 1120); year-end statements are then the check.

In both cases, compare year-to-date profit with the old bookkeeper's last report for the same date. Each difference is a question for the reviewer. Reconcile monthly from then on, as Publication 583 advises.

What if returns were already filed from the old books?

A filed return stays as filed until a correction replaces it, and a change of bookkeeper does not alter it. The correction is an amended return or, for a partnership that has not elected out of the centralized audit rules, an administrative adjustment request (IRS). Compare the books for each filed period with its return, and write down every difference. Avoid editing locked months to make them match.

Payroll and sales tax returns come first: they carry deposit penalties and, for payroll, the employer's liability. Whether any return needs correcting, and by which procedure, depends on the changed figures and the entity: correcting a filed business return. A notice already received sets its own date: an IRS notice to your business.

When is the job too big for a straight swap?

A straight swap works when a reviewer can tie the file to statements and to the last filed return, and nothing filed is wrong. Otherwise, the finding sets the route.

Three calls decide the plan: repair or restart, the cutover date, and which filings may need correcting. Each depends on what the review finds in the file.

Example

These examples are illustrative; all figures are in US dollars.

A landscaping S corporation stops reconciling in March

An S corporation with US$600,000 of revenue finds its accounts unreconciled since March. The owner sets July 1 as the cutover, the day after a quarter-end, and a reviewer reconciles March to June against statements before anything moves. If every month ties, the new bookkeeper starts July 1 and reconciles July first. If March does not tie, the cutover moves to the first day after the last month that does, and the later months are caught up. The corporation runs payroll, so Form 941 for April to June and the last June deposits still fall due after July 1: the owner names who files and deposits them.

A consultant's LLC where the bookkeeper is the only admin

A single-member LLC with US$180,000 of revenue has a bookkeeper who is the only administrator of the file. The owner first gets admin rights, then saves a backup and the reports, adds the new bookkeeper, then removes the old user. The owner sets the closing date at the cutover and keeps the password.

A two-partner restaurant lets the bookkeeper go

A restaurant partnership paying US$25,000 of payroll each month checks the business's own EFTPS account before the switch. The payment history matches the payroll register. The bookkeeper lists every deposit due in the next quarter, and the partners keep those dates with the new bookkeeper.

Different for you?

• You want a second look at the file before you tell anyone: checking your bookkeeper's work covers what you can test yourself. Running all six tests on the whole file is the part that needs someone else, so get bookkeeping help.
• Books are months behind and a filing, loan or return date is close: catching up on overdue books shows what to rebuild. Which months to prove first depends on that date, so get bookkeeping help.
• The old bookkeeper holds the only copy of the file, or has stopped answering: taking over books covers getting records back. Repair or restart depends on what comes back, so get bookkeeping help.
• Money looks missing, or the bookkeeper can move money: cut payment access first, as above. What must be traced and corrected depends on the records, so get bookkeeping help.
• The second look finds payroll or sales tax filed from wrong numbers, or withheld payroll tax unpaid: see behind on payroll taxes and correcting a filed business return. Which filings need correcting depends on the figures, so get bookkeeping help.
• The payroll provider or the return preparer is changing too: see switching payroll providers and switching accountants.
• You are choosing the next bookkeeper: see questions to ask before hiring a bookkeeper.