A Los Angeles immigration law firm had been recognizing retainer fees as revenue upon receipt for 4 years. We corrected 4 years, filed amended returns, and generated a $44K tax refund.
01The Situation
Immigration retainers are paid upfront, often $3,000–$8,000 per case, before any work begins. Under accrual accounting, these are liabilities until work is performed. The firm had been booking every retainer as revenue on the day received since it opened four years ago.
The bookkeeper had set up the system incorrectly at launch. Four years later, $176,200 in retainers had been taxed prematurely, creating a $44K overpayment with the IRS.
02What We Did
We rebuilt the revenue recognition schedule for all retainer agreements over four years. Each retainer was matched to the case file and stages of work completed. Revenue recognized proportionally as work was performed using the firm standard case timelines for each visa type.
Amended returns were filed for FY 2021–2024. The IRS issued refunds totaling $44,050 within 16 weeks. Going forward, retainers go into a deferred revenue account and are recognized monthly as cases progress.
03Client Impact
The firm had been taxed prematurely on $176,200 in retainers for four years. The $44K refund was unexpected and welcome. The bigger change is that financial statements now accurately show what has been earned versus received, making management decisions about staffing and capacity much clearer.
Breakdown
| Year | Retainers Received | Properly Deferred | Taxable Revenue Reduction | Tax Saving | Status |
|---|---|---|---|---|---|
| FY 2021 | $284,000 | $68,400 | $68,400 | $17,100 | |
| FY 2022 | $312,000 | $42,800 | $42,800 | $10,700 | |
| FY 2023 | $368,000 | $28,200 | $28,200 | $7,050 | |
| FY 2024 | $412,000 | $36,800 | $36,800 | $9,200 | |
| 4-YR TOTAL | $1,376,000 | $176,200 cumulative | $176,200 | $44,050 |
What changed
Revenue Recognition Corrected for 4 Years
All retainer agreements restated. Revenue recognized as work performed, not when cash received.
$44K Tax Refund Received
Amended returns filed for FY 2021-2024. IRS refunds issued within 16 weeks.
Deferred Revenue Account Implemented
New retainers go into liability. Revenue recognized monthly as cases progress.
Accrual Basis Properly Established
Financial statements now accurately reflect work-in-progress.
The firm had been taxed prematurely on $176,200 in retainers for four years. The $44K refund was unexpected and welcome. The bigger change is that financial statements now accurately show what has been earned versus received, making management decisions about staffing and capacity much clearer.
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