Clarity Practice Management | The Land Mines in Tax Returns
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The Land Mines in Tax Returns

The Land Mines in Tax Returns

Your next role as CEO is reviewer. There are two types of review: primary and secondary.

Depending on the size of your firm, you may only have primary reviews. If your firm consists of you and a preparer, you won’t have a second level of review. I don’t consider the self-review as a review step. I consider it part of preparation.

The primary review is sometimes called the tick and tie review. If it’s just you and a preparer, you will be the primary reviewer. The primary review compares all source documents to the final return amounts. First, the reviewer looks at the current-year return alongside the prior year and looks to explain the differences. In the financial statement world, we call this the analytical review. It is the most powerful review tool.

I can find 90 percent of all preparation errors before ever looking at the actual documents.

If you had $10,000 of dividend income last year and only $200 this year, this is probably wrong. I compare the current 1040 line by line with the prior year. When you find differences, you are likely to find an underlying error unless something significant has changed in the client’s situation. The purpose of the analytical review is to identify potential errors for further review. It is also a fine tool for preparers to use in their self-review.

Next, the reviewer verifies that all of the source documents have been entered into the tax return on the correct forms and in the correct amounts. Most tax software packages offer the ability to put a tick mark next to verified amounts. Our software allows for multiple colors of tick mark. So, we expect our preparers to use one color for their self-review and the reviewer uses a second color.

After agreeing the source documents to the return and performing the analytical review, the primary reviewer then completes a review checklist. Our review checklist is now contained within our project management software. Previously, we used a PDF form as a checklist.

If you have a manager level, your managers perform the primary review step. Again, the key to the review is fresh eyes. Our managers typically spend about 30 minutes on an average personal tax return review. At the end of the review, the reviewer sends comments and errors back to the preparer for correction. Once the preparer corrects the return, he sends it back to the reviewer for a final check to make certain all of the errors have been corrected. Then the reviewer sends the return to the secondary reviewer.

The secondary review is sometimes called the conceptual review. This review takes about 15 minutes. Use your knowledge of the client to inspect any return areas that you believe require special attention. For instance, if you prepared a tax projection in December, compare the projection to the tax return to see if the real world did you the favor of conforming to your predictions.

If the return differs significantly from the projection, determine why and pray that it wasn’t your fault.

Next, perform a quick analytical review. Your job is not to find data-entry errors missed on review. If data-entry errors make it through self-review and review, you are entitled to publicly behead the preparer and give the reviewer 50 smacks upside the head with a master tax guide. Shrink the heads of the errant preparers and mount them on your office wall. This public shaming has worked well for thousands of years. When people know someone else is responsible to catch their errors, they make many more errors than when they believe the world will end if they don’t catch their own mistakes.

Your job is to determine what might be done better, and to come up with brilliant tax-saving suggestions for the next year. Looking at cash versus accrual normally yields some happy clients each year for me.

If you need more information on performing effective tax return reviews, read Ed Mendlowitz’s book called “How to Review Tax Returns.” I disagree with Ed on practice management topics about .006 percent of the time. If practice management has a father, Ed needs to take a paternity test and pay child support.

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