and what are the lessons for cpas?
“these problems raise the question as to whether return preparers are asking the right questions and seeking sufficient documentation,” according to prof. annette nellen in this week’s aicpa tax insider.
nellen groups the tax errors into five main categories:
- overlooked income, such as due to a missing 1099 or income not reported on a form w-2 or 1099.
- missing documentation, such as for charitable contributions or entertainment expenses.
- lack of preciseness in the law, such as how to allocate tax preparation fees between schedule a and schedule c or e.
- insufficient research, such as misclassifying overnight camp expenses as qualifying for the dependent care credit or not reporting income donated to charity.
- insufficient attention to other taxes, such as employment taxes on household help.
she wonders:
talk in the press and on blogs questioned whether the tax problems were just a sign of tax law complexity. arguably, some errors, such as overlooking a form 1099, are not due to the complexity of the law, but perhaps to complexity of one’s work situation. some errors, such as inadequate documentation for charitable contributions or thinking that both overnight and day camp qualify for the dependent care credit, are due to complexity. however, additional research, time and attention might have caught these errors prior to filing. but, how much time is needed to generate an error-free return and is such a goal achievable?
and she offers suggestions for avoiding errors:
- checklists: a checklist for verifying various elements of taxable income, credits and other taxes can help catch errors as well as missed opportunities for deductions and credits. the aicpa tax section provides its members with extensive checklists.
- frequent reminders to clients: proper computation of federal and state income tax liability and any other taxes a client may owe, such as employment taxes on household help, requires attention throughout the year, not only when gathering tax records after year end. frequent reminders to clients about what type of documentation is needed to claim charitable contributions, business expenses, dependent care credits, energy credits, and more, will serve both to help clients understand the tax law and have appropriate documentation.
- have a technique to help find “unusual” items: how is a preparer to know that a client is provided a car and driver if it doesn’t show up on a w-2 or 1099? one possibility is to provide clients with brief scenarios of “typical” transactions and ask if they have anything that doesn’t fit that fact pattern.
for example:
— employment: typically, employees are paid a cash salary and fringe benefits such as health care. if you received anything else from your employer, please let us know.
— income: most individuals receive income in the form of wages, interest and dividends. if you received any other types of payments, such as from consulting, speeches, odd jobs, online sales, auctions, or gambling, please let us know.
- engagement letters: these should include the reminder from ssts no. 3 that clients are responsible for the contents of their return.
- office education: it is important that all return preparers in an office be familiar with the guidance noted earlier and be aware of the office procedures for when documentation should be reviewed and how to identify and handle situations that just don’t look right.
so, how many of your clients could stand a congressional review?
full article here.
