choose a process, then trust it.
by ed mendlowitz
how to review tax returns: the field-tested update
i have mentioned seven types of tax return reviews and explained the first three. today it is time to look at the other four.
more: three types of tax return reviews | routine is key to reviewing tax returns | why you can’t skip checklists | tax review procedures are your quality control | seven types of tax return reviews | how to turn tax returns into new business
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a comment is that i believe i will present the best overall method to review tax returns. it is clear that no matter what i say many will not agree with me, many will have no interest in changing but will want to make some minor changes if they appear helpful, or many are reading to validate what they are doing.
to recap, the seven types of reviews that are explained separately are:
- preliminary cursory review
- content review
- issues review
- review procedures between april 1 and april 15
- get it out the door method
- top-side review
- final review by partner before signing the return
review procedures between april 1 and april 15
between april 1 and april 15 is where your normal review procedures are suspended, and a different type of review is performed during the end of tax season, which is usually the busiest period and there is a push to get everything that can be completed out to the client.
it seems that if procedures are changed during the busiest time then why aren’t the procedures for the rest of the year changed to this? if this abbreviated, different or expeditious review is sufficient for this large volume of returns, then why shouldn’t it be sufficient for all returns throughout the year? and if those procedures aren’t sufficient for the rest of the year then why are they being used during the period where it will affect a very high volume of returns?
here is an illustration of the april 1 to 15 review compared to the review procedures performed during the rest of the year. this period has been selected to refer to the final and busiest period of tax season. if yours starts earlier or ends earlier, substitute those dates for what we chose.
| what often happens april 1-15 | what should happen in rest of the year |
| reviewers cannot teach | reviewers teach |
| reviewers cut corners | reviewers do not skip any steps. reviewers are guardians of the procedures and follow them diligently |
| if checklists are used, reviewers bypass looking at checklists and relax requirement of making preparer complete checklists | if checklists are used, reviewers look at checklists and explain deficiencies to preparers, and insist checklists be followed completely. a good reviewer would give the return back to the preparer and have the checklists completed before they start their review |
| reviewers do not compare this year’s return to last year’s | reviewers compare this year’s return to last year’s and look for big differences.
this can be done two ways: 1. compare the return line by line for the first four or five pages and then review selected schedules looking for large differences. 2. use the tax comparison worksheet (either provided by the tax software or the excel version that will be explained later) looking for large differences and then checking further to determine the reasons and whether the items have been properly entered |
| if the firm has a policy that the reviewers do a thorough content review, this is omitted, and the reviewers look for big issues and big numbers. the reviewer might spot check one or two items to see if those items are properly treated | if the firm has a policy that the reviewers do a thorough content review, this is done with the omission of the reviewer looking for big issues and big numbers (because time is consumed with the ticking and tying and looking at all of the detail) |
| if a projection was done, reviewers skip reconciling big differences between projection and completed return | if a projection was done, reviewers reconcile big differences between projection and completed return |
| reviewers make changes instead of preparer to get return out the door | reviewers prepare a list of errors and explain to preparers what they did wrong and have preparers make the changes. alternatively, reviewers can call in the preparer and explain each error and what needs to be done to correct it and not have error reoccur |
in my opinion every one of the abbreviated april 1-15 procedures is bad except omitting the thorough content review, and instead the reviewer looks for big issues and big numbers with a couple of items spot checked to see if they are properly treated. think about this. wouldn’t the client be best served by the reviewer concentrating on big issues and big numbers with some spot checking? how is the client best served by the reviewer ticking and tying?
comment: remove the constraints of your present methods from your minds and consider the logic of the last two sentences. if you agree in a teeny-weeny way, then consider making some changes. you do not need to make complete revolutionary changes but can try some changes and then evaluate the results. if they work, then you can make changes for your next tax season.
i understand that every firm follows different procedures, but my extensive consultations with tax partners and reviewers indicate to me that most firms follow shortcut procedures during the busiest time at the end of tax season.
my contention is that these shortcuts are not effective and should not be engaged in. however, in the above illustration there was one takeaway that should be adopted throughout the year: an issues review and the abandonment of the content review. (or transfer this step to a peer preparer as explained previously.)
the get-it-out-the-door method
the get-it-out-the-door method is essentially no review with one exception. if there is a balance due or a large unexpected refund the reviewer – or partner if the reviewer is bypassed – would look to see why, and then call the client to let them know.
if the call is not made, there is a likelihood the client would call the partner, in which case the partner would have to take the call at a possibly inconvenient time or have to return the call at some point. it is always better to initiate the call. also, the call provides the opportunity to speak to the client and perhaps uncover an error that can then be corrected.
note that a failure to call or speak with the client when there is an unexpected result usually would result in a lost client – if not for the next year then the following year for sure.
another way to handle this review is to review what the client would look at.
top-side review
the top-side review is usually done by a manager or partner before signing off on the return.
a top-side review should also be done by the reviewer before starting their review. it will give a quick overview of the return and skilled reviewers can spot major errors or discordant items. it also provides a context of the issues the return reports on and adds an alertness to the reviewer. this review also will provide a look at the size of the refund or balance due and whether the reviewer feels it is reasonable for that client, creating a focus for the review.
i suggest that these reviews start with the tax comparison worksheets looking for major differences between the current and previous year. what is “major” is different for each client and judgment is needed. i would then look at the biggest items and try to grasp what they were from or for; then i would make sure the bottom line, i.e., refund or balance due, was reasonable and not an unexpected amount. i would also look at every page of the return to get a feel for what’s on the return and would want to see if anything jumped out at me. if something did not look right i would either look at the backup or speak to the reviewer about it.
for partners signing off on the return, the top-side review would end their review process. for reviewers it is the beginning and they would then continue with their regular review procedures. alternatively, the reviewer can do a top-side review after they complete their review and before they hand it off to the partner. i feel the reviewer’s top-side review should be done first; that will become a preliminary issues review. if the top-side review is done at the end, it is a double-check on what they did and can be effective for that.
when the reviewer does the top-side review it is a redundant process because it is a duplicative process. if the content review is omitted or performed by a peer preparer, then the top-side will be another tool to uncover issues, which is the job professional tax preparers should be doing.
final review by partner before signing the return
the final review is similar to their role in the top-side review. this usually takes a very short time, perhaps a couple of minutes, and gives a feel of the results and a glimpse at the major transactions reflected on the return. by definition this would not be performed by the reviewer. if the partner did not do the top-side review, then he or she should follow the procedures for a top-side review, spending a little more time than they would if they had done the top-side review.
when a partner gets the return to sign off, they can do one of four things:
- do nothing other than sign off.
- do a quick look to see if anything jumps off the return at them.
- look at the tax comparison schedule or worksheet and make sure they understand the issues on the return, the major differences from the previous year and the net result.
- follow the procedures for a top-side review.
what the partner should not do is a re-review of the return beyond the top-side review. the partner should also not be expected to come up with missed or overlooked issues or benefits. there is a reviewer, and the partner should rely on their review. if the partner feels they cannot rely on the reviewer, then they need to replace that reviewer.
recommended method for the reviewer
based on the above there are various recommended methods. some are solely for the partner or person signing the return, and most of the others for the reviewer or a peer preparer.
based on the descriptions and explanations, following are my recommended review procedures. use the right-hand column as a worksheet to develop your review procedures.
| recommended review procedures | what your firm will do |
| reviewers teach | |
| reviewers do not skip any steps. reviewers are guardians of the procedures and follow them diligently | |
| if checklists are used, reviewers look at checklists and explain deficiencies to preparers, and insist checklists be followed completely. a good reviewer would give the return back to the preparer and have the checklists completed before they start their review | |
| reviewers compare this year’s return to last year’s and look for big differences.
this can be done two ways: 1. compare the return line by line for the first few pages and then by selected schedules, looking for large differences. 2. use the tax comparison worksheet (either provided by the tax software or an excel version) looking for large differences and then checking further to determine the reasons and whether the items have been properly entered. |
|
| the reviewer should not do a content review; rather the reviewers would look for big issues and big numbers, spot checking selected items to see if those items are properly treated.
if the firm wants a full content review, then it could be performed by a peer preparer. |
|
| if a projection was done, reviewers should reconcile big differences between the projection and completed return. | |
| reviewers prepare a list of errors and explain to preparers what they did wrong and have preparers make the changes. alternatively, reviewers can call or meet with the preparer and explain each error and what needs to be done to correct it and not have error reoccur. reviewers should not correct any errors. |