think “quality control,” not “review.”
by ed mendlowitz
how to review tax returns: the field-tested update
it occurs to me that there is a difference in the quality between the returns someone does for himself or herself and the returns they do for their clients.
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an informal survey by me showed that the percentage of returns with errors of sole practitioners and partners in cpa firms is less than 2 percent, while the percentage of errors by their staff ranges from a low of 25 percent to a high of 95 percent! why the difference? note that preparer errors are measured by the completed returns they submit for review. and sole practitioner and partner errors are measured by whether a notice was sent by a tax agency or an error is discovered when the following year’s return is being prepared.
it seems that there are two primary reasons:
- knowing that someone will check everything and
- knowing that no one will check the work.
i don’t believe work is done as carefully if it is known that someone will be rechecking everything that was done. when a preparer works on a return, they are fully aware that there will be a complete review of what they do, so the care to get it done right is “slightly” missing. when we as partners or owners prepare our own return, we know that no one will be reviewing what we’ve done so we must be more careful to get it right.
we can replicate the getting-it done-right mindset by having a system that takes away the “slightly” reduced care. and i believe that by not checking the input, e.g., eliminating the ticking and tying, we can create this mindset. this would elevate a doing-it-and-getting-it-right mentality.
following are some ways to use this knowledge to have better returns prepared by staff and being able to use the reviewers more effectively.
- one way to solve this problem is to not recheck everything – usually referred to as “ticking and tying” – but to let it be known that there will only be spot checks or brief, but selective, overviews; and that errors are the full responsibility of the preparer.
- another way is to have the preparer tie in everything and close off the work papers assuming everything is perfect and will need no changes. this will cause a big annoyance and much more work if errors are found. however, by using this method i have seen that the quality of the preparers’ work is greatly improved with much less time being spent by reviewers and much lower overall time spent on the return, albeit the extra inconvenience and cost of reopening the closed files. also, the added time would be pushed to the preparers and not upward to the reviewers, as is the case with the ticking and tying process. the objective is a better return with quicker turnaround and higher quality, and that is usually the result. the higher quality comes from the reviewers being better able to look for issues and planning opportunities rather than errors in arithmetic on grouping sheets, transpositions and copying errors or missed charity deductions. note that this method is for returns done by people competent to do the work, and not people you are training or teaching; however, this method can be adapted to any level of preparer.
comment: this only works if followed completely and the firm leader has the resolve to insist on this and the strength to ignore the whining and complaints about the “extra” work by the people who make the errors. note: i strictly followed this procedure and it would not win me any good fellow awards, but the quality of the returns submitted by the preparers are greatly elevated, making tax season much calmer and everyone happier (but i still wasn’t given any award!). you have to decide what you are trying to accomplish.
- a third way is to delegate the “ticking and tying” (if you feel a compulsion to have it done) to a peer preparer, before it is turned in to the reviewer.
i have used all three of these methods and they all result in a better product, less cost and quicker turnaround than a method where the reviewer rechecks everything. another method that i have recently begun advocating is to change the name of the “review department” to “quality control department.” i believe this will decrease the error rate because of qc’s stronger identity with quality. also, everyone knows that the qc people rarely recheck everything.
knowing that no one will check the tax return causes a much more deliberate and thorough self-review. proof of this is the small amount of errors made by people preparing their own tax returns. “errors on a return” is defined by either a tax agency notice being sent to correct or call attention to an error; finding an error yourself after the return has been filed, such as when you are preparing a subsequent year’s return; or the client calling you to say they found an error. in the office for clients’ returns you can also define an error as one that is caught by the partner as she was about to sign off on the return.
assuming i am correct, then if a system could be initiated to have the preparers in a firm do a better job of reviewing their own work before handing it in, then overall quality will be improved and once again you will be reducing the most dear time during tax season – that of the reviewers – oops, that of the qc people.
none of the above involves additional teaching or training in taxes, but it does require a major change in the firm’s and preparer’s mindset. if i might suggest, it requires a change of a permissive culture to one of extremely low tolerance for errors. this change generally starts at the top and works its way down, so the partners need to buy into it before you start and remain in during tax season.
in some instances, i have seen highly improved qc with isolated reviewers working on their own who take the time to insist preparers give them good work. they set the standard and teach it one on one to those who will be passing work to them. usually this change starts with consternation but results in better work all around, happier staff, and a high-quality return for the client. and greater profits!
my challenge to you is to consider your internal procedures and decide if you are satisfied with them. if so, then good for you! however, if you believe a change is in order, why not consider what i said above and try it?
another informal survey by me indicates that there is no increase in the amount of notices sent on a percentage basis by tax agencies for returns done during april 1-15. there is also better turnaround and a higher quality return with fewer preparer errors because the preparers understand that the review won’t be as thorough, so they do a better initial job. in addition, the issues reviews are more focused, which is really the best way to use the reviewers’ brains, experience and training.
