a rundown of seven types of tax return reviews.
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by ed mendlowitz
how to review tax returns: the field-tested update
there are numerous ways to review tax returns. most reviewers have their own techniques, and some alter these based on
- the type of or size of the return, or
- who the preparer is or
- who the partner in charge of that client is.
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there is nothing wrong with this as long as the reviewer is experienced and really knows their stuff.
my purpose is to show how returns can be reviewed effectively and efficiently and not cause major changes for those who are already doing a great job reviewing returns. hopefully they will glean a few tips from here. however, in many cases reviewers are not working effectively and efficiently and so i offer processes that have worked for me and are working for many firms following these methods and that could help the reader work better reviewing returns.
effectively and efficiently is mentioned often so perhaps it should be defined.
effectively means doing the right review work to be assured that the return is correct, takes advantage of all the tax benefits available to the client, that any planning opportunities are presented to the client, that there are no unavoidable red flags that could cause an audit and that the preparer learns from any mistakes they made. it also means assigning the right staff to prepare and review the return.
efficiently means the return is completed in a timely manner without excessive work, handling or touches, and that all work done is necessary and adds value to the process and client; and that the work was properly planned in advance with staff assignments coordinated with the various people who would be working on the return.
a suggestion is for the reviewers to adopt uniform review procedures and then adhere to them. this requires a concentrated effort by the head of the tax department to develop the review procedures in concert with the reviewers. the more uniform the procedures, the better organized the reviewers will be and the more receptive the noninvolved partners.
i believe the methods described in this post will present a workable effective and efficient review method. it is necessary to describe the major or obvious methods because
- not everyone will agree with me,
- many will not want to change what they are doing,
- some will need to be shown why a method they are following is not as effective as my recommended method and
- some just need some guidance or tweaking and are receptive to reasons that appear logical or more logical or workable than what they are doing.
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 this post to validate what they are doing.
i find it hard to believe that a reader will not get at least an idea or two that will more than not be worth their time reading this post, even if no major changes in review method are made. if you do not agree with me, contact me and tell me why and maybe we can learn from each other. send me an email with your comment and your phone number and i will call you, usually within a couple of days. even if we will not agree fully with each other, there might be some ideas we can both walk away with.
seven types of reviews that are explained separately below 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
not listed here are self-review techniques by preparers. an effective self-review should be taught to each preparer and they should be encouraged to use it on every return they transfer to the reviewer.
preliminary cursory review
the preliminary cursory review is a quick runthrough of the information the client provided before the return is assigned and put into process. this is usually done by a partner or manager who assigns the returns.
some firms have a classification system to rate the complexity of the returns to be assigned to the appropriate staff level.
this review also enables a review of any notes or comments made by the client about their return and questions the client might have that need a reply by the partner or manager. the questions could be related to the return, or something that has nothing to do with the return and for which an immediate reply is necessary. it could also be a note saying they are leaving on a vacation in three days and need the return the day after tomorrow. not noticing that can be very embarrassing.
when this review is performed, the partner or manager can make notes or reference transactions or backup that the partner is aware of that should be used when the return is prepared. actually, any such backup should have already been placed in the client’s file, whether you use the old-style cabinets or a cloud-based paperless system. reference should also be made in the workflow software so it will be obvious to the person assigned to prepare the return. this is another facet of the system.
if this review is performed by the partner who will sign the return, they will get a head start with doing this review. their brain will absorb the data and discordant features will jump up at the partner when they do the final pre-signing review.
by nature of this review it cannot be the only method, and this will not be performed by the trained reviewers.
content review
the content review is where the reviewer checks most or all of the original client info and determines whether it has been entered and used correctly.
this review is the most time-consuming of any of the review methods, and although a lower-level staff person can do it, a tax department specialist usually does. we find that this type of review does not add value. it might improve the accuracy of the return, but it doesn’t make the client richer. this is sometimes called a “tick and tie” review: ticking off the items that were entered after tying them into the entries made by the preparer.
a suggestion for firms that insist on this type of review is to have a peer preparer perform the ticking and tying. a peer preparer is someone at the same level of the preparer. they are certainly capable of checking the accuracy of the input. this will free up the reviewer’s time to spend on uncovering issues and looking for planning oportunities. it will also add skills to the preparer doing this review because they will see the types of errors made and the carelessness of people on their own level. i believe this will sharpen the skills of the peer preparer, while creating an emabrrassment the original preparer would want to avoid, thereby resulting in a more careful job by them on future returns. it will also reduce or eliminate reviewer fatigue, which will occur if almost all of their time is spent cataloguing careless errors by low-level staff.
reviewer fatigue is an overlooked reality. any repetitive function creates decreasing diligence the longer it is carried on. this means that reviewers will find fewer errors (if they exist) as the firm gets heavier into tax season. this can be proven by the increase of partners finding errors when they are given the completed returns to sign off on, or by clients contacting the partner to call attention to an error, or by a notice by the irs or other tax authority.
see for yourself by looking back to last tax season and reviewing the errors; compare the post-april 1 errors to the pre-april 1 errors and then decide. in any event, why would you want your highest-paid staff person spending time on something that a lower-level staff person could do, or spending time on something that doesn’t add value or help the client in any manner, other than help somewhat in the accuracy? it is also not challenging work, it’s tedious, and i am sure it’s not what the reviewer trained for and took advanced tax cpe for to be at the top of their game.
my contention is that this type of review should not be done at all and should be replaced with the issues review, which is an advanced form of the top-side review. to placate those who think i am crazy, i am suggesting the peer preparers do the content review, freeing up the reviewer to use their brain.
before you make any judgments, read what i wrote for the issues review and then decide. at least you would have been offered alternatives, and that is why you are reading this post, so good for you no matter what you decide. note that if you still firmly disagree with me, contact me and let’s discuss it. my email is emendlowitz@withum.com and give me your phone number and i’ll call you.
by the way it is my experience that when preparers know that someone will be checking their work there is less attention to getting the detail right. not performing a tick and tie review will improve the quality of the preparers. that will also save scarce tax season time eliminating corrections and re-reviews.
issues review
the issues review is where the reviewer examines tax issues and looks for planning opportunities.
the focus on this review is on finding ways to make the client richer. an issues review purely adds value. this is what professional firms are being paid to do.
an issues review uses the full measure of the reviewer’s skills, experience and knowledge. that is why he or she gets the big bucks. not using them for this is to waste the asset that has been created and is being maintained at considerable cost each year.
there are ways of doing this type of review that will be explained later, but for now you should consider what the real role of the reviewer is.
each type of review requires a different discipline. the two primary types of reviews are content and issues.
in an ideal world, everything that should be done would be done with the proper time allowed for each step. also, preparers and reviewers must recognize that the tax return must be properly prepared – with the input carefully and correctly entered; with an understanding of what information might be missing; with tax savings, planning, compliance issues deliberately considered; and with “outside the box” planning considered such as financial, retirement or family security issues developed or brought to the clients’ attention as the return is being prepared and reviewed by the accounting firm.
now, back to reality. any human endeavor has errors. the issue becomes one of where you want the errors to occur – in missing a charity receipt, or overlooking an opportunity to provide advice on opening a sep retroactively, contributing to a roth ira, enrolling in their employer’s 401(k) or cafeteria plan, tax-wise ways to make charitable contributions, whether an amended return should be filed to apply an nol or claim an amt credit, or choosing types of mutual funds that would help a client achieve their financial goals that they expressed to you.
question: if you primarily do a content review, whose job would it be to find the overlooked items mentioned in the previous sentence (and many more such items)? keep in mind that a content review would not uncover any of these items because none would be on the data submitted by the client!
looking at the big picture instead of every small detail helps to save time and catch mistakes, and with the right reviewer should not sacrifice quality.
i am not advocating errors, but an added comment is that the proper handling of errors found by the client or a government agency can be an opportunity for the firm. if the error is quickly identified, acknowledged, apologized for and rectified, the client often will gain a greater confidence in the firm than if the error hadn’t been made. however, i do not recommend this as a method of client bonding.
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 when they 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.
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.