six questions to ask yourself.
by ed mendlowitz
how to review tax returns: the field-tested update
the purpose of tax return reviews is to assure the quality of the return.
more: seven types of tax return reviews | how to turn tax returns into new business
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quality should be defined as an accurate product along with pertinent and applicable tax law benefits applied as well as planning opportunities identified so the client could maximize their financial wealth and security.
the review should also uncover and eliminate red flags that might cause a notice or audit.
i refer to the review process just as that – the review process. however, in reality it is part of the firm’s quality control (qc) system. if you think of the review as qc would you look at tax return reviews differently?
ask yourself if there is a difference between review and quality control. i think not! from my speaking to thousands of accountants across the country, it is my understanding that average review time is about 40 percent of the time it takes the preparer to do the return (not considering calls to get additional information and error correcting time). consider your clients that have qc departments. how much time do you think they spend on average for qc? would 5 percent seem right?
accounting firms that have high review times usually have high error rates necessitating the higher review time. doesn’t that sound crazy? why not set up procedures to reduce the error rate? note that i have been told that error rates range between 5 percent and 95 percent for many firms. ninety-five percent!!!??? that is crazy! there must be a time that you decide to reduce this amount. you can rationalize all the expediency reasons in the world, but this is just bad … and poor business!
here are six questions with comments to ask yourself:
1. should qc need to be made a top priority for the firm, and especially the tax preparation process?
the higher the qc time, the greater your costs to prepare the return. the higher the error rate by the preparers, the longer it will take the return to go through the review and preparation process. and the higher your wip inventory, the longer it will take to get paid and the more unhappy your staff and the client will be. further, the greater the number of touches the more likelihood there is of an error.
2. in your opinion, who should be responsible for qc?
- the reviewer
- the owner or managing partner
- the preparer
- the person assembling the return
- the client
- the irs or tax agency
the answer is the managing partner. if he or she isn’t responsible for qc, then they have a nice title, but they are not a leader. if the managing partner is unable to deal with this, they can still be a leader by designating a champion for qc, developing with them a qc method and process, communicating it to the entire staff, empowering them, and then standing aside.
standing aside means not interfering with the process. it will be difficult … very difficult … the first tax season it is done, but it will be one of their smartest investments. the problem with implementation is the complaints generated from everyone else in the firm about the onerous procedures, and the temptation to calm them down by relaxing the standard or procedures the qc champion established. giving in to that temptation will destroy the system while it is still in its infancy.
note that a huge problem in execution is getting buy-in from, or a noninterference treaty with your other partners and senior staff. the importance of this process has to be impressed upon them, and they must be made to understand that this decision has been made to make them richer and their work better … in the long run. they must be “hands-off.” if you think you are a leader, then this will be your first test!
the managing partner’s main job after the plan is established would be to monitor compliance and back up the qc champion.
believe me, i know what i am talking about. i went through this process, and only by promising them they would not have to deal with anything (i.e., the staff complaints) other than by telling them to see me. it was tough the first time we did this, but i decided it had to be carried through tax season before it could be evaluated. at the end of tax season, it became a no-brainer to continue with it. if you have any questions or want to discuss setting up an effective qc program, call me. i will be glad to talk with you.
3. if you don’t think you need an effective qc program, ask yourself:
- how many returns have errors that the person signing the return finds?
- how many errors does the assembler find?
- how many errors does the client find?
- how many errors does the tax agency find?
there should be none to each of these. these questions solely deal with errors after the reviewer signs off on the return. now find out how many errors the reviewer finds and has corrected. that would be much more than the above number of returns with errors. also, another issue is to find out how the returns with the errors got through the reviewer. the reviewer might have missed things they shouldn’t have, either because they didn’t know something they should have about the client, they weren’t fully qualified or they had reviewer fatigue because of being worn down by the never-ending volume of error-filled returns they were forced to review. fix it!
4. do your preparers check their work?
a. o “yes” or o “no”
b. what is your number of preparers’ returns that have errors the reviewer finds?
o 5% o 25% o 50% o 75% o 95%
c. how do your preparers check their work?
- do they fill out the preparer’s checklist if you use one?
- do they clear all the diagnostic questions?
- do they look at the completed return before handing in for review?
- do they compare the completed return to last year’s return?
- do they compare the completed return to the tax projection for that client?
- do they review the tax comparison schedule provided by the tax preparation software?
- do they separately calculate the tax apart from the return?
- do they look at every page of the completed return before they hand it in for review?
- do they look at the size of the refund or balance due to see if it looks “reasonable”?
- does the preparer feel a sense of pride in a job well done when they submit the return for review?
- what do you do when you prepare a return to check yourself?
consider the quality of a self-review. the reasons for doing so should be obvious – it will reduce overall time, conserve the reviewers’ time and create a more efficient process. actually, each of the above needs to be done. you need procedures to make sure these steps are implemented and followed.
comment: each of these, if used properly, will uncover errors before the return is given to the reviewer. errors found and corrected by the preparer are a lot less costly than when the reviewer finds them and either has the preparer make the corrections or does it by themselves.
5. question: when the partner gets the return to sign and they find an error, whose error is it?
o the preparer’s? or o the reviewer’s?
in my opinion it is the reviewer’s error. the reviewer’s job is to find the errors before passing on the return. why did the reviewer make the error? see the answer to question 4c above for some reasons.
6. are the checklists filled out deliberately, carefully and correctly?
o by preparer o by reviewer o by anyone else o by anyone?
the checklists should be filled out as the return is being worked on. anything else would ruin your system. some people treat the checklists as punishment for completing the work and check the boxes off just before they hand in the work.