best practices for individual and business returns.
by ed mendlowitz
how to review tax returns: the field-tested update
ask a preparer who submits returns with errors, “is this the best you can do?”
better yet, have the reviewer ask the question before accepting the return for review.
more: don’t use eyes, use brain | stop tax return review shortcuts | routine is key to reviewing tax returns | seven types of tax return reviews
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ask yourself this question after you hear that a return was submitted for review that needed extensive corrections: “why am i letting the future of my firm depend on people who keep making errors on tax returns?”
comment: the future of your firm means your future wealth and your eventual financial security.
question for you: why do you put up with the pattern of continuous errors on tax returns?
reviewer’s checklists
following are two reviewer’s checklists – for individual and business returns. i’ve tried to keep these as short as possible. the purpose of these checklists is to deal with the procedural aspects of reviewing returns and not the technical aspects.
to assist in the technical aspects of the review i suggest the long-form tax preparation checklists provided by ppc and other tax services and the aicpa tax division. these checklists are very thorough and complete. using these checklists will ensure that the preparer and reviewer will not miss anything technical.
my reviewers’ checklists are less concerned with the technical details but cover ways to uncover large technical and the many types of errors preparers make that are more concerned with the details of preparing a return, such as incorrectly spelling a client’s name, not answering all the checklist questions or making sure the preparers provided proper backup and documentation for the return.
one way for the reviewer checklist to be used is for the reviewer to give it to the preparer, telling them to make sure that the reviewer will be able to easily find the information they need to in order to perform their review easily.
some comments about the checklist and the need for attention to detail.
- the only thing a client might spot is their name or address spelled wrong.
- not preparing a state or local return can be very embarrassing and also subject the client to late filing penalties when it is discovered.
- the previous year’s unusual items should be looked at to determine if they are applicable for the current year.
- all of the withholding should be accounted for.
- the gross amounts on the 1099s should be less than or equal to the amounts reported on the return. it should never be greater.
- all carryovers and suspended losses should be verified as being accurate.
- the gross receipts from all sources of capital transactions should be reconciled with the amounts reported on the tax return.
- it is very important that a client who must take a required minimum distribution from their retirement accounts has taken them and that they are reported on the tax return. ira distributions from multiple accounts can be aggregated and taken from any of the accounts, but it is necessary for 401(k) and pension amounts to be taken from each account.
- if the client had or controlled a foreign account or trust, it is absolutely necessary that this is properly handled.
- it is important to make sure that there are no stupid items on the return or instruction sheets.
- the checklists are aids but planning opportunities must be looked for.
this checklist should be used as a guide and can be adapted to your firm’s circumstances.
reviewer’s procedural checklist for individual tax returns
this checklist deals with procedural and not technical aspects of the tax preparation process. excellent preparer checklists that reviewers could use are available from the aicpa tax division, ppc and other sources. i refer you to those checklists when you review tax returns.
client________________________ year______ date prepared___________ by_____________
following is a suggested checklist of things for the reviewer to do:
- review client’s name and address, social security numbers and business code (if applicable) (if this is first year doing this client’s return).
- if client showed a change of address, was there a sale of residence to be reported or part year state returns, or was change of address required to be reported to a tax authority?
- were all required state and local tax returns prepared?
- was proper tax filing status used?
- review current and prior year’s tax comparison summary or worksheet, and projection if one was prepared, and explanations for large variances, differences, inconsistent amounts or surprise items.
- compare last year’s return with this year’s return if comparison worksheet was not prepared.
- review last year’s unusual or large items to see if they are applicable for this year.
- verify that estimated tax payments were made.
- review that estimated tax payments and withholding taxes were entered properly on tax payments worksheet, and that withholding tax ties into w-2s and other documents.
- review that estimated payments were calculated properly for the current year.
- review k-1 input.
- review w-2 input.
- total of all 1099s should tie in with amounts on return. if necessary a separate worksheet should be prepared for each type of income.
- were carry-forwards entered properly and accounted for?
- were suspended losses properly treated?
- were gross sales from security transactions reconciled with 1099s?
- review cost basis that client provided, or that were on 1099s and also for wash sales, and stocks received as a gift or inheritance.
- were deductions for worthless stock or non-business bad debts considered and properly documented?
- compare state returns to federal return to see that add-backs and reductions seem logical.
- if a trial balance or financial statement was provided for client’s schedule c business or schedule e rental property, reconcile any book-to-tax differences or adjustments and that they appear reasonable.
- were elections made or considered for clients who are real estate professionals or stock traders?
- was the qualified business income (qbi) deduction (sec. 199a) considered and documented?
- were qbi aggregation amounts properly reported?
- have all applicable bonus and accelerated depreciation deductions been applied?
- are hobby loss rules applicable?
- were unreimbured outside partnership expenses considered and deducted on schedule e?
- if client is over age 70½, were all required minimum distributions taken?
- was kiddie tax considered for children under age 24?
- were tax preparation and planning fees allocated to schedules c or e or other categories of income?
- if client made qualified charitable distributions from their ira, was it properly treated on tax returns?
- was there any circumstance requiring the filing of form 5329 for additional taxes on retirement plans?
- are health insurance forms 8962 and 8965 applicable?
- were items on flag sheets, notes based on discussions with client during the year, special instructions and knowledge points in tax control considered?
- look at client’s correspondence and notes that accompanied their tax information to see if any were applicable to the tax return preparation or if it requires separate followup actions.
- address any notes or comments by a partner.
- look at tax notices received last year to see if they affect current year’s return.
- there should be no diagnostics, open or unresolved items.
- all questions on the preparer’s checklist (if checklists are required) should have responses.
- address s corporation distributions to client in excess of aaa or with negative capital.
- were client’s bases in s corporations properly treated?
- if self-employment income, was a sep or other pension plan payment made or considered?
- if client did not make maximum ira or roth ira contributions, were they made aware of it?
- was question for foreign bank accounts or signatory powers checked on organizer and fincen form 114 prepared if required?
- if question on organizer was not checked, was client asked if they had a foreign account or signatory powers?
___yes ___no (if no, make sure they are asked question) and proper box should be checked
- review amt adjustments, calculations and opportunities to use amt credit from prior years.
- are filing and estimated tax instructions correct?
- all interest and underpayment and late filing and other penalties should be calculated.
- look at every page of completed return and review for any obvious red flags or audit triggers.
- was there any followthrough by client on tax or financial planning recommendations made last year? report any comments: ____________________________________________________________________________________________________________________________________________________________________________________
- were opportunities identified for tax or financial planning for the client? this should be followed up after tax season. put this on tax calendar with followup date. if not included on separate checklist, list here: ____________________________________________________________________________________________________________________________________________________________________________________
reviewer’s procedural checklist for business tax returns
this checklist deals with procedural and not technical aspects of the tax preparation process. excellent preparer checklists that reviewers could use are available from the aicpa tax division, ppc and other sources. i refer you to those checklists when you review tax returns.
client________________________ year_____ date prepared___________ by_____________
following is a suggested checklist of things for the reviewer to do:
- did a partner or manager review the input and net result and approve it? yes____ no____ (if no, this should be done before you review return.)
- review client’s name and address, business code, state of incorporation or organization and all tins and owners’ social security numbers (if this is first year doing this client’s return). the term owners used here refers to stockholders, partners or members, as the case may be.
- passthrough entities: managing owner should have submitted an updated members’ address list.
- passthrough entities with change in ownership: verify that the dates of change and income allocations were entered and allocated properly.
- for first year, make sure all the proper elections have been made such as accounting basis, inventory method, sections 263a and 409a, s corporation (including states), mark to market for traders, depreciation and amortization. for later years make sure return is consistent with elections.
- was section 199a for qbi items considered and properly handled?
- make sure all questions on return have been answered.
- determine that accounting basis listed on the tax return is consistent with the income statement and balance sheet presentation on tax return (for example, if the cash basis is checked, make sure the balance sheet on the tax return is prepared using the cash basis, and that there are no a/r, bad debts or inventory for a cash basis company). note that this is a vague area and each firm should determine what the appropriate balance sheet presentation should be.
- tie in retained earnings or capital accounts balances with trial balance and tax return. even though “trial balance” is used in this checklist, you can use the company’s financial statements if that was what was used for the preparation of the tax return, or computer-generated statements.
- make sure the time spent by officers is reflected as a percentage and not as “all” or “part.”
- review book-to-tax adjustment reconciliation and tie in totals to trial balance.
- if financial statement was prepared, review note regarding income taxes for inconsistencies.
- determine that the individual amounts on book-to-tax reconciliation appear reasonable.
- check that cash balance on tax return agrees with year-end bank reconciliations.
- check that totals of fixed assets and accumulated depreciation and amortization on balance sheet of tax return agree with depreciation and amortization schedules.
- verify that gross payroll on tax return agrees with gross payroll on w-3.
- tie in total of all 1099s client prepared with amounts on return.
- reconcile sales on the client’s sales tax returns with the sales on the income tax return.
- have all applicable bonus and accelerated depreciation deductions been applied?
- if company is on accrual basis, were accruals timely paid after year end?
- determine if retirement plan accruals were properly calculated and timely and properly paid.
- determine if retirement plan is top-heavy.
- check that interest was properly paid, received or accrued on loans to/from related parties, and that actual notes receivable or payable have been executed.
- obtain explanations for large variances, differences, inconsistent amounts and surprise items appearing on tax return as compared to prior year and/or projections if prepared.
- were estimated tax payments entered properly on tax payments worksheet?
- were estimated payments calculated properly for the current year? (if a c corp and earnings over $1,000,000 any one of last three years, different estimated tax payment rules apply.)
- are there unreasonable compensation or unreasonable accumulation of earnings issues?
- review k-1 input and tie in to distributions and investments during the year per the books.
- were carryforwards entered properly and accounted for?
- were gross sales from security transactions reconciled with 1099s?
- compare federal to state returns to see that addbacks and reductions seem logical.
- address s corporations that had distributions in excess of aaa or with negative capital.
- were there foreign relationships, transactions or ownership that require special forms such as 8804, 5471, 5472 or fincen form 114?
- were items on flag sheets, notes based on discussions with client during the year, special instructions and knowledge points in tax control considered?
- look at client’s correspondence and notes that accompanied their tax information to see if applicable to the tax return preparation or if it requires separate followup actions.
- address any notes or comments by a partner.
- look at tax notices for last year to see if they affect current year’s return.
- there should be no diagnostics, open or unresolved items.
- were all questions on preparer’s checklist (if one was required) answered? there should be no unanswered items.
- are filing and estimated tax instructions correct?
- all interest and underpayment and late filing and other penalties should be calculated.
- look at every page of completed return and review for any obvious red flags or audit triggers.
- was there any followthrough by client on tax or planning recommendations made last year? report any comments: ____________________________________________________________________________________________________________________________________________________________________________________
- were opportunities identified for tax or planning for the client? this should be followed up after tax season. put on tax calendar with followup date. list here: ____________________________________________________________________________________________________________________________________________________________________________________