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Improving Your 1040 Tax Return Review Process

Creating a more efficient process for your firm

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Welcome to CPE at:

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CPE Credit Guidelines

• You must be in attendance for the entire session.

• There will be polling questions periodically; you must answer all polling questions to receive credit.

• CPE certificates will only be available to those attendees who• CPE certificates will only be available to those attendees who stay for the entire session.

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• Click the Chat panel

• Type your question in the text field

• Click Send

To ask a question

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• Partner with WithumSmith+Brown

• Author of 18 professional books

Presenter: Ed Mendlowitz, CPA, ABV, CFF, PFS

books 

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• Some of the material presented has been used and/or adapted from the AICPA published book by 

Edward Mendlowitz

and where applicable is subject to their copyright and is used and reprinted with permission.

• The book is available for sale from www.cpa2biz.com

Introduction• Nature of Tax Return Preparation

– Tax season is a microcosm of everything done in an accounting practice 

– Tax season creates terrible workflow issues in accounting firmsfirms 

• Work compression creates big opportunity for staff because of and quick review turnaround and feedback

Work product

Are tax returns commodities or the result of a professional service?of a professional service?

Level and training of preparers• Leveraging staff

• CPA firm business model

• Why checklists are critical

• Zero tolerance

If it t I ld h t l li f– If it were up to me, I would have a zero tolerance policy for non‐compliance with checklists and procedures

Purpose of tax return reviews• To assure the quality of the return 

– 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 can maximize their financial wealth and security.

Review or Quality Control?Things to consider and ask yourself:

• Is there is a difference between review and quality control?

• QC should represent reality, not theoretical wants or would like to haves 

• Who is responsible for QC?• Who is responsible for QC?

• Who does the QC at your firm?

• Do preparers check their work?

• When the partner gets the return to sign and they find an error, whose error is it? 

• Are the checklists filled out deliberately, carefully and correctly?

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Review discipline and mindset• Motivation

• Repetitiveness

• Creating excitement

• The single most important thing in the world to a client who signs their tax return (now it is e‐filing and digital returns)signs their tax return (now it is e‐filing and digital returns)

Polling question #1

Types of tax return reviews• Preliminary cursory review 

• Tick and tie

• Issues review

• Review procedures during April 1 to April 15

T id i• Top side review

• Final review by partner signing return

• Look at every page

Content review• In a content review the preparer checks most or all of the 

original client info and determines whether it has been entered properly and used correctly. 

• This review is very time consuming, and although a lower level staff person can do it, a tax department review 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.

Issues review• An issues review purely adds value. 

• Not only are tax issues examined to see if applicable, but the focus is also on planning for the current year and finding ways to make the client richer.

• An issues review can also uncover retroactive opportunitiesAn issues review can also uncover retroactive opportunities such as opening an IRA, Roth IRA or SEP after the year under review ended or to  or filing an amended return to apply an NOL.

April 1–15 vs. rest of yearApril 1‐15 Rest of year

Reviewer cannot teach Reviewers teach

Reviewers cut corners Reviewers don’t skip any steps

Reviewers skip looking at checklists and relax standard of making preparer  properly use checklists

Reviewers look at checklists and explain deficiencies to preparers

properly use checklists

Reviewers look for big issues and skip looking at all of the detail.  Might spot check some big or critical items.

Reviewers don’t really look for big issues –time is consumed ticking and tying and looking at detail

Reviewers skip looking at previous year’s return.  Good reviewers won’t skip this.

Reviewers compare to previous year’s return

Reviewers skip reconciling big differences between projection and final returns. Good reviewers won’t skip this.

Reviewers reconcile and try to understand big differences between projection and final return

Reviewers make changes instead of preparer to get return out the door

Reviewers make lists of errors and explain errors to preparers who make changes

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Polling questions #2

Reviewer Checklist

REVIEWER’S CHECK LIST FOR INDIVIDUAL TAX RETURNS

Client________________________ Year____ Date Prepared_________ By_____________

Following is a suggested checklist of things for the reviewer to do:

Review entry for client’s name and address

Review all Social Security numbers (if this is first year doing this client’s return)

Review tax comparison worksheet – current and prior year’s summary information. Obtain

explanations for large variances, differences, inconsistent amounts, and surprise items

If a projection was prepared, review large differences between projection and actual return

Were estimated tax payments entered properly on Tax Payments Worksheet

Review K-1 input

Review W-2 input

Does total of all 1099s tie in with amounts on return

Were carryforwards entered properly and accounted for

Were gross sales from security transactions reconciled with 1099s (we have form for this)

Compare federal to state returns looking to see that add backs and reductions seem logical

Were items on flag sheets, notes based on discussions with client during the year, and

knowledge points in XCM considered

Look at client’s correspondence and notes that accompanied tax information to see if

applicable to the tax return preparation or if it requires separate follow up 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

Should be no diagnostics, open or unresolved items

Were all questions on the preparer’s checklist answered. Should be no unanswered items

Were special instructions on the control sheet followed

Compare last year’s return with this year’s rerturn if Excel sheet was not prepared

Were last year’s unusual or large items reviewed to see if they were applicable for this year

Was there any follow through 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 (complete separate

worksheet). This should be followed up after tax season. Put on XCM calendar with date.

Note: XCM is our workflow software

Follow up sheet

Polling question #3

Reviewing outsourced returns When returns should be submitted to reviewer• When completed by preparer

• Open items a preparer can have when they submit return to reviewer

• Handling and following up open items

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Methods to reduce review timeThe reviewer’s time is the main element that needs to be managed and reduced. Some ways this can be accomplished:

• Better training of the preparers

• Better training of the reviewers (including reviewer specific training)training)

• Digitization as much as possible 

• Better scheduling of the preparation work

• Specific scheduling of complicated returns with the reviewer 

• Work flow management

Reducing reviewer bottlenecks

• Preparers’ involvement

• Pre tax season training

• Continuous training during tax season

• Work paper organization

• Uniformity of procedures

• Modularization of certain preparation procedures

• Ownership and responsibility

Improving quality of preparers

• Work paper organization and documentation

• Use of checklists by preparers

• Use of checklists by reviewers (that preparers are aware of)

responsibility

• Job vs career attitude

• Memorializing our role and purpose 

• Creating a less harried, less hurried office atmosphere

• Keeping everything in order and in its place

Polling question #4

Polling question #5

Self‐review by preparersAn informal survey by me showed that the percentage of returns with errors of sole practitioners and partners in CPA firms is less than 2%, while the percentage of errors by their staff ranges from a low of 30% to a high of 95%! 

Why the difference?• Knowing that someone will check everything; 

vs. 

• Knowing that no one will check the work.

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Tax comparison worksheets

• Why should they be used?

• Other uses, including as a client deliverable

• Types of tax comparison analyses (see following slides)

Lacerte page 1 of 2

Lacerte page 2 of 2 Fast Tax page 1 of 2

Fast Tax page 2 of 2 BNAPage 1 of 38 (only page 1 shown)

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Turbo TaxOnly 1 year entered here

Excel page 1 of 2 worksheet presentation

Excel page 2 of 2 worksheet presentation

Excel page 1 of 2Enlarged portion of worksheet presentationfor discussion

Polling question #6

Ed’s Excel presentation and review worksheets• On the following pages are samples of the Excel® worksheets 

that Ed uses for presentation to clients and for review purposes. These will be discussed by Ed. 

• Full disclosure: I am fanatic about this! 

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John and Abigail AdamsTax summary worksheetTax year 20YYPrepared Nov 4, 20YY

K-1 and Grantor Trust Summary

20YY Proj 20XXW/P P/A ST Net Effect Income Rental Interest Long-Term Capital 179 PenaltyRef of K-1's (Loss) Income Income Sec.1231 Gain/(Loss) Deduction Charity on early draw

Associates 11A P NY 26,035 24,963 1,072 2,371 Group (Final in 2002) P NY - S S Corp (John) 11J A NY (35,887) (38,065) 2,178 S S Corp (Abigail) 11K A NY (362) (384) 22 Alpha Company A NY (136,192) 25,691 (1,613) (137,317) (22,953) (2,799) US 1 Realty P NY 10 10

Private Realty, LLC 11B P MD (7,061) (7,061) Semi Private Realty, LLC P MD (47) (47)

Public Investments LLC (John) PA (51,157) (51,181) 24 Public Investments LLC (Abigail) PA (517) (517) -

Entity

Sample Excel Tax Comparison and Projection WorksheetK‐1 Summary Schedule

Comfortable Apartment Group 11E P DC 11,854 11,804 50 Uncomfy You Bet LLC 11L P DC 287,465 (10,090) 720 296,835 BTO Realty 11G P DC 82,846 82,836 10

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Total Partnership K-1's 176,987 (52,699) 90,658 4,076 295,222 (137,317) (22,953) (2,799) 2,371

Gamma Company 11M A MS 599,999 (158,760) 2,068 756,691 (180)

Total S-Corp K-1's 599,999 (158,760) - 2,068 756,691 - - (180)

Total Grantor Trust Income 120,000 - 120,000 - - - -

Total K-1 and Grantor Trust Income 896,986 (211,459) 210,658 6,144 1,051,913 (137,317) (22,953) (2,979) 2,371 (22,953) 179 expense line12 of Sch D line 30 of 1040

Ordinary K-1 Income (211,459) 1231 Gain - Prior Disallowed Passive LossesPrior Disall. Pub Tr Ptsp Passive Losses - Disallowed Passive Losses - - Disallowed Pub Tr Ptship Passive Losses - Sch D line 11

Pass Through Income (Loss) (23,754) 1,051,913 Form 1040,

Line 17Form 1040,

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Training and assigning reviewers • Training reviewers to review 

• Care and feeding of reviewers 

• Finding vs developing reviewers

• Different levels of reviewers

D l ti f i d /• Delegation of review procedures/processes

• Review time management 

• When the review should be stopped and tax return sent back to preparer

• Technical issues the reviewer needs to identify

• Where the reviewer should go when they need technical help

Reviewer qualification test1. What is the latest date a simplified employer pension (SEP) plan can be opened for 2010 for a 

sole proprietor?

2. What date is used as the “date purchased” to report a stock transaction that includes an unallowed loss because there was a previous wash sale? 

3. Are extra payments made to an ex‐spouse to cover unanticipated increases in tuition in her nursing school deductible as alimony?

4. What is the maximum federal capital gains tax rate from any portion of the gain on commercial real estate that an individual tax client sells?

5. When would you use the annualization exception for the 2210 penalty?

6. How are Section 1256 gains taxed by individuals?7. How would you advise a client who gives large amounts of annual charitable contributions and 

typically has large long‐term capital gains?8. What cost basis is used when a client sells at their point of vesting their employer issued 

restricted stock shares that had no cost and the stock broker has provided a 1099B showing proceeds of $8,100?

9. What would a minimum strategy be for a client with Incentive Stock Options to avoid the Alternative Minimum Tax?

10. What is the equivalent taxable interest amount for a client with 4 percent municipal bond interest if his or her marginal federal tax rate is 25 percent (assume no state tax)? 

Reviewer qualification test answers1. It can be opened until through the latest due date, including extensions, of the tax return for 

the previous year.

2. The date the first or original lot of stocks was purchased.3. Voluntary payments to an ex‐spouse are not deductible as alimony.

4. Pre 1987 recaptured depreciation on real estate is taxed at ordinary income rates.  1987 or later recaptured depreciation on real estate is taxed, for 2010 tax reporting, at a top capital gains rate of 25%.

5. When the income or deductions are earned erratically, bunched or not received or paid equally during the year, and it results in a lower 2210 penalty.

6. The gains are taxed as 60% long term capital gains and 40% short term capital gains regardless of holding period.

7. To consider donating appreciated long term held securities. They would get a charitable deduction for the full value of the securities and not have to report the capital gain income.

8. $8,100. The employer is required to report the entire gain as wages on the employees Form W‐2.

9. To consider exercising as much of the ISOs as the client can to the point where the Alternative Minimum Tax would kick in. 

10. 5.33%. 4% would be divided by 75% (1 – 25%).

Handling errors by preparers• Types of errors

• Frequency of errors

• Ways to reduce errors

• Who corrects errors

L i t iti d t i i t l f• Learning opportunities and training tool of errors

• Error reduction methods

Ed’s suggested review method• Reviewer receives a completed tax return with all back up 

properly indexed on server

• Reviewer looks at Excel® worksheet for large differences, inconsistent amounts, surprise items, and compares to projection, if one was done, and prior years’ amounts

• If unexpected items or difference from projection then reviewer would look at preparer notes and reconciliation

• Reviewer follows REVIEWER’S CHECKLIST. All items that require reconciliation or comments should have been done

• Selected items can be spot checked

• Return should be “locked” in tax program

• Reviewer should look at every page of completed return

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Instilling a firm‐wide quality culture• Office wide QC mind set

• Respect for tax season

• Time management during tax season

World class tax return professional preparationSome key points to having a world‐class tax department are:

• A commitment to providing great service to every client

• User‐friendly services

• Responsiveness to client questions and ideas

C ti it ll i i• Creativity as well as precision

• The ability to anticipate client concerns

• Interested, interesting, excited, and exciting people working in an environment that fosters everything a world‐class tax department should do

World class tax return professional review• Previous slide:

Have a question?

Book available at www.cpa2biz.com.

You can contact Ed Mendlowitz at emendlowitz@withum.com