Art of Accounting: 3-step tax return review process

Accounting

A student recently asked me how I managed tax season. I am an adjunct professor at Fairleigh Dickinson University in its Master of Accounting program and the students are eager to know how we work and what to expect when they start their careers. I am happy to respond and share my experiences. 

Occasionally questions are asked that I haven’t thought much about previously. Last semester I was asked which I liked better — audit or tax — and I responded with a 20-page memo. I was also asked how I prepared for the CPA exam and another 20-page memo was generated. I am now trying to anticipate other questions they might ask. 

One question that sort of caught me off guard was how I managed tax season. They are not aware that I have presented over 100 live presentations and written three books on that topic, plus many peripheral speeches, webinars, articles and books. Yet, I did not want to spend much time on that since I am teaching an auditing course and it was off topic. I provided a short three-step process and then thought about it afterward. Here is the answer with some added explanations.

  1. I made sure everyone followed the checklists as they did the work.
  2. When the return was completed and ready to go out, I reviewed the tax comparison worksheet looking for differences and unexpected results.
  3. I made sure the return was sent out with a bill.

Here are brief explanations of each of these three steps:
Checklists: We had rigid and uniform procedures for almost every step of the tax preparation process. If the process was followed, then I assumed the return would be done correctly. We also had reviewers who would make sure the return was right and who looked for planning opportunities and issues that might help reduce the client’s tax, probability of an audit or that there were no stupid mistakes such as spelling a client’s child’s name wrong.

Tax comparison worksheets: The preparation software provided a current and prior-year comparison of every return. For about 80% of the returns, these were adequate to review the return. For the remaining 20%, the preparer prepared a two-page Excel summary worksheet with a line for every item on this year’s and the previous two years’ returns. The preparer had to provide explanations for all unexplained, unusual or unexpected differences or results. This greatly facilitated the review. Built into this process was a self-checking procedure so reviewers did not receive error laden work. I even trademarked this process as SmartProof®. 

Bill: No return could be delivered without a bill. I compared the bill and the return to the prior year for consistency and, if there were no major differences, then the fee was increased about 5% or some other inflationary amount intended to cover our increased costs. If there was a difference in the final return, then I found out what extra work was necessary, the level of cooperation from the client, the possible value of the added work, and then OK’ed the bill or had it changed. I also made sure that any added work was separately identified on the bill, so the client would not have to wonder why the fee was increased. This process gave me a good understanding of what we did for the client, and what added resources were used. 

Planning opportunities: I had an added step for some of the returns of asking the reviewers if they came up with any planning opportunities for the client, either for the return just completed or for the current or later years. This was a one-on-one discussion but some of the reviewers included a Planning Opportunities Worksheet clipped to the tax comparison worksheet. 

Three or four simple steps that took less than three minutes per tax return gave me a great handle on the return and an easy ability to discuss the results with the client, if necessary.

Do not hesitate to contact me at emendlowitz@withum.com with your practice management questions or about engagements you might not be able to perform.

Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People list. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, and “Managing Your Tax Season, Third Edition.” He also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com along with the Pay-Less-Tax Man blog for Bottom Line. He is an adjunct professor in the MBA program at Fairleigh Dickinson University teaching end user applications of financial statements. Art of Accounting is a continuing series where he shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. He welcomes practice management questions and can be reached at (732) 743-4582 or emendlowitz@withum.com.

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