The Top 12 Tax Return Preparation Errors
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Ed Mendlowitz, CPA and partner at Withum CPAs in New Brunswick, N.J., has survived more than 40 tax seasons and built a thriving book of business.
He knows a thing or two about how to run an office in busy season. Over the years, he has compiled this handy list of the most frequently found errors in tax return preparation:
1. Number transposition and spelling errors. This includes income and deduction amounts and client Social Security numbers, addresses and zip codes. Spelling errors should also be avoided – they indicate a lack of attention to what you are doing.
2. Unreported 1099 income. Clients frequently leave out 1099s, but the preparer should
make sure all 1099 items from last year are accounted for. Missing 1099s that were not final
for last year should be accounted for.
3. Tax payments. Entering incorrect and unpaid amounts can be avoided by requiring the
client to provide “proof” of the payments. Entering “incorrect” amounts provided by the client
is a major cause of tax notices.
4. Keeping review notes after the return is completed. This can create liability issues if
there is ever a controversy over the return. Review notes usually deal with errors and
omissions and the type and quantity of them can indicate a lack of training, proper
procedures, adherence to processes or care. Retaining these notes cannot ever help you.
5. Not correcting reason for tax notices for prior year on this year’s return. This is a no
brainer, but for many preparers there is a disconnect between a notice for last year’s return
and the preparing of this year’s return.
6. Not questioning numbers that stretch the imagination. My imagination is likely to be
different from yours, but a client with high debt indicated by mortgage and home equity loan
interest usually won’t be making cash charitable contributions equal to 8 percent of their
gross income. Likewise for maximum allowable IRA contributions. Explain the requirements
for substantiating these deductions and ask client if they have it.
7. Not following up enough with clients to get missing information. This could create last minute rushes and unhappy clients, even though it was because of client’s lack of response.
8. Not specifically asking clients if they have, can sign or control a foreign bank account.
9. Not telling client about items that aren’t on return. Items such as traditional and Roth
IRAs, SEPs, making charitable contributions with appreciated stock, claiming a grown child
with minimal income who lives with client as a dependent, or signing up for an employer’s
401k plan and/or flexible spending account, or partial exercising of ISOs to avoid AMT.
10. High mortgage interest deductions. Excessive amounts (usually over $50,000) are a red flag for the IRS. Make sure the interest is not from excessive mortgages, that the funds were used for proper purposes or that the interest tracking rules have been complied with and if mortgage proceeds were used for investment purposes, it is properly reflected on the return.
11. Alternative minimum tax. Watch for unapplied AMT credits and AMT NOLs, and state tax refunds reported as income even though not deducted in prior year because of AMT.
12. Not calling a client to relay unexpected (and especially bad) final results.
GET THE INSTANT DOWNLOAD: “12 Reasons to Love Tax Season: Ed Mendlowitz’ Tax Season Opportunity Checklist Kit” (PDF, 16 pages). FREE to PRO Members
Including:
- The Reviewer’s Checklist for Individual Tax Returns – 34 Items
- The Reviewer’s Checklist for Business Tax Returns – 42 Items
- The Top 12 Tax Return Preparation Errors
- Reviewer Qualification Test: 10 Questions Every Reviewer Should Know…
- ” …And the Answers (No Peeking!)
- Additional Services Checklist: 15 Potential Client Needs
- Sample Listing of Additional Services to Clients: 40 Services Every Firm Could Cross-Sell
- What Makes a Good Client: 16 Tips
- The One-Page Tax Season Client Follow-Up Action Plan
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Interest in foreign corporation / partnership or foreign gift is also worth asking if you know that your client maintain close connection with their home country or any foreign country. If we are reporting foreign banks, income from foreign investment is also important to address while preparing the tax returns. Cost of ignorance is huge.
left out– gifts to children grandchildren in excess of allowable amount
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Items 2 & 3 can be pre-empted, when dealing with later and post-Season filers, by requiring a signed Form 2848 along with a signed engagement letter. This enables you to access the IRS “wage & income statement” and “account transcript” – which are being updated more timely, every year. State est’d pmts & first filers remain ‘problematic.’ ;-)