As a tax professional you have the obligation and responsibility to make sure all returns you prepare are correct.
Any tax preparer – regardless of training, experience, or “initials” – can make a mistake. Even I have made mistakes on 1040s I have prepared over the years (a surprise, I know).
The mistake can be mathematic or involve the proper application of tax law or regulation.
A tax preparer can unintentionally omit reporting or entering income or deductions from an information return or client worksheet.
A tax preparer can unknowingly understate or overstate taxable income or legitimate deductions. A tax return is prepared based on information supplied by the taxpayer, and this information can be, purposefully or not, faulty.
Over the years I have found that tax preparers who use tax preparation software – which I expect is now about 99% of all tax pros (I am truly one of the last of the dinosaurs) – tend to become lazy when it comes to checking software-generated tax returns.
There is nothing to guarantee that a tax return generated using tax preparation software package is correct, mathematically or otherwise.
I triple check all finished returns before giving them to the client. This should not be limited to returns prepared manually. Tax returns generated by software must also be triple checked in the same manner.
Here is what I do -
I run three series of adding machine tapes – verifying net taxable income three different ways.
The first is a tape adding and subtracting, as appropriate, the numbers on pages 1 and 2 of the Form 1040.
I next run a continuous tape of all the numbers on all the forms and schedules in the return – Schedules A, B, C, D, and E and so on – and any unattached worksheets used to determine entries on the 1040 in the order the information appears on Page 1 and 2.
For example, I would add the wages and other income numbers of Page 1 (that are not carried forward from an internal form or schedule or unattached worksheet) and the individual entries from each internal form and schedule and unattached worksheet that are carried over to Page 1, subtract the adjustments to income in the same way (using the individual entries from any internal forms and schedules and unattached worksheets), subtract either the individual components of the Standard Deduction or the individual items from Schedule A, including any individual items of deduction or adjustment from unattached worksheets, and each personal exemption individually.
The total from both of these first two sets of adding machine tapes should be exactly the same. If they are not I go back and check the additions and subtractions of individual items on each of the internal forms and schedules and unattached worksheets to verify the carryforward numbers.
I run the last tape directly from the original source documents of the information reported on the return – W-2s, 1099s, K-1s, 1098s, bills and receipts, and any worksheets either prepared by myself or provided by the client. Here I use the complete dollars and cents for each item. The total of this tape should be within a couple of dollars (and change) of the totals on the first two – considering there would be minor rounding adjustments.
In the case of a Schedule D with a loss, where the total of all the individual items results in a net loss in excess of the $3,000 allowable maximum, I first run separate tapes of the Schedule D items – both from the return and the source documents – to verify the net capital loss and then use the $3,000 loss deduction in each of the 3 “triple-check” tapes. I would also do the same with Schedule E if a passive loss is limited.
Once the net taxable income has been verified I double check the actual tax calculation, using the number on the tax return and the net taxable income from the third adding machine tape process.
This triple check process is not as time consuming as it may seem from the explanation.
Any questions, or suggestions for additional checks?