It’s probably one of the most frustrating and time-consuming jobs in tax prep: fixing the mistakes of preparers who mangled a business or individual return before you saw it.
Many problems seem to stem from bad communication. “The greatest number of items I find is the number of items that the previous preparer didn’t ask the taxpayer about, [and] leaving out of the return many deductions,” said Paul French, an RTRP in Johnston, Iowa.
His examples of missed deductions include home offices and business mileage, “especially where the taxpayer’s employer reimburses for business miles driven but the employer reimburses at less than the IRS-allowed limit.”
“Calculating depreciation incorrectly, [and] taking bogus employee business expense deductions,” are among the mistakes seen by Stephen DeFilippis, an EA at the DeFilippis Financial Group in Wheaton, Ill.
Delmar Gillette, an RTRP at Newport News, Va.-based Economic Planning Services, sees previous preparers most often not setting up a depreciation schedule correctly or not using various carryovers: “Long- and short-term losses, passive losses, charitable carryovers, not picking up the taxable portion of the prior-year’s state refund.”
Marie Young, an EA at TaxTalk Inc., in Arden, N.C., and preparer of individual returns for more than 20 years, noted some of the biggest but simplest mistakes for individual tax prep:
- Failing to carry forward prior-year losses for capital losses, but also including suspended rental losses.
- Self-employed health insurance premiums.
- Depreciation for rental properties.
- Failing to capitalize expenditures for rental properties.
Regarding partnerships and corporations, the balance sheet is not required for some entities based on revenue and assets.
“I find the most errors when a preparer does not prepare the balance sheet,” Young added. “Other errors on business tax returns include deductions for non- deductible insurances, as well as for automobile improvements and equipment, rather than capitalizing the asset.”
EA Michael Harvey Baum, of Baum Accounting, Tax & Computer Help in Naples, Fla., lists what he sees as previous preparers’ biggest blunders:
- On both corporate and partnership returns, many preparers fail to balance the Schedule L as well as tie the M-1 to net income (loss) or tie the M-2 to retained earnings or partner capital. (“This often makes it very difficult to prepare the current-year return when using just the current-year information, usually from a QuickBooks file,” he said. “Often the preparer either does not give the client’s adjusting entries and verify they’re made or makes them in the client’s QuickBooks file. This adds a lot of time to preparation.”
- No proper basis statements, which also adjust a shareholder or partner’s debt basis.
- Failure to provide the client with a fixed asset schedule.
One prior-preparer horror story began for Las Vegas-based EA Shirley Callahan with a client family whose aunt went into a nursing home.
“The aunt had sold a rental property that had been sold on an installment sale contract,” she said. “The prior preparer reported the interest as a principal payment and the principal payment was reported as interest. The cost basis of the rental property was listed as $95,925, instead of $35,257. This created an excess depreciation deduction which in turn created an excessive loss on the rental property.”
“I agonized before making the call to tell the family about the errors of the prior preparer and informing them that they now owed the IRS,” Callahan said. “I expected them to be mad at me and distrustful of the returns I prepared, and I was almost certain I was never going to get paid for my work. Imagine my surprise when they were ever so grateful to hear the news.” Callahan even laminated the rotten return and occasionally pulls it out to remind clients of the importance of a qualified tax professional.
Some previous preparers’ work obviously crosses the line from simple carelessness to an apparent attempt at crime. Catonsville, Md.-based CPA Al Giovetti offered this laundry list:
- Putting false information on individual 1040s to get larger refunds, such as large fraudulent deductions for charitable expenditures or losses on schedule Cs, Fs or Es.
- Advising clients to justify gambling losses with other taxpayers’ losing tickets for the lottery or horse races, and not using a gambling card to track losses.
- Not taking deductions for items that increase the chance of an audit (“There have been cases where not claiming legitimate deductions was evidence of covering up unreported income,” he noted.).
- Filing returns where unreported income was omitted.
- Not following up with reasonable questions and requests for documentation when a client gives a preparer suspiciously false information.
- Ignoring IRS audit guides and procedures.
- Not subtracting land values from amounts depreciated for buildings and improvements.
Bunch of money’
Smacking your head over previous preparers’ goofs can pay off far less than your better course: correcting mistakes and earning goodwill and future clients.
CPA John Stancil in Lakeland, Fla., for example, taught tax and other accounting at a local college. “Frequently,” he recalled, “students would come to me for tax help, particularly international students who got a W-2 or 1099-MISC and were totally baffled. Recently a student came to me with a 1099-MISC for the current tax year and a copy of a return prepared by another preparer for the prior year. Fortunately, the prior-year return had not been filed by the preparer.”
“The student was in the U.S. on a student visa and was required to file a 1040-NR,” Stancil added. “In filing this return, there are three very important things to be aware of: Visa information for the individual is to be included on the return; someone filing a 1040-NR can itemize deductions but does not get a standard deduction as an alternative; and the individual on a student visa is not subject to Social Security and Medicare.”
“The preparer had prepared a 1040, took the standard deduction, and calculated self-employment tax on the student. The first words out of my mouth were, Have you paid her for preparing this return?’ I explained what was wrong with the return and saved him a bunch of money,” he said.