No doubt a good portion of your overwhelming workload over the past tax season involved correcting goofs from clients’ previous tax preparers. Mistakes seem to run the gamut from typos to tangibles, from basics to basis.
“Depreciation: It’s crazy how many mistakes I see,” said Enrolled Agent Jeffrey Schneider in Port St. Lucie, Fla. “I’ve seen 27-½ years for non-residential RE (when it should be 39) and the reverse. Probably the most common mistake is missing unreimbursed employee business expenses. My clients usually tell me that their previous preparer did not ask as many questions as I do.”
“The most common mistake our staff sees from clients of other prepares are [those preparers] not informing clients of the maximum deductions and credits,” said Christopher Javis, operations manager for Javis Financial Services in Columbia, S.C.
Simply, previous preparers “are not reviewing their work,” said Helen O’Planick, EA at HELJAN Associates in Manchester, Pa.
The Affordable Care Act is only one of the latest complicating factors for tax prep. A recent Government Accountability Office report detailed finding “significant preparer errors during undercover site visits to 19 randomly selected preparers.” Stressing that this sample cannot be generalized, the GAO found that refund errors, to name one area, “varied from giving the taxpayer $52 less to $3,718 more than the correct refund amount.”
Other common errors included not reporting non-W-2 income, claiming an ineligible child for the EITC, not asking the required eligibility questions for the American Opportunity Tax Credit, and not providing an accurate PTIN.
A consumer primer on the site of Florida CPA firm Fiske & Co. notes that common mistakes on business returns often involve incorrect calculation of depreciation or misuse of carryovers such as long-term and short-term losses, passive losses and charitable carryovers, among others.
O’Planick also sees old mistakes from carry-forwards, such as capital losses. “The former preparer never looked at the prior year’s return to see if anything is there to carry forward,” she said.
Mistakes common to individual returns, according to the Fiske CPA site, include those for a home office or failing to capitalize expenditures for rental properties.
Typical business return errors include deductions for non-deductible insurances, as well as for automobile improvements and equipment, rather than capitalization of the asset. On both corporate and partnership returns, many tax preparers fail to balance the Schedule L as well as to tie the M-1 to net income (loss) or tie the M-2 to retained earnings or partner capital. Often the tax preparer did not give the client proper basis statements, which affect a shareholder’s or partner’s debt basis, or failed to provide a fixed asset schedule.
The ongoing danger of sloppy previous preparers: You might eventually bear legal responsibility for an inherited-yet-uncaught mistake.
Preparers who are up to speed on tax prep’s infamous minefields can probably guess the other big trouble areas. Terri Ryman, an EA at Southwest Tax & Accounting, in Elkhart, Kan., for instance, sees the most goofs regarding EITC due diligence and 1099s.
“I’m getting in clients who have had no documentation required of them to claim their $5,000-to-$10,000 refund,” Ryman said. “Quite often when I meet with new clients and after going over their information, I ask them if they issued 1099s to folks they paid for professional fees, repairs, rent, vets, attorneys and so on. Typically they just stare at me and say, I’ve never heard of doing such a thing. Is it required?’ This is particularly true of folks that have been preparing their own returns.”
“A lot of the mistakes I see are simply fat finger’ issues, and I think this is really due to the use of software,” O’Planick added. “Many preparers have never done a return by hand. They trust the software and don't go back and check things.”
You don’t know where they’ve been
EA Kerry Freeman of Freeman Income Tax Service in Anthem, Ariz., often encounters past years’ prep errors when clients change their state of residence yet hold onto a past preparer.
“Then one day they decide to use someone local and that’s when I discover that important local state deductions or credits are missing because the out-of-state preparer did not research the differences,” Freeman said. “For example, in Arizona medical deduction is taken at 100 percent on the state’s Schedule A. Since most people are conditioned that you can't deduct medical on the federal return, they never bring this information for the state return.”
Another common error concerns state tax credits, said Freeman: “Again, here in Arizona certain federal deductions for charities can also give the taxpayer a state or local tax credit.”
“New clients come to me usually because the previous preparer is in over their head with the more complex return,”’ said Martha Nest, an EA at Westview Tax Services, Bardstown, Ky. “I also find that new clients haven’t been asked the right questions when it comes to the education credits, itemized deductions, employee business expenses and deductions on a schedule C.”
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