What are the Signs of a Poorly Prepared Income Tax Return?
It’s tax season, and – whether we like it or not – time to gather our documents and file income tax returns.
As a CPA firm, we see our fair share of tax returns filed by various preparers, usually shared by clients who are shopping around for a new CPA.
At times the client suspects they did not receive all the deductions they were entitled to. At times the client spots mistakes or receives an IRS notice and loses trust in their tax preparer.
Assessing whether an income tax return has been prepared correctly is almost impossible for most individuals without a tax background. There are, however, a few tell-tale signs that might prompt you to get a second opinion.
No one investigated the accuracy of business accounting
This first tip applies only to business owners. Although it is very tempting to pay as little as possible for bookkeepers and accountants, this strategy can lead to huge problems, including large tax penalties and interest.
The numbers from your accounting flow into your tax returns – and if the accounting numbers are incorrect, your corporate, partnership AND individual income tax returns will be incorrect as well. This is a LOT of exposure for an IRS audit.
You want to work with a tax preparer who does not simply accept your profit and loss statement, but who asks for access to your accounting file (in a program like QuickBooks Online). They should be verifying your numbers, cleaning up mistakes, and making adjustments as necessary.
If your accountant / tax preparer is fine with you doing accounting in Excel (just one step above a shoebox full of receipts), simply has you email them your bank statements at the end of the year, or does not ask for access to your accounting file, they are not doing a very good job of making sure your numbers are correct and make sense. They are also not taking their liability for a correctly prepared income tax return seriously.
You paid very little for income tax preparation
Preparing an income tax return requires a LOT of skill, attention to detail, knowledge of tax law and ever-changing regulations. All this on federal, state and local levels. Signing a tax return also creates a lot of liability for the tax preparer.
As the complexity of your income tax return goes up (multiple places of employment, self-employment and business income, multiple investments, capital gains, deductions, tax planning strategies, etc.), so does the time the tax preparer should be spending on your return. More time means higher costs.
A great tax preparer will have a conversation with you, look at your past year’s returns, your current documents, as well as the answers to your tax organizer (a type of questionnaire regarding your taxes and finances that you should have filled out before submitting your tax documents), and follow up with you regarding questions, open items, or accuracy of various forms.
They will also dive into your accounting, if you own a business, and want to verify the numbers on your profit and loss statement – they will not simply take your word for it.
If you’re paying a few hundred bucks for a tax return you can be sure your preparer spent only an hour or two preparing. They might have also outsourced/offshored the return. When offshored, the tax firm you hired cannot guarantee the safety of your personal data, as US privacy laws do not apply in foreign countries.
While no one likes paying hefty fees for income tax preparation – you get what you paid for. If your income tax return preparation fee is very low, the quality will be very low as well.
Your tax preparer spends very little time preparing your income tax return
We once had a client ask us why tax firms charge so much for income tax preparation if they only spend an hour preparing an income tax return. This client was a high-income earner with W-2s, 1099s, rental properties and various investments
Our answer was… we don’t spend only an hour! We spend significantly more! Complex returns can take days to complete, and this client’s return was complex. We were aghast that her previous tax firm put so little effort into income tax preparation.
If you receive a request for e-signature authorization the same day you uploaded your documents, your return might have been rushed, or completed without attention to detail. This may result in mistakes on your tax return and spark an IRS audit.
Remember, you are also liable for an incorrectly prepared income tax return – never work with a firm that takes its responsibility lightly.
You can spot mistakes on your return
We’ve heard it all… From clients complaining about their tax preparer filing with the wrong state, to tax returns containing someone else’s data, to incorrect filing statuses, to deductions that were claimed incorrectly (or, more often, not claimed at all).
Although it might seem like a hassle, always look over your income tax return before signing it, and ask your income tax preparer all questions that come to mind. You should also look for spelling errors and incorrectly checked boxes.
Your return seems incomplete
It’s difficult to know all the parts that should comprise your tax return, but it is in your best interest to do your research.
If you own a single-member LLC and your return is missing a Schedule C, or there are no shareholder’s basis worksheets for your S Corporation, or you cannot spot data from your K-1 though you invested in a partnership – it’s best to ask your preparer why the return looks incomplete.
You owe a lot more than you usually do – or get a much larger refund than expected
If your income goes up during a tax year, you should adjust your withholdings and/or quarterly estimated tax payments. Otherwise, you will face a hefty tax bill at the end of the year. If you did some tax reduction planning, you can expect a lower tax bill or a refund.
What if your tax liability is much higher, or much lower, than you were expecting?
This might mean a mistake was made on your return, your preparer missed a deduction, or there was a change to tax law.
Before paying the high tax bill (or receiving the large refund), you might want to double check with your tax preparer or get a second opinion on your return from a different CPA firm.
You spot incorrect deductions – or no deductions
We all want deductions – and lots of them! But the IRS knows which deductions apply in your specific case, and which do not. Claiming an Earned Income Tax Credit or Child Tax Credit if your income is above the threshold will not serve you any favors in the long run.
Similarly, if you DO qualify for a deduction, but your tax preparer forgets to include it on your tax return, you will be paying more in taxes than you need to be. This is why it is so important for your accountant not to rush the return, and pay attention to details.
Your return is missing states you worked in – or shows incorrect states
Just last week we took on a new client whose former CPA had filed an incorrect state income tax return for the previous year. While she worked and resided only in state A, the return showed income in states A and B. This was the result of a mistake on the part of her employer.
While it was not the CPA’s job to verify the accuracy of her W-2, it was the client’s job to notice the mistake, and not sign the return until the mistake was corrected (in this case by her employer).
We’ve also seen clients NOT filing returns in states that they should be filing in, e.g. not filing non-resident state income tax returns in states that their rental properties are located in. This is usually discovered by the state in question, and the taxpayer receives a tax notice, and might be subject to penalties and interest.
Your income tax preparer will not sign the income tax return they prepared
A tax preparer that refuses to sign an income tax return they prepared might be the most worrisome on the list.
This is something the IRS warns about – so-called “ghost” tax preparers. They might be a friend doing you a favor, or a business committing fraud. In either case, they will not state on your return that they prepared it – shifting all the liability onto you.
According to the IRS: “A ghost preparer is someone who doesn’t sign tax returns they prepare. Unscrupulous ghost preparers often print the return and have the taxpayer to sign and mail it to the IRS. For e-filed returns, the ghost will prepare but refuse to digitally sign as the paid preparer… Not signing a return is a red flag that the paid preparer may be looking to make a quick profit by promising a big refund or charging fees based on the size of the refund.”
You can read more about ghost preparers here.
We see similar situations in case of tax planning firms who create tax reduction plans for clients but will not prepare a tax return with the strategies they recommended. This is a way to dodge liability for tax advice.
Any time you see a tax firm or tax preparer refrain from taking liability for their work, it’s best to ask “why” and get a second opinion.
In summary
While tax season might be a major annoyance in your life, it is also an annually-recurring necessity for most taxpayers and businesses. An incorrectly prepared tax return might lead to various problems, including penalties and interest with the Internal Revenue Service or State Department of Revenue. This is why you should make sure you’re using a reputable tax preparer, and keep your eye out for signs of a poorly prepared income tax return.
If you feel your income tax return contains errors, your tax liability is too high or too low, your return was prepared in a too short amount of time, it may be a good idea to seek a second opinion.
Feel free to read more about income tax preparation on our services page.