Reviewing Your Tax Return Before Filing
Since we’re in the midst of tax season, I thought it would be helpful for this month’s blog to provide some information that is timely and useful for taxpayers who have not yet finalized their tax returns. It could also potentially be useful to my early bird clients whose returns are already out the door, by providing some helpful hints for next tax season.
Before e-file, I always provide the tax return for my clients to review, so that I may obtain their informed consent for the filing. The taxpayer is the ultimate responsible party for what is filed, regardless of whether they use a paid preparer. Oftentimes clients tell me that they don’t really know what to look for when they review their returns. So below I’ll provide a few helpful hints on things to check before you sign, classified by a few different taxpayer situations. Feel free to skip circumstances that don’t apply to you. Also keep in mind that this is not an exhaustive list, just a few items to consider as you review your return.
A Few Things to Check on Business Returns
If you’re reviewing your partnership return, S corporation return, C corporation return, or even a Schedule C filed in conjunction with your individual return—here are a few things you’ll want to review:
- Does income look correct to you? Most business owners have an idea in their heads about how much money their business made or lost during a year, so generally the revenue and expenses on the return shouldn’t be a complete surprise. However, through the due diligence process wherein the taxpayer substantiates the income and significant deductions on the return, it may be discussed that certain items may not be deductible, depreciation could be accelerated in the initial year of purchase, tax accruals of certain expenses may be recorded, or some other reasoning may apply for a client’s income on the tax return being different from what was initially reported on the books. But if you don’t understand why the income or loss is what it is, definitely ask about this before you sign. You may also want to check out the “Tax Return Comparison” if this is not the first year of existence for your company, so you can check last year’s performance versus this year’s.
- Does the demographic information for your business look correct? Did your business change its mailing address during the year and you forgot to update it on the organizer? Did you change the type of business you operate and it still shows the previous industry you were in? Did you legally change your business name? Be sure to check that all the information about your business is correct.
- Does the balance sheet look correct to you? This would not apply on a Schedule C, but for the other returns mentioned above, what’s shown as end of year cash, depreciable assets, liabilities, etc. should make sense based on what you know about your business. If something looks incorrect about the assets, liabilities, or equity reported on your tax return, be sure to mention it.
A Few Things to Check on Individual Returns
If you’re reviewing your individual return, here are a few things you’ll want to check:
- Are your filing status and dependents correct? If you got married or divorced in the most recent tax year, had a new baby, have a child who has become an independent adult that is no longer eligible to be claimed, began supporting an elderly parent, or have other circumstances that impacted your tax situation and don’t see that reflected in your return, always be sure to bring that up before we submit. Although these questions appear on the organizer, sometimes clients rush through the completion of it and may overlook something. So the review process is the final opportunity to make any necessary changes before we file.
- Is your demographic information correct? Did you change your address since last year, is your direct deposit or direct withdrawal information correct, did you or a spouse change your legal name on your Social Security card, did you renew your driver’s license, did you forget to provide your IP PIN? These are all things that are important to verify before submitting the return.
- Do your income, deductions, and credits make sense? Clients who do not work with me throughout the year can oftentimes have swings in income that result in drastic changes in refunds or balances due from one year to the next. So the first thing I always recommend in this situation is to check the page called “Tax Return Comparison” so that you can see differences between this year’s return and last year’s return. It will show comparisons between income this year and income last year, itemized deductions this year vs. last year, credits this year vs. credits last year, and lastly the comparison between tax brackets and your effective tax rate. Did you expect to make more money this year vs. last year? Did you not make your required estimated tax payments? Did certain deductions or credits change or get eliminated? The Tax Return Comparison is always a page to spend some time looking at to see your tax picture at a glance.
A Few Things to Check For Rental Real Estate
If you are a taxpayer who reports real estate activity on your tax return, here are a few things you’ll want to check:
- Are all assets you purchased placed in service? Usually one of the largest deductions for real estate investors is depreciation. In order for depreciation to be recorded, the assets of the property must be “placed in service” during the tax year being filed. Be sure to check out the depreciation listing and Form 4562 to be sure that any improvements you made and substantiated during the tax return process are included within the return.
- Do your rental income and expenses look correct? Oftentimes real estate investors think of rental real estate in terms of “cash flow” and not necessarily what is deductible on the tax return. For example, maybe you received $30,000 of rental income for the year, made $25,000 in mortgage payments and $5,000 in escrowed property tax/insurance payments—so you feel there shouldn’t be any reportable income or loss. Though cash flow is an important determination for any business or investment endeavor—on the tax return, only the interest portion of the mortgage payment is deductible. Also, depreciation for the property is deducted on the tax return, but not paid out in cash. After those considerations (and others), you may end up with taxable income or a taxable loss rather than breaking even.
- Are Fair Rental Days and Personal Use Days Correct? One of the easy things to overlook when it comes to rentals are “fair rental days” and “personal use days”. However, they can be quite significant when determining what is tax deductible for the rental property. If you used the rental property personally for a month or allowed a family member to stay in the property rent-free (or for a substantially discounted rate compared to the property’s fair market value), be sure such use is reflected on the return and that the expenses for such use have not been deducted. During an audit involving rental activity, the auditor is certain to ask for any leases that apply during that tax period, and gaps in leasing periods or rental income that appears to be below fair market value will require plausible explanations that can be substantiated.
If You Have Questions- Please Ask!
Once you’ve reviewed your return, don’t hesitate to reach out to me if you have any questions about anything presented on the return or anything that you feel was left out. Usually by the time we get to the review stage, any issues were already discussed and fleshed out. But sometimes you may not understand why something was reported the way it was, or you provided the wrong account for direct deposit, or something else needs to be corrected. It’s important that any issues are sorted out before we submit. 😊 I do want to mention that sometimes it may add billable time to the return if I have to make a change to the packaged return for information the client didn’t provide initially, but the important thing is to get the return right. It’s better for the client to pay for an additional hour or so now, than to have to respond to a notice, amend a return, or have a refund go to the wrong bank account.
I hope that you found this article helpful! I always welcome opportunities to work with my clients throughout the year—in an effort to avoid surprises in the tax filing. Please don’t hesitate to reach out during the year if you need assistance with books, calculating estimated tax payments, or would like to minimize your tax liability.