Tax workpaper procedures.

• Author: Holub, Steven F.
• Position: Corporate and individual tax returns

The term "workpaper" can have many different, equally valid meanings. This article covers normal practices within a corporate tax department, and the common practices in public accounting firms for the preparation of individual income tax returns.

Individual Tax Return Workpaper Organization

An excellent discussion on return workpapers can be found in the AICPA's "Tax Practice Management" service. That discussion begins by noting, "Tax return workpapers should provide a trail from the source materials to the final figures on the return. Most firms have adequate workpapers for the preparation of business returns. Often, however, workpapers for individual taxpayers are neglected. Under the crush of the tax season workload, preparers may try to cut corners with workpapers." Fortunately, in comparing the workpaper requirements found in the internal procedure manuals of two different firms (one a small local firm, the other a medium-size firm, each in a different part of the U.S.), the practices were almost identical. The workpaper requirements common to both firms stated that the workpapers for the current year's tax return should contain the following items:

1. The engagement letter;

2. The completed and signed-off checklist (finding even one major item by using the firm's individual tax return checklist will forever prove its value);

3. Computer system byproducts (e.g., diagnostic messages, carryover schedules, etc.);

4. Interviewer's notes and comments;

5. The client's completed tax organizer;

6. Copies of all K-1s, retirement distribution information, basis information, etc.;

7. Copies of any tax research performed regarding issues within the return;

8. Copies of W-2s. (Note: There was a difference in practices as to retaining copies Form 1099s. The medium-size firm did not retain copies if the client had completed the tax organizer and the tax accountant had checked off the item "Agreed to Form 1099" The local firm retained copies of all Form 1099s, based on its experiences with the IRS's CP-2000 program. The CP-2000 program does a computerized comparison between the tax return as filed and the data received by the Service from Form 1099 filers. This comparison is done long after the tax returns have been filed; for example, taxpayers received CP-2000 notices concerning their 1996 tax returns in 1998. Frequently, the CP-2000 system misses corrected Form 1099s or W-2s that have been filed, resulting in taxpayer notices that do not reflect the...