Most, if not all, accountants will ask for a prior-year tax return before they will file your current tax year return. This might seem counterintuitive, especially because an accountant has enough knowledge to file taxes without the prior-year returns. But seeing what was done in the previous year answers a lot of questions that your accountant may have and gives them a better understanding of your finances, which will be a boon for you and your business. Here’s the four of the main reasons accountants request those returns:
To see that they were filed. This might seem odd, but it is amazing how many people forget to file, miss a filing, or didn’t even realize it wasn’t submitted. A client of mine thought they had been filing but hadn’t clicked the button to file. By asking for prior-year returns, I was able to catch this and resolve it without issue. Despite what people might think, the IRS is accommodating if we acknowledge and fix issues. My grandfather was the type of person who always paid his taxes on time, every year. And when he started to develop dementia prior to his death, his health and well being were our top priorities and the question of whether or not he had paid his taxes fell to the bottom of the list. No one realized he hadn’t paid in several years until his estate was being cleaned up. Fortunately, after a call to the IRS and a few filings later, we managed to get it all resolved with a few prior-year returns.
To review the return for obvious errors. Oh what kinds of errors we can find. If you have been completing your own return, you might have missed an obvious deduction, and an accountant helping you correct this could save you hundreds. Maybe you didn’t realize that your rental property needed to be reported on a separate schedule. Or maybe something basic was just missed. Again, this can easily be remedied with the IRS. Amended returns can be filed, and we can fix any issues.
To check carryovers. One client of mine was doing their own returns and lost track of carryovers. In this instance, it was a net operating loss. Business losses can be carried forward indefinitely and can save you tons of money. The only problem is that you have to keep track of them. The complexity can quickly grow and cause confusion. In the case of this client, he had lost track of what his true net operating loss was. By looking back at prior returns, I was able to understand what the true amounts were so he wouldn’t lose any of his carryforward losses.
To check for completeness. This is helpful in making sure we have everything. By looking at prior-year returns, we can assess whether a K-1, W-2 or an investment account you haven’t looked at in a year is missing. We can see these amounts and make sure we aren’t overlooking anything going into the future.
Overall, prior-year returns are a quick and easy way for accountants to check to make sure the return they are submitting is correct. We have to trust our clients, but we also want to do as much due diligence as possible so we aren’t missing anything and ensure we are getting the best return for you as well as following the law. So if you’re asked for one, it’s a great opportunity to provide your accountant with more background and context so they can better assist you going forward.
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