“I have followed your blog over the years and thank you for your posts and many insightful information.
I know you do not use tax software to prepare returns. I am curious to know your process of performing returns by hand. I admire your persistence in not using tax preparer software. Do you copy/paste your clients' name and information from one year to the next? Do you triple check the return and tax calculations? I am a younger tax preparer with ten years of experience and I know that with my ‘fat’ fingers I would make many mistakes filing returns by hand.
In addition, do you perform write-up work and payroll/payroll tax returns by hand as well?
This would be a great blog post.”
It might be a good past at that – so here goes.
First off - I do use General Ledger software to prepare the one regular payroll that I still do and for “write-up” work. I expect that I would no longer either prepare a regular periodic payroll or “keep books” by hand anymore.
The GL program that I use exclusively – ONE WRITE PLUS - is no longer available. It was purchased by Peachtree years ago as a way of doing away with competition. I started using it, the first software package I ever did, in the mid-1980s and it has served me well all these years. I have never used Quickbooks or Microsoft Money, nor have I ever used EXCEL or any “spreadsheet” program. The only other GL program I have used, briefly for one client back in the late 1980s, was DAC EASY.
I do the 990 and LM forms (and quarterly 941s) for a local of the Social Security employees union. I do not keep the books during the year – that is done by the Treasurer. In January the Treasurer emails me the year-end trial balance print out and I prepare old-fashioned standard manual “workpapers” to bring it from preliminary TB to Income Statement and Balance Sheet.
I prepare all the Form 941s for all of my remaining business clients manually. I am required to file all NJ payroll and sales tax returns electronically – there is no manual alternative. I do not use any outside software package – I prepare and submit the returns via the NJ Division of Taxation website (as I prepare and submit many NJ-1040s via NJWebFile) and make payments thru the NJDOT system by “electronic check”.
And now on to the main question.
Having prepared tax returns manually for 39 years I have developed a process or routine that I feel actually takes less time then if I had to input all the individual information into a software package. I obviously begin by organizing all the documentation and working through the 1040 from there.
First I divide the W-2 forms into three groupings – Copy B for “Sam”, Copy 2 for the state and Copy C for the client – and run three sets of tapes. I always attempt to reconcile differences in the total federal and state wages, and can do so in most cases. This is especially important with the NJ-1040, as Section 125 health insurance premiums and FSA amounts are not “pre-tax” for NJ state tax purposes, and these items can be included in the state’s deduction for medical expenses (one of the very few deductions allowed against NJ gross income).
I have no idea what is meant by asking me “Do you copy/paste your clients' name and information from one year to the next?”. I hand write the returns with a pen, so how would I do this?
FYI my handwriting of numbers is, if I may be allowed to toot my own horn, practically flawless. And I do use a ruler to make sure they are straight. The IRS and state tax agencies have no problem reading my numbers – and my manual returns have literally be called “works of art” by both fellow tax preparers and the IRS.
I do triple check the finished returns – something that should not be limited to manual returns. Tax returns generated by software should also be triple checked in the same manner.
I run three series of adding machine tapes – verifying net taxable income three different ways.
The first is a tape adding and subtracting, as appropriate, the numbers on pages 1 and 2 of the Form 1040.
I next run a continuous tape of all the numbers on all the forms and schedules in the return – Schedules A, B, C, D, and E and so on – and any unattached worksheets used to determine entries on the 1040 in the order the information appears on Page 1 and 2. For example, I would add the wages and other income numbers of Page 1 (that are not carryforward from an internal form or schedule or unattached worksheet) and the individual entries from each internal form and schedule and unattached worksheet that are carried over to Page 1, subtract the adjustments to income in the same way (using the individual entries from any internal forms and schedules and unattached worksheets), subtract either the individual components of the Standard Deduction or the individual items from Schedule A, including any individual items of deduction or adjustment from unattached worksheets, and each personal exemption individually. The total from both of these first two sets should be exactly the same. If they are not I go back and check the additions and subtractions of individual items on each of the internal forms and schedules and unattached worksheets to verify the carryforward numbers.
I run the last tape directly from the original source documents of the information reported on the return – W-2s, 1099s, K-1s, 1098s, bills and receipts, and any worksheets either prepared by myself or provided by the client. Here I use the complete dollars and cents for each item. The total of this tape should be within a couple of dollars (and change) of the totals on the first two – considering there would be a minor rounding adjustment.
In the case of a Schedule D with a loss, where the total of all the individual items results in a net loss in excess of the $3,000 allowable maximum, I first run separate tapes of the Schedule D items – both from the return and the source documents – to verify the net capital loss and then use the $3,000 loss deduction in each of the 3 “triple-check” tapes. I would also do the same with Schedule E if a passive loss is limited.
Once the net taxable income has been verified I double check the actual tax calculation, using the number on the tax return and the net taxable income from the third adding machine tape process.
This triple check process is not as time consuming as it may seem from the explanation.
The one and only advantage I can see to a software-generated return is that when I do discover an error in my triple check process I do not have to rewrite all the necessary forms and schedules from scratch. That is the only advantage for me.
I certainly do not advocate that all 1040 preparers abandon the use of software and return to the “old-fashioned” way. I merely state that it works for me. I do, however, sincerely believe that all paid tax preparers should initially learn how to prepare 1040s by doing them manually, without using any software. That is the absolute best way to truly understand each and every component to the preparation process.
I hope I have explained my “process” in an understandable manner, and will be glad to answer any questions or clarify any part of the process.
Well – did it make a great post?