One reason was so I could check for errors made by the previous preparer that I could “fix” by preparing amended returns. My mentor and I found that you would get the new client for life if you could amend a prior year’s return for an additional refund. This worked a lot better back in the day of Income Averaging and other “rabbits” we could pull out of hats. (This review of prior years' returns is that on which I base my contention that over the years I have found more errors on returns prepared by CPAs than on self-prepared returns.)
But the most important reason to review at least last year’s returns was to see if there were any unique deductions and credits to look out for and any carryovers that would affect the current year’s return. There are a multitude of reasons why a preparer may need information from past years returns of new clients in the process of completing current returns.
I cannot imagine a taxpayer going to a new preparer for the first time and not being asked to provide copies of prior returns.
But there apparently are many preparers out there, especially those employed by fast food tax preparation chains, who do not ask for past returns. When reviewing the 1040s of lost lambs who had returned to the fold in the past I have discovered that carryovers from returns I had prepared were not “carried over” to the returns of the new preparer, resulting in an overpayment of tax.
Several years ago a representative of the Government Accountability Office spoke at the IRS Tax Forums about the sting operation it ran which resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors” (one of the initial factors that led to the current tax preparer regulation regime). The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors.
I asked the presenter if any of the alleged “tax pros” approached in the study had asked the GAO undercover “client” for a copy of the previous year’s return. I was told that in none of the 19 instances did the fast food preparer want to see the prior return.
As an aside comment, the GAO agents also discovered unethical sales practices related to Refund Anticipation Loans (RALs).
The most common carryover is the capital loss carryover. The maximum deduction for a net capital loss is $3,000. Net losses in excess of $3,000 can be carried over, and deducted at up to $3,000 per year until all used up.
A recent article in one of the National Association of Tax Professionals publications I was reminded that if a tax preparer forgets to carryover a net capital loss all is not lost, even if the omission is discovered for a “closed” year.
Generally a taxpayer has three (3) years from the due date of a return to amend that return to claim an additional refund. At this writing the 2010, 2009, and 2008 Form 1040s are “open”. One can no longer amend a 2006 return to claim an additional refund.
According to TC Memo 1983-318 a taxpayer who did not claim a capital loss carryover in a closed year, either the year the loss was created or a subsequent year, can claim a carryover deduction in open years.
The example used in the NATP article stated that a taxpayer had a $20,000 capital loss in 2005 that could have been carried forward (apparently a net loss of $23,000, $3,000 of which had been claimed on the 2005 return) but was not. No deduction was claimed in the subsequent years.
In this case tax years 2006 and 2007 are now closed. If we assume there were no capital gains, or capital gain distributions, reported in 2006 and 2007, the taxpayer would have to reduce the $20,000 by the $6,000 that could have been deducted in 2006 and 2007 (although they were not) and enter a $14,000 capital loss carryover on the Schedule D of a 2008 amended return.
The taxpayer would not only get the benefit of at least a $3,000 reduction in gross income, but, as the capital loss deduction would reduce AGI, could also increase a laundry list of credits and deductions that are phased-out or lost altogether based on AGI.
Another important carryover is the “tax basis” from non-deductible contributions to a traditional IRA reported on Form 8606. Once you file a Form 8606 for the first time to report a non-deductible contribution you should continue to file a Form 8606 each and every year thereafter, even if no non-deductible contributions are made in a year, to maintain the carryover balance so that it is readily available when you begin to take distributions from an IRA.
You may have made a non-deductible contribution to an IRA in 2004. No additional non-deductible contributions were made in 2005 through 2010. If no Form 8606 was included in the 2005 through 2010 Form 1040 filing, to carryover the IRA basis amount, then when you change to a new tax preparer for your 2011 return, a year in which you took a distribution from an IRA account, the new preparer would have no way of knowing about the 2004 non-deductible contribution and would claim the entire IRA withdrawal as fully taxable, causing you to pay unnecessary federal income tax.
So if you happen to change tax preparers for 2011, for whatever reason, be sure to give the new preparer copies of your 2008, 2009, and, most important, 2010 tax returns (and, to be honest, I would also recommend not going to a fast food tax preparation chain)!