Now that tax season is in full swing, I'd like to share my thoughts about bookkeeper-tax preparer interactions. This alliance is natural, as we work for the same client and have interconnected roles. However, I find myself wishing that more tax preparers worked in collaboration with their client’s bookkeepers. I often run across tax prep firms who want to “burn and churn” a tax return and are unresponsive to bookkeepers' questions. I can only assume the reason is to keep costs down, but I believe this does not best serve their mutual client’s needs. Learn 4 questions that bookkeepers will always need to be answered by the tax pro and best practices when working with a client's bookkeeper.
Here are some real-life interactions with a CPA/EA/tax preparer and some less-than-stellar responses I have encountered. Engaging in some simple Best Practices can mitigate these circumstances.
When I ask my clients, they often don’t know and don’t always provide me with copies of their past tax returns. So, I must ask the tax preparer.
The answer to this question is critical if I have inherited a QuickBooks (QB) file for which cleanup needs to be done to the Accounts Payable and Accounts Receivable reports. If I need to clear out years-old uncollectible invoices, the method I use will differ based on whether the tax return is cash vs. accrual. Cash-basis books typically do not use bad debt expense, whereas accrual-basis books do.
One client’s file had invoices with small open balances, many over five years old. First, I was amazed that the CPA firm never cleared out these balances, mainly because the firm’s bookkeeper was doing the books until I stepped in! Many of these invoices included sales tax collected, which in California is paid on an accrual basis which meant that each invoice may be eligible for a partial sales tax refund. The invoices must be reviewed individually to determine if the balance due is for non-taxable labor or taxable parts.
I have tried to contact the client's CPA three times in the past year regarding the cleanup of their books, but I have not received a response. This leads me to believe that the books are on a cash basis, which is why the CPA is not concerned about the open accounts receivable. However, I want to ensure that the client has a clean report with accurate and current balances. I do not want the report to show 5-year-old invoices with balances that the business owner must ignore.
Best Practice: A bookkeeper should check the A/R and A/P reports every month, quarter, and year-end for any issues. The tax preparer should also do the same. This way, the books will be cleaner and less likely to need corrections for past periods. If a bookkeeper has trouble getting answers from the tax preparer, they should call them directly. Talking to each other (instead of using email, voicemail, or text) can help build rapport and improve the relationship for the future.
I’d like to know if the tax preparer wants me to expense that new equipment or add it to the Balance Sheet as a fixed asset. Some tax preparers want all purchases posted to the Profit & Loss, and they’ll decide what to move to the Balance Sheet at tax prep time. That being said, some want Excel reports from the Bookkeeper, not access to the actual QB data file, and as a result, they never look at the expense details. In those cases, how would they know that a $1,200 piece of equipment is ‘hidden’ in Office Expense? If I don’t post the expense to the Balance Sheet, the CPA won’t know there is a decision to be made. I go the extra mile for these CPAs to export the Office Expense Detail Report to Excel so they can eyeball the individual purchases.
Best Practice: A clear capitalization threshold from the CPA would eliminate this exercise. The bookkeeper should ask the CPA, "What is the minimum amount for capitalizing a purchase?" If the bookkeeper is unsure about the threshold, they can email or call the CPA for clarification. A quick phone call can answer several questions at once, and tax preparers usually appreciate the bookkeepers' attention to their mutual clients' books.
Note to other bookkeepers: My client Service Agreement template now includes a $150 additional fee if year-end reports must be exported to Excel and emailed to the tax preparer. It is a lot of extra work to curate Excel reports for a tax preparer who does not use QBO, and it’s reasonable to be compensated for your time.
When I take on a new client, I often find the previous bookkeeper failed to address uncleared transactions in the bank register that weren’t on the bank statement during the bank reconciliation. For example, last year, I reviewed a file that included duplicate sales tax payments for four months in 2022. The previous bookkeeper cleared a single check/payment each month but neglected to void or reverse the duplicate checks during the account reconciliation process. The books were closed and the tax return was prepared.
The Balance Sheet is inaccurate. The Business Checking account and Sales Tax Payable accounts are understated by the amount of the four duplicated checks that were never deleted or voided. Now, I must initiate a discussion with the tax preparer to find out how they want to eliminate the duplicates in this calendar year. Note: This is an instance where the tax preparer never looked at the QuickBooks file for tax prep, they instead relied upon exported reports.
Best Practice: A tax preparer working directly in a QuickBooks file can use the Books Review tool to see if there are uncleared transactions from prior years that need review. Ideally, the bookkeeper will have already done this, but it never hurts for the tax preparer to do the same.
I like to make the books match the tax return as much as possible. Many tax practitioners work their magic on the tax return but do not provide the bookkeeper with adjusting journal entries. I've noticed that many tax preparers are hesitant to dedicate time to sending over AJEs for cash-basis books, especially since most tax returns on the cash-basis don't include a Balance Sheet. However, in my perspective, this shouldn't result in carrying forward with an inaccurate Balance Sheet. Consequently, I often find myself reaching out to tax preparers to request adjusting entries, even though they may not be keen on investing time in this task.
I have also worked with tax preparers who will work off a QuickBooks file but then tell me they don’t or won’t make journal entries in the file. Sometimes, they will email me the journal entry (great!), and sometimes, they email written instructions on changes to make in the file (less great, but I’ll take it).
Best Practice: Ideally, the tax preparer should directly enter the year-end journal entries in QuickBooks. If that is not possible, then the tax preparer should send the bookkeeper a listing of AJEs in the proper debit and credit format, along with the proper description. If you don’t get the AJEs you need, pick up the phone and politely request it. The tax preparer may have the adjusting journal entries ready but might have been overwhelmed with other tasks to send them over promptly. A little bit of understanding and patience can go a long way in fostering a positive and collaborative relationship between bookkeepers and tax preparers.
Many tax preparers like to manually name the AJE number in QuickBooks with an entry such as “2022 Depreciation.” I don't think they realize that the next journal entry created in QuickBooks will continue a sequence of automated AJE numbers using this same wording.
Best Practice: Tax preparers should accept the next auto-generated journal entry number and use the description or memo field in the Journal Entry screen to record their notes. This will avoid the creation of ongoing oddly numbered Journal Entries in the books.
When tax preparers and bookkeepers recognize and value the symbiotic relationship they have with their mutual clients, the result is cleaner books. Cleaner books make for happy bookkeepers, happy tax preparers, and, most importantly, happy clients! Engaging in the Best Practices mentioned above enhances service delivery, improves client satisfaction, and ultimately contributes to the success of professional relationships.