Posted: November 2nd, 2015

AC 371 Tax Return Project

 

 

AC 371 Tax Return Project

Fall 2015

 

 

 

 

 

Student Handout 1:  Instructions and Background Materials

 

Introduction and Background

Scott and Kourtney Smith have been clients of Footem and Filem, LLP (F&F) for the past few years. Scott owns a real estate business, Smith Realty, which he operates as a sole proprietorship. Kourtney is an elementary school teacher. The couple has also received investment income in recent years, including royalties from an oil and gas property as well as income from a rental house they purchased in Ruidoso, NM.

 

F&F is a CPA firm that provides tax and assurance services. To ensure quality in all services, the firm has established best practices for staff, seniors, and partners to follow when providing services to both tax and assurance clients. For tax services, the partner conducts a meeting with the client after year-end to collect information about the tax year just ended. The senior accountant performs a preliminary review of information provided by the client (commonly referred to as “PBC” materials), and this information is forwarded to a staff accountant for further review and comparison with prior year work papers and tax filings.

 

Next, the staff accountant meets with the senior accountant to ask any preliminary questions about the client and suggest any additional information that might be necessary to request from the client to complete the current year tax return. The senior accountant either answers the staff accountant’s questions directly or approves questions to be asked of the client. This best practice was established to ensure that client interactions are always useful and productive.

 

Once the staff accountant has an approved list of questions, he or she must schedule a follow-up meeting with the client to gather additional information. This meeting is an important time for the staff accountant to develop client interaction skills, particularly in conveying technical information in a non-technical manner. The information gleaned from the client meeting allows the staff accountant to complete the tax return, which is then delivered to the senior accountant along with the current year work papers and a carryforward memo detailing key information from the current year. The senior accountant will follow up with the staff accountant for clarification or correction of items in the work papers or the tax return.

 

As a staff accountant for F&F, you are assigned to prepare a personal income tax return and supporting documentation for Mr. and Mrs. Smith for the current tax year (2014 in this case, also labeled “CY”) in accordance with the firm’s best practices described above. You will be provided with prior year (2013 in this case, also labeled “PY”) work papers and client communications, a copy of last year’s tax return, as well as a letter and supporting documents from the client for the current year. To complete the case, you will generate questions based on the initial information provided, meet face-to-face with the client, and roll forward a set of 2013 electronic work papers before submitting a complete 2014 engagement file for senior review.

 

This case requires a heightened level of critical thinking and reinforces both technical and communication skills valued in professional practice. The formulation of questions for the client will allow you to practice discussing technical topics in a non-technical manner and to better understand the required balance between attitudes of client advocacy stressed in professional tax practice and legal requirements for “good-faith” tax return reporting. Details about the case assignment are provided below and in the supporting materials.

Task 1: Review current and prior year information; begin preparation of the tax return

Your first task in this project is to familiarize yourself with the client and begin the preparation of the current year tax return.  This will require your review and understanding of several different documents you will receive from your senior, discussed below:

 

• Current year PBC manual documents – items prepared by the client for 2014. They consist of a letter Kourtney Smith wrote to describe some of the major events she and her husband experienced this year, various W-2 forms for both Kourtney and Scott, as well as several 1099 forms (1099-B, 1099-DIV, 1099-INT, 1099-MISC, etc.). Each 1099 form provides detail for a specific type of transaction the client experienced during 2014.

 

• Current year PBC Excel documents – two documents in an Excel spreadsheet prepared by the client. The first is an income statement for Smith Realty (Scott’s company) for 2014. The second document is a listing of the couple’s 2014 expenses. It is categorized into personal expenses, expenses for the couple’s rental cabin in Ruidoso, and expenses for their oil and gas property.

 

• Prior year engagement file – contains a copy of the 2013 income tax return F&F prepared for Scott and Kourtney and manual copies of all work papers used to complete the 2013 engagement. Items are tick marked (a tick mark is a unique symbol indicating that a task has been performed, accompanied by a comment in the work papers to reconcile and/or clarify amounts recorded on PBC documents) and tied within the work papers, and should be traceable to the tax return. Items denoted “SALY” (same as last year) in the prior year work papers should be confirmed with the client and/or applicable IRS guidance for the current year. The prior year engagement file also includes a carryforward memo, which lists issues that arose during the 2013 engagement as well as transactions noted by the client that were not taxable or includible (denoted “N/T” in the work papers) on the tax return. Use this as a guide in preparing the current year carryforward memo in Task 3B, discussed below.

 

• Prior year Excel work papers– electronic work papers used by F&F staff to complete the 2013 engagement. These include a list of questions presented to the client during last year’s engagement (including client responses), an annual depreciation schedule, a schedule of itemized deductions to be claimed on Schedule A, a schedule of business income and deductions to be claimed on Schedule C, and a lead sheet tying all calculations in the work papers to the final balances reported on the tax return. You will need to roll forward the 2013 Excel work papers to complete the 2014 tax return, although minor revisions may be necessary to adapt last year’s work papers for the current year. This will make efficient use of your time and maintain consistency with last year’s engagement.

 

A review of the above listed items should help you get started preparing the 2014 tax return and work papers. It should also help you generate questions about any additional documentation needed or whether certain items that applied in the prior year still apply this year. Please prepare as much of the 2014 tax return and work papers as you can with the information provided and make a list of questions for your senior and/or the client. One member of your team will then need to forward these questions to your senior to begin Task 2. Note that you will only have one opportunity to meet with the client during Task 2, so you need to be extremely thorough in Task 1 as you work your way through the current year return and generate questions.

As you prepare this year’s return, make sure you have included the following forms and schedules, all of which can be found at www.irs.gov:

• Form 1040;
• Schedules A, B, C, D, E, and SE (Section A);
• Form 2441;
• Form 4562 (for business and rental property);
• Form 4684;
• Form 4797;
• Form 8829;
• Form 8949; and
• Form 8960.

 

Task 2: Meet with Senior and Client

The second task for this project is to meet (or email) with the senior accountant to discuss your questions before scheduling a follow-up meeting with the clients, Scott and Kourtney Smith. After completing Task 1, you should contact your senior accountant to ask any questions you might have about the engagement in general, client information that might be missing, and/or clarification of information initially provided in the engagement file. Your senior accountant will answer all questions that he/she can before the client meeting. Any remaining questions for the client must be approved by the senior accountant before the client meeting.

You have one opportunity to meet with the client to ask questions. Keep in mind that Scott and Kourtney are very busy, so do not waste their time with unnecessary questions (i.e., any questions not approved by your senior). Remember that you are representing F&F in this meeting, so be sure to smile, greet the client in a respectful way, and keep all interactions professional. Make sure to thank them at the end of the meeting.

Task 3A: Prepare the work papers and tax return

Your third task is to complete the preparation of the current year work papers and tax return for Scott and Kourtney Smith. As mentioned in Task 1, electronic work papers should be rolled forward from the previous year. Use the prior year engagement file for examples of how your tick marks should look and what documentation should be created for the current year. Once the work papers are complete, they should be printed for your senior to review and organized in a similar fashion to the prior year engagement file. All manual work papers and communications from the client should also be included in the current year file.

Along with your work papers, the tax return should beput into the current year engagement file for review by the senior accountant. Please ensure that all numbers tick and tie properly (i.e., tick marked numbers in the work papers should match the tax return where indicated).

Task 3B: Prepare a carryforward memo

Your final task is to prepare a carryforward memo for the engagement file to assist the staff accountant who prepares next year’s tax return for Scott and Kourtney Smith. Refer to last year’s carryforward memo for help with formatting and content, and note that two primary goals of the memo are to (1) document items that were particularly challenging and/or unusual compared to the prior year and (2) provide details of any items that were excluded and/or phased out when preparing the current year return. When you have finished this final task, please deliver your carryforward memo, final tax return, and current year work papers to your senior for review.

 

Following is a detailed list of all team and individual deadlines for this project.

What is due?	When is it due?	Is this a team or individual assignment?	Where does it go?
Task 1 list of questions for your senior and client.  The senior MUST approve your questions before you meet with the client.	No later than Friday, October 23 at 5:00 pm.	TEAM (only one person needs to turn this in for each team)	Put all of your questions in a Microsoft Word document and email them to Parks Haley ([email protected]).
Task 1 Critical Thinking Questions (see Blackboard)	No later than Friday, October 23 at 11:59 pm.	INDIVIDUAL (each team member must turn in his or her own original work)	Download the questions from Blackboard and answer them directly in the supplied Microsoft Word document.  Save your answers and upload them to TurnItIn using the link provided on Blackboard.  Check your submission to make sure your file uploaded correctly.  Credit will not be given for late responses for any reason.
Task 2 meeting with the client.	No later than Friday, November 6 at noon.	TEAM (at least one person from each team must meet with the client, but all team members are encouraged to attend)	Meet with your client in Dr. Stinson’s office (Alston 331) during one of the following windows:   Tuesday, October 27:  9:30am – noon Wednesday, October 28:  8am – 3pm Monday, November 2: 8am – 11:30am Tuesday, November 3:  9:30am – noon Wednesday, November 4: 8am – 3pm Thursday, November 5:  9:30am – noon Friday, November 6:  8am – noon   You do not need to schedule an appointment in advance (these are open office hours), but your client will meet with teams on a first come, first served basis.  DO NOT wait until the last minute to meet with your client.  Your questions will be finalized at the end of Task 1, so there is no reason to delay the client meeting.  No credit will be given if a team fails to see the client before the deadline for any reason.
Task 2 Critical Thinking Questions (see Blackboard)	No later than Friday, November 6 at 11:59 pm.	INDIVIDUAL (each team member must turn in his or her own original work)	Download the questions from Blackboard and answer them directly in the supplied Microsoft Word document.  Save your answers and upload them to TurnItIn using the link provided on Blackboard.  Check your submission to make sure your file uploaded correctly.  Credit will not be given for late responses for any reason.
Task 3A and 3B final tax return, work papers, and carryforward memo.	Due at the beginning of class on Tuesday, November 17.	TEAM (only one person needs to turn this in for each team)	Print and organize all of your final documents to turn in at the beginning of class.  Your final files should look and be organized in a manner similar to the prior year engagement file on Blackboard.
Task 3A and 3B Critical Thinking Questions (see Blackboard)	No later than Tuesday, November 17 at 11:59 pm.	INDIVIDUAL (each team member must turn in his or her own original work)	Download the questions from Blackboard and answer them directly in the supplied Microsoft Word document.  Save your answers and upload them to TurnItIn using the link provided on Blackboard.  Check your submission to make sure your file uploaded correctly.  Credit will not be given for late responses for any reason.