Learning Tax with Flowcharts

Editor: Annette Nellen, J.D., CPA

The flowchart is a visual representation of a document flow, process, or logical pattern of thought. Because flowcharts are useful in communicating information, tax textbook authors sometimes create illustrations with flowcharts. Authors may depict the series of steps in the enactment of a tax bill or the logic in determining a particular tax treatment, such as the value of a casualty loss or vacation rental deduction, through a flowchart exhibit.

Flowcharts are useful in many different settings, including classrooms and accounting practices. Flowcharting activities in a tax class not only help students understand the course material but also prepare them for their professional lives. Tax advisers use flowcharts to explain rules to their clients when appropriate. Auditors and other systems analysts use them to illustrate and document the processing of information through a system and may pinpoint ways to improve business practices.

The IRS publishes flowcharts to help taxpayers understand complex tax rules. These charts can help bridge the technical gap between tax professionals and their clients, particularly with complex tax rules that may be difficult to follow in the narrative form. (See, e.g., IRS Publication 936, Home Mortgage Interest Deduction (2009). Flowcharts presented in the first few pages can help taxpayers determine whether their home mortgage interest expenses or financing points are deductible.)

Accountants preparing flowcharts to document the sequence of transactions through a system may uncover unnecessary steps in the processing of the transactions, duplication of processes, or lapses in internal control. In “Flowcharts See a Revival as Auditing Tool” (Compliance Week (August 22, 2006)), Christine Dunn reported a revival in the use of flowcharting as a vital tool for accountants in the study and documentation of internal control processes when complying with the Sarbanes-Oxley legislation.

Flowcharting is a skill with many applications in the business environment. The benefits that students derive by creating electronic flowcharts can be gained with little to no cost other than the instructor’s start-up time; most programs already have the software available in their spreadsheet applications. This column provides instructors with step-by-step instructions to minimize their start-up time when assigning flowchart construction.

Flowcharts in the Classroom

The use of flowcharting in the classroom helps students learn using multiple senses. Simply put, students who are strong auditory learners appreciate the traditional classroom lecture. On the other hand, illustrations—such as charts, graphs, and diagrams—enhance the classroom environment for the visual learner. And students with tactile preferences for learning may remember the lesson best by making models, puzzles, and time lines. Following up a traditional lecture by requiring students to prepare their own flowcharts stimulates learning using these multiple cognitive styles.

Self-Constructed Student Projects

In “Technical Communication, Art, and Printing Services: What Are the Pedagogical Connections?” (71 Bus. Comm. Q. 216 (June 2008)), Lee Tesdell describes a collaborative project between the art and English departments at Minnesota State University, Mankato. Tesdell advocates communicating technical information through the blending of visual and verbal content. In the project at Minnesota State, college students combine graphic art and technical writing to create materials for professional teaching conferences. This physical activity teaches students skills that will help them function in their future workplaces.

Step-by-Step Instructions for Introducing Flowcharting in the Tax Classroom

1. Present students with a one-page handout reviewing the basic flowcharting symbols: termination, processing, decision block, connector, input/output blocks, and directional arrows (see Exhibit 1). Each student should prepare a simple flowchart in pencil depicting the general process of creating a flowchart. This initial activity is suggested as a warm-up exercise to introduce students to the basic symbols.

2. After students have prepared their first flowchart, the tax instructor should deliver his or her standard lecture on a textbook topic. Following this lecture, students should be asked to prepare a second flowchart (again in pencil) that depicts the rules of the tax treatment as described in the instructor’s lecture. An activity such as computing cost recovery deductions works well because there are multiple considerations. Students must take into account the amount of time the asset is used for business, the type of asset, the pattern of purchases, and other options for computing the amount of cost recovery. Students can begin the charting activity alone with a pencil on paper (thinking phase) and then compare their flowcharts in groups of two or three students (sharing phase). Afterward, the tax instructor may choose the best flowchart and, with the students’ permission, share it when reviewing the topic of cost recovery in later classes.

3. Subsequent to the paper and pencil activities, the tax instructor may follow up a traditional lecture with the requirement that each student prepare a flowchart using electronic software. The instructor gives students an instructional handout on electronic flowcharting and asks them to draw a flowchart that depicts the process described in the lecture. Computing the tax basis of stock received by stockholders in an exchange governed by Sec. 351 works well. Sec. 351 is important because its provisions play an important role in determining the basis for stock received upon incorporating a business, and incorporation is often the first topic introduced in connection with teaching corporate taxation. A sample solution is presented in Exhibit 2.

Conclusion

Flowcharting is an important tool to use when communicating information in the workplace and the classroom. For the tax practitioner, one of the best uses of the flowchart is to bridge the communication gap with clients. Through visual representation, flowcharts reduce the technical construction and language of tax law to a diagram that clients can more easily understand.

In the classroom, during the process of drafting their own charts, students must identify tax authorities, recognize and prioritize decision steps, and communicate an overall picture of the logical sequence in determining a specific tax treatment. Developing an ability to flowchart helps the student learn the tax rules and provides a technical skill to be used in the professional workplace.

In general, student reactions to flowcharting assignments have been extremely positive. As reported at the American Accounting Association’s Effective Learning Forum (Cereola and Riordan, “Teachers and Students Succeed in Tax Class with Flowcharts,” paper presented at the AAA Annual Meeting, Chicago (August 2007)), the majority of students in two undergraduate federal income tax classes strongly agreed that the activity of creating a flowchart—whether prepared by the authors of their text, the instructor, other students, or themselves—helped them understand the material in the course.

Instructions for producing flowcharts are provided on p. 125. The instructions are based on the assumption that the creator has no experience with either flowcharting or Excel programming. The teaching notes are presented in two sections, the first for manual flowcharting and the second for flowcharting in Excel. The instructions can be used separately or in sequence, depending on whether the instructor plans to have students prepare charts only in pencil or to follow up with software programming. These instructions have been used successfully with both students and faculty learning to draw charts for the first time.

EditorNotes

Annette Nellen is a professor in the Department of Accounting and Finance at San José State University in San José, CA. She is a former member of the AICPA Tax Division’s Tax Executive Committee and a current member of the AICPA Tax Division’s Individual Income Tax Technical Resource Panel. Sandra Cereola is an assistant professor of accounting and Diane Riordan is a professor of accounting at James Madison University in Harrisonburg, VA. For more information about this column, contact Prof. Cereola at cereolsj@jmu.edu or Prof. Riordan at riordada@jmu.edu.