Editor: Annette Nellen, Esq., CPA, CGMA
Hands-on learning, or learning by doing, is a valuable tool in helping students connect what they learn through reading and lectures to the real-world situations they may encounter after graduation. In the tax classroom, one such example at both the undergraduate and graduate level is a practice tax return assignment. With these student-prepared tax returns, professors supply source documents or other client information, and the students complete the return by entering the information into a tax software program or by handwriting directly onto the tax forms.
However, preparing a return does not necessarily demonstrate conceptual knowledge of income tax laws. A May 2019 Campus to Clients article proposed flipping the tax return assignment as a way to better meet learning objectives (Vitale, "Campus to Clients: Flip the Tax Return With a Professor-Prepared Tax Return," 50 The Tax Adviser 378 (May 2019)). The purpose of this column is to expand upon the idea of the professor-prepared tax return with an additional twist of providing a professor-prepared return with intentional errors where students assume the role of the reviewer and demonstrate a mastery of concepts while obtaining valuable real-world experience.
Drawbacks of the traditional practice tax return assignment
While exposure to income tax forms is certainly relevant for accounting students (both personally and professionally), assigning a student-prepared tax return has several drawbacks. If tax software is used, the professor must provide students with training on how to input the client information, using already limited class time. In addition, students must gain access to the software and have the use of an electronic device on which to install the software, which may be cost-prohibitive or not equally accessible for all students. While some publishers may include access to tax software (e.g., H&R Block or TaxAct) with the purchase of the textbook, each program has a different input method, and it is unlikely that the software used in the classroom will be the same software that students use after graduation as they enter the accounting profession. Thus, time and resources must be devoted to software training rather than the core content of the class.
Another drawback of student-prepared tax returns is the focus on data entry within the tax software program. Students might focus more on where to input specific taxpayer information than on understanding the output and how the client information is ultimately presented on the tax return.
To avoid these issues associated with using tax preparation software, students can instead be asked to complete the tax forms by hand. However, this approach has drawbacks as well. Professors must often design the client information to limit the number of forms and schedules students must complete. Despite these attempts to simplify client information, the intricacies of the tax forms themselves may overwhelm students and draw attention away from increasing their understanding of income tax laws, thereby countering the purpose of this type of assignment. For example, a student attempting to report a simple long-term capital gain on Schedule D, Capital Gains and Losses, would be confronted with references to numerous other forms, carryovers, distributions, the 28% collectible rate, and unrecaptured Sec. 1250 gains.
Furthermore, student errors in, or omissions from, pro forma information, such as names and Social Security numbers (typically auto-populated at the top of each form), or failing to answer yes/no questions on various schedules poses a grading conundrum for the professor: While technically incorrect, failing to accurately complete this information does not necessarily demonstrate a lack of understanding of the income tax laws covered in the class. Using handwritten forms can also focus students' learning on where to include the information, and students may narrowly focus on following each line's instructions rather than stepping back and thinking about what they are actually calculating.
The professor-prepared tax return with intentional errors
To help address some of these issues, the May 2019 Campus to Clients column suggested flipping the assignment and replacing the traditional student-prepared tax return with a professor-prepared tax return. With this approach, the professor prepares an income tax return covering the desired topics and poses various questions to the students based on the return, such as interpreting or explaining the results. Source documents may or may not be provided. This eliminates the need for students to enter information into tax software; it also eliminates the risk of overwhelming students with unfamiliar blank tax forms. Thus, professor-prepared tax returns provide an opportunity to move beyond data entry and assess students' understanding of tax return results.
Professor-prepared tax returns are well suited for an exam-like setting where students are asked to respond to questions about the tax return. However, with one twist, the professor-prepared tax return can also provide students with a real-world experience they are likely to encounter in the tax profession — reviewing the work of the tax return preparer. With this approach the professor takes on the role of the preparer and purposely includes mistakes on the tax return that mimic those that might occur in practice. For example, data can be entered in the wrong software location and therefore appear on an incorrect line on the tax return; numbers can be transposed; taxable (or nontaxable) amounts can be omitted (or included); or the same information can be duplicated.
Students would be provided with copies of the client information and the tax return prepared by their accounting firm "staff" (i.e., the professor) and asked to review the return. After reviewing the information provided by the client, students analyze the prepared return, taking a step back in the reviewer role and asking themselves, "Does this look right?" Students who are able to identify errors on the return would demonstrate a high level of mastery of the topics.
A professor-prepared return with intentional errors provides a number of advantages. First, the learning objective of analyzing the tax return output better aligns with where students focus their time and energy while completing the review assignment (in contrast to students' focusing on data entry with tax preparation assignments). It also offers the professor complete flexibility in deciding what topics to emphasize, as well as what errors to include. The professor can decide on the appropriate mix between content-related errors, such as incorrectly including municipal bond interest in gross income, and input errors, such as transposing numbers. Students can also be told to assume all calculations on the forms flow properly, to avoid a focus on verifying arithmetic calculations.
Professors also can customize the number of forms and schedules used in the assignment to avoid overwhelming students. For example, after discussing itemized deductions in class, the professor may choose to have students review a professor-prepared Schedule A, Itemized Deductions. Errors can also be limited to certain forms or schedules closely related to topics covered in the class so that more complex schedules (or schedules that have not been covered in detail in class) only have flowthrough errors, such as a correct calculation based on an incorrect adjusted gross income (AGI).
Professors can also take advantage of practice tax return assignments provided by textbook publishers, which are often already designed to increase in complexity as additional chapters are covered. Professors can modify the answer keys of these assignments to include the most commonly seen errors, thereby allowing students to review and recognize these errors. The professor can also make a wrong (or contradictory to client information) selection for questions that students commonly skip over if preparing a return themselves, such as whether the taxpayer wants to designate $3 to go to the Presidential Election Campaign Fund.
Importance of reviewing skills
Finally, a key advantage of a professor-prepared tax return with intentional errors is that it can place a focus on building reviewing skills. Reviewing is important for two reasons: First, as students enter the tax accounting profession, they will likely be asked to prepare tax returns. Before submitting their work to a supervisor, a crucial step for preparers is to review their own work and check for errors. Despite the rush to complete returns during busy season, a firm's overall workload can be dramatically reduced if preparers can identify (and then correct) their own input errors before submitting the work for peer review.
In addition, recognizing that something might not look quite right on the return and asking for help can demonstrate that the preparer is attentive to detail and ready to learn. Thus, being able to review one's own work is an important skill for demonstrating diligence and readiness to advance in the profession. Even students who will not enter the tax profession can benefit from this review practice as they prepare and file their own personal tax returns. By practicing the review skills first in a classroom setting, once students are ready to prepare tax returns (either their own or their clients') in the real world, they will have already begun developing skills and strategies necessary to step back and examine their own work through the eyes of a reviewer.
Second, in addition to self-review, reviewing the work of another person is an important skill. Understanding the review process is likely more important than ever in the public accounting profession, as students entering the tax profession are being asked to review the work of other professionals much sooner in their careers than in prior generations. Significant improvements in technology and communication methods, as well as in their reliability, have provided opportunities for accounting firms to begin outsourcing certain types of work. According to a 2004 New York Times article, accounting firms began increasing their reliance on outsourcing the preparation of tax returns in the early 2000s and have continued to expand this practice, as it benefits both the firm and the client (Browning, "Your Taxes; Outsourcing Abroad Applies to Tax Returns, Too," The New York Times, section 3, p. 12 (Feb. 15, 2004)). The firm benefits from additional preparation assistance to help relieve busy season overload, creating the ability to take on additional work and clients.
As the time-consuming preparation work is being done by other professionals, this allows the firm to focus on relationship-building activities with clients and provides time for additional client interactions. In addition, outsourcing tax return preparation can be cost-effective for firms, as the salaries of knowledgeable professionals in other countries are typically less than in the United States, allowing firms to pass on the savings to clients. Clients benefit from improved turnaround times with their tax return preparation, reduced costs, and the opportunity to spend additional time with their accountant discussing prior tax strategies and developing new ones.
However, one worry of outsourcing is that without preparing numerous individual income tax returns themselves, new tax professionals miss out on valuable on-the-job training. The Journal of Accountancy reported that a primary concern of outsourcing is whether accountants lacking preparation experience will truly understand tax services. Specifically, they note that tax partners who gained a foundation of tax knowledge as tax preparers may be concerned whether and how new employees "will build their base knowledge and whether they will be able to review tax returns effectively if they themselves don't prepare them" (Shamis, Green, Sorensen, and Kyle, "Outsourcing, Offshoring, Nearshoring: What to Do?" 199-6 Journal of Accountancy 57 (June 2005). Professors can address this concern by incorporating tax review strategies in the classroom, as these skills are likely as important as tax preparation strategies for current students.
Reviewing is a key component of high-quality tax-compliance work in accounting firms. The sooner reviewing skills are introduced to new tax professionals, the better the long-term outcomes. Reviewing the work of others benefits the new tax preparer as well. For example, providing feedback on how others could make their work more efficient and effective provides an opportunity to think critically about one's own preparation style. The experience of identifying the strengths and weaknesses in others' working papers and referencing techniques makes it more likely new professionals will incorporate the strengths and avoid the weaknesses in their own work.
Further, reviewing is also part of a larger skillset related to self-reflection; identifying one's strengths, as well as weaknesses, is a powerful feedback tool that can be used to track performance over time and will likely be requested as part of one's regular performance reviews. In sum, building reviewing skills in the classroom not only ties to future professional skills but also contributes to developing the ability to step back and look at the larger picture, an important skill for entering the next phase of life after college.
Variations of the review assignment
The professor-prepared tax return with intentional errors can be adapted for a number of classroom activities and assignments that focus on building reviewing skills. For example, before assigning a tax return for student review, the professor can emphasize the importance of developing strong review skills by inviting a manager from a local CPA firm to speak to the class. The manager could explain how the review process for tax returns works in a public accounting firm so that the review process in the classroom with the professor-prepared tax return closely mimics reality and students will understand and anticipate any differences. The manager could also describe the standard format used in his or her firm, including how to reference workpapers and tax return line items, or even provide the class with a review note template from practice. It is also common in practice for a tax return to go through multiple rounds of review.
Thus, the manager could provide helpful instruction on how to review corrections made by the preparer and how preparers should self-review to ensure they have addressed all comments. As someone who has experienced the time pressures of busy season, the manager may be especially helpful in providing insight on how reviewers balance budget pressures to complete a return quickly (and thus potentially make corrections themselves) with providing detailed feedback in review notes to mentor and educate preparers on their errors.
As an in-class activity, students can work in groups to find the errors in the tax return. Professors can inform the students of how many errors they should be able to find, and the first group to find all errors wins a nominal amount of extra credit or some other benefit (for example, additional class participation points). Working together likely allows students to identify errors more quickly than on their own, and the element of competition may make the activity more enjoyable, as opposed to a solo assignment or an exam-like situation.
Rather than simply requiring students to identify the errors, a writing assignment can focus on writing review notes. Students would not only point out an error but would also explain why it is wrong and provide detailed explanations to help educate and mentor the "preparer." Written explanations help demonstrate whether the student truly understands the income tax laws and provide useful practice with professional business communications. As part of preparing for the writing assignment, the professor may assign readings from human resources literature on how to give effective and constructive feedback. Regardless of the career path a student follows when entering the accounting profession, practice providing such feedback is a great opportunity to prepare for future upward and downward performance reviews as the student progresses from staff to senior, to manager, and beyond.
After having students review the return and identify errors, the professor can review the assignment with the class. Not only does this allow the professor to reinforce key class concepts and student understanding using a real-world example, it also allows the professor to discuss errors that students had difficulty finding and provide strategies for finding similar errors in the future. The professor can ask the students to share how they identified certain errors, as students likely approached the review process differently and can learn valuable review techniques from the strategies used by their classmates.
The assignment can also be extended to assume that the client wants the return completed right away, so students cannot wait for the preparer (i.e., the professor) to fix their errors. Thus, students must use their own review notes to correct the errors and complete the return by hand (by correcting incorrect numbers or starting with blank schedules). With this extension, the student gains valuable experience as the preparer, yet is not faced with blank, unfamiliar forms, as in the case of the traditional student-prepared tax return. The student has already reviewed the forms and has seen the flow of information through the professor-prepared tax return.
Correcting the errors can be further extended with additional information. For example, in early chapters of an individual income tax textbook, the professor may prepare a Form 1040, U.S. Individual Income Tax Return, using the standard deduction and provide the form to the class. When itemized deductions are discussed, the professor can provide additional client information and have the students prepare Schedule A. The students can then incorporate this change into the professor-prepared return, and, as part of the review, the student can be asked to update the numbers that will change as a result of this new information and identify how the revisions affect the other tax forms and the individual income tax formula.
For more advanced tax classes — in particular, those focused on entities — the professor could also prepare workpapers, such as a tax trial balance with adjusting journal entries. The student again takes on the role of the reviewer, reviewing not only the tax return but also any adjustments made to the trial balance for tax purposes. For added complexity, students could also be provided with a prior-year tax return and workpapers and asked to prepare a list of questions that should be asked of the client or a list of other open items.
Building real-world skills
Using a professor-prepared tax return in place of the traditional student-prepared practice tax return assignment can keep the focus of the assignment on reviewing outputs and demonstrating understanding of income tax laws, while maintaining a level of complexity and difficulty the professor deems appropriate. One small but important adjustment to this assignment: Preparing the return with intentional errors also allows the students to assume the role of the reviewer. Review skills are increasingly important as firms move toward outsourcing and automating basic data entry. Thus, the professor-prepared tax return with intentional errors allows students to practice an important real-world skill, while simultaneously meeting class learning objectives.
|Kimberly S. Krieg, CPA, Ph.D., and Sarah C. Lyon, CPA, Ph.D., are assistant professors of accounting at the University of San Diego School of Business. Annette Nellen, Esq., CPA, CGMA, is a professor in the Department of Accounting and Finance at San José State University in San José, Calif., and is a past chair of the AICPA Tax Executive Committee. For more information about this column, contact firstname.lastname@example.org.