"I don't know what I'm looking at. So I'm trusting you guys did it all right."

Tax pros across the country usually get this reply after sending out draft tax returns for clients to review and approve. 🫢 I recently recorded a 10+ minute Loom for a client on exactly how to spot check the return from their side.

Here's the framework, broken into three questions:

• What is the anatomy of a tax return?
• What should the client look for?
• How to tell if something is off?

Tax Return Anatomy

One note before we start: we prepare a lot of business returns. So this is mainly about partnerships (1065s) and S-Corps (1120S). Spot checking a personal return is a different exercise, but some of the takeaways still apply.

Page 1

This is the key entity information. Here's what you can check:

• Entity name, spelling, etc.
• Address
• EIN

For non-rental activity, Page 1 will also show income statement (P&L) activity that's been adjusted for book-tax differences (non-deductible expenses, depreciation, etc).

Page 1 P&L or Form 8825 (Rentals)

This is the tax-basis income statement: revenues, income, expenses.

Tie it back (roughly) to the internal P&L you gave the tax pro. Especially total income, cost of goods sold, expenses, salaries, property tax, and other large line items.

Sometimes "other" deductions get lumped into a separate "statement" you can search for. The face of Page 1 or 8825 will tell you which one (e.g., Statement 5).

This will be adjusted for book-tax differences and regrouped to fit tax return categories. You're looking for a close tie, not a perfect match.

Schedule L: The Balance Sheet

A few pages past Page 1, you'll find Schedule L. This is the entity's balance sheet.

Same process as the P&L: tie it back to the balance sheet you gave the tax pro. Cash, receivables, property, accounts payable, loans to banks. Those should tie out tight.

Items that may not match: accumulated depreciation, amortization, equity. That's expected.

K1s: Godspeed

The K1 is the only piece of the tax return your investors actually see. 👀 So it will be heavily scrutinized and deserves a lot of attention before sending.

Start with the basics: names, addresses, and ownership percentages should be correct and consistent with last year unless anyone got bought out or bought in.

The left-hand side of the K1 includes two items you need to verify:

1. Debt allocated to the partner. If the loan is recourse, that partner has a guarantee on the note (or is the note holder). If there's no recourse or guarantees and it's a rental with bank debt, look for a share of loan allocated to qualified nonrecourse.
2. Distributions. Below the loan amounts, you'll see a capital rollforward for the partner. This includes a distribution amount. Your investors will check this against their records. Make sure it matches yours first.

The right-hand side of the K1 shows items of income, gains, and losses allocated to each partner. Unless you have experience with tax allocation rules, this is hard to spot check well.

Is Something Off?

This won't cover every possible issue. But these should make you pause and confirm with the tax pro:

• EIN, name, or address changed from last year
• Balance sheet doesn't balance. You'd be surprised how often software trips this up. 🙈
• Distributions don't tie to your internal schedule
• No book-tax adjustments on Schedule M1, but the balance sheet or income statement don't tie to your books
• Mixed capital account signs across K1s. Some partners showing positive ending capital and some showing negative can happen, but it's rare enough to ask about.
• Missing state returns for any state where the business operates

The tie-out to your financials and the distribution check alone covers 80% of the job. That's what gives you real confidence when investors come back with questions.

The Takeaway

You don't need to understand every line of a tax return to review one well. You need to know where to look and what should match. Tie out the P&L. Tie out the balance sheet. Check the K1 basics. Verify the distributions.

That's four checks. They take 30 minutes. And they're the difference between "I'm trusting you guys did it all right" and actually knowing.

🫡

Meme Cleanser 🧼

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