What Does a Manual Review Mean and Should You Be Concerned?
Understand the implications of a manual review, what it entails, and how it might affect your financial processes and outcomes.
In financial processes, a manual review involves human intervention to scrutinize transactions or applications more thoroughly than automated systems. This added layer of review can affect timelines, outcomes, and financial standing. Understanding why manual reviews occur and how they unfold helps individuals and businesses prepare for potential disruptions.
Common Financial Reasons for a Manual Review
Manual reviews often stem from discrepancies or anomalies flagged by automated systems. One key trigger is unusual transaction patterns. For instance, a sudden spike in transactions that deviates from historical data can suggest potential fraud or money laundering, prompting further investigation to ensure compliance with regulations like the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) provisions.
Tax discrepancies also frequently lead to manual reviews. The IRS may initiate one if reported income conflicts with third-party documents like W-2s or 1099 forms. This has become especially relevant with the IRS’s focus on ensuring compliance with updates to the Tax Cuts and Jobs Act, including changes for 2024. Accurate reporting aligned with official records is essential to avoid scrutiny.
Credit applications are another common area for manual reviews, particularly when credit reports show inconsistencies or when applicants have limited credit history. Lenders may request additional documentation to verify income, employment, or financial obligations. This process helps ensure lending decisions are based on reliable information and mitigates potential risks.
Documentation Requested During Review
The required documentation depends on the reason for the review. If a financial institution is investigating transaction patterns, they may request detailed financial statements, such as balance sheets and income statements, to assess whether the activity aligns with the business’s scale and history.
For tax-related reviews, the IRS may ask for W-2s, 1099 forms, or receipts for deductions to substantiate reported figures. With the 2024 updates to the Tax Cuts and Jobs Act, businesses and individuals should ensure their records align with the new tax brackets and deduction limits. For example, a business claiming a deduction for research and development must provide detailed records of associated expenses.
In credit application reviews, lenders may request payslips, bank statements, or employment verification letters to confirm financial stability and repayment ability. They might also seek explanations for negative credit report entries, like late payments or defaults, to better assess the applicant’s risk profile.
How Final Decisions Are Communicated
Final decisions following a manual review are typically communicated through formal written notices, such as detailed letters or notifications. These documents summarize the findings, outline the rationale behind the decision, and serve as records for future reference.
The communication often highlights key issues identified during the review and specifies any corrective actions required. For instance, if irregularities in financial statements are found, the decision letter may outline areas needing rectification or additional documentation to resolve concerns. This ensures clear guidance on compliance steps and timelines.
In addition, the decision may explain how the findings affect financial terms or obligations. For example, a lender might adjust loan terms based on the review, detailing any changes to interest rates or payment schedules. Transparency in these communications fosters trust and ensures all parties understand the outcomes and next steps.
Potential Changes After a Manual Review
The outcomes of manual reviews can lead to significant changes in financial operations. For businesses, this might involve improving financial reporting practices to align with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Enhanced internal controls or revised accounting policies may be necessary to ensure accurate and transparent statements, reducing the likelihood of future scrutiny.
Tax obligations may also be affected. If inaccuracies are found, revised assessments could result in additional tax liabilities, interest, or penalties. To minimize such risks, businesses and individuals should consider periodic audits by tax professionals to ensure filings comply with the latest regulations.
Operational processes may need adjustments as well. For example, a manual review might reveal gaps in compliance with Know Your Customer (KYC) regulations, prompting businesses to implement more robust verification procedures. Strengthening due diligence can help prevent future anomalies and align with regulatory expectations, reducing the risk of further reviews or penalties.