EXECUTIVE
SUMMARY |
WHATEVER CPAs CAN DO TO
SYSTEMATIZE the repetitive
aspects of individual tax work and spread
the workload over the year makes their
lives easier and allows their firms to
make more money.
THE ESSENCE OF A
SUCCESSFUL TAX SEASON is
effective communication in the office;
adherence to procedures and systems for
handling client information; keeping
everything in its place; and a
user-friendly attitude and service.
TO FOSTER HIGH MORALE
and strengthen firm culture,
CPAs should concentrate on staff
training. Clear rules help make review,
error disclosure and training a pleasant
experience rather than a chore for both
instructors and trainees.
CPAs SHOULD REQUIRE STAFF
to first check the master tax
guides, federal and state tax packages
or the applicable instruction form
before referring work to the firm’s tax
department. Questions should be in
writing by e-mail with a copy to the
engagement partner.
AN ANNUAL PRE-SEASON TAX
MEETING for staff and
colleagues from other firms can be an
important networking, marketing and
training event. Firms can distribute
training materials and a hypothetical
client’s tax return for the group to
analyze and critique.
ONE OR TWO OUT OF EVERY
HUNDRED individual tax return
clients refers a business
client—possibly a small home-based
business, a professional organization or
a company filing with the SEC for the
first time. That’s a side benefit of the
tax practice. | EDWARD MENDLOWITZ, CPA/ABV,
PFS, is a partner in the firm of
Mendlowitz Weitsen, LLP, East Brunswick,
New Jersey, and New York City, and the
author of Introducing Tax Clients to
Additional Services, published by
the AICPA (
www.aicpa.org ). His e-mail address
is EM@MWLLP.com
. |
ndividual tax-return preparation is
a small portion of most CPA firms’ dollar volume,
but tax season is the most visible part of an
accountant’s work. Although the momentum of busy
season makes overall firm management simple in
some ways (we make fewer big decisions then—who
has time?), the sheer volume of the workload makes
unconscionable demands on a CPA’s energy and
personal life. But such is our business, and the
challenge is to run it well and improve
efficiency. Whatever we can do to systematize
repetitive events and spread the workload over the
year makes our lives easier and allows us to make
more money. Accordingly, our practice—Mendlowitz
Weitsen LLP, a three-partner, 15-person firm in
East Brunswick, New Jersey—has developed
procedures to guide our staff and partners in
processing a client’s tax return, from first phone
call to final invoice. We hope our system will be
useful for small tax practitioners, managing
partners and CPAs in tax departments of all sizes.
A CULTURE OF TRAINING
The essence of a
successful tax season consists of:
Effective communication within the
office.
Firmwide adherence to procedures and
systems.
Keeping everything in its place.
A user-friendly attitude and service.
To instill respect for the tax season,
foster high morale, strengthen both our firm
culture and brand and give staff a feel for busy
season, we put tremendous effort into training.
The process is continuous, and we expect each
person to learn and to grow professionally and
technically. The crux of achieving that aim is to
take the guesswork out of tasks. Clear rules help
make review, error disclosure and training a
pleasure rather than a chore both for those who
instruct and our trainees. The Tax
Man
The IRS’s operating costs in
2003 were $9.4 billion.
Source:
www.irs.gov .
| The exhibit tracks our
procedures for preparing a tax return in about 25
steps, including obtaining preliminary client
information, setting up a file, getting answers,
preparing and reviewing a return, doing a final
check, making corrections as needed and sending
the return to the client. We prepared it for
promotional reasons but now use it for training.
TOOLS: TAX SERVICES AND UPDATES
We make sure all our staff has up-to-date
training in current tax law, and we provide them
with master tax guides ( CCH Master Tax Guide,
RIA Federal Tax Handbook and J. K. Lasser’s
Your Income Tax, professional edition,
with citations and references) and federal and
state tax packages for reference purposes. We have
a large tax library that includes all prior-year
master tax guides, although most of what we might
need is now online. We send tax updates to staff
monthly or more often if needed. We also have
access to the extensive AICPA tax division
checklists and valuable AICPA CPE resources.
Our two-person tax department is the
tax-planning, research and review arm of the firm
as well as an in-house resource. When staff
members have a question, they are required first
to check the master tax guide, federal and state
tax packages or the applicable instruction form
before referring work to the tax department. They
submit all questions in writing by e-mail with a
copy to the engagement partner.
WHAT WE DO WHEN
Late October through December.
When we prepare returns, we also do
most tax projections—a key part of the
tax-planning process—for the present and following
year. It’s more efficient to begin them while a
client’s file is already open. We use the best
information available, knowing it may change
during the year, and check the actual amounts of
the prior two or three years. The projection
serves as a review tool for the current and next
year and for pre-yearend meetings with some
clients.
November. To strengthen
clients’ relationship with the firm we stay in
touch by phone and e-mail during the year. We mail
a pre-yearend newsletter or letter and sometimes
send a note encouraging clients to call to discuss
any expressed concerns. We ask clients to inform
us of lifestyle changes such as a divorce, new
job, retirement or inheritance.
January. We send clients
organizers and a detailed instruction letter. It
includes a sentence or two about services with
extra fees to alert the client to them and open a
door to cross-selling other services. These could
be calculating a stock’s basis; helping determine
the basis of an asset that is sold; reviewing a
divorce or separation agreement and determining
taxable alimony; or calculating a net operating
loss deduction. We find most tax clients need
other services. Extra billing is identified as
such on the tax preparation invoice.
February. On the first
Monday of February our firm has an annual
pre-tax-season dinner for staff and colleagues
from other firms. We use the meeting, which runs
from 5:00 until 10:00 p.m., for networking,
marketing and exchanging ideas and techniques. We
distribute a 300-plus-page manual detailing tax
season procedures; it includes a section on
important changes, copies of our internal forms
and an organizer and tax information for a
hypothetical client whose return will be reviewed,
analyzed and critiqued that evening. Tax partner
Peter A. Weitsen, CPA, prepares the return, which
we use to teach our junior members and to elicit
ideas from peers.
HANDLING THE WORK
Whether clients come to the office and meet
with partners, as we require each new client to
do, or mail in their information, our goal is to
process every return within two weeks. We schedule
and prepare returns on a FIFO basis. Unless
someone has a dire need for a tax return by a
specific date, such as before leaving the country,
we do not take returns out of the order that they
come to us. For some established clients we
schedule the work and tell them when to mail us
their information. A partner reviews the
correspondence that accompanies the client’s
information and follows up with a telephone call,
if necessary. We call most mail-in clients to tell
them their information has arrived and when the
return will be completed.
Information log. When tax
information comes in, the secretary records it in
our tax control program. She enters canceled
checks for Schedule Cs or Es on QuickBooks and
puts them in an envelope to send back to the
client. We scan and save everything we will need
for our files. We’ve become largely “paperless”
and most of our workpapers now are stored
electronically (see “
Electronic Evolution ”). When work starts,
our secretary enters the start date on the tax
control log.
Electronic
Evolution
Before we adopt a new
procedure we test it to see if it will
simplify our clients’ access to us and
allow them to obtain the best service and
to review the work we do for them.
Accordingly, we ventured reluctantly into
electronic filing in February 2004. Our
decision was encouraged by the IRS policy
of giving professionals who file more than
100 returns electronic access to its
computer database for those clients.
At the same time, we adopted a nearly
completely paperless tax capability. All
file copies now are maintained in a
paperless environment; about 87% of the
returns we prepare are filed
electronically with the IRS and many
clients receive their copies by e-mail
in pdf format. The new system has
greatly reduced the need for paper file
folders as everything is saved on our
server. Electronic filing reduced paper
handling, eliminated the stress of
mailing deadlines, cut postage costs and
obtained client refunds faster. We
accomplished this transition in a matter
of days. Our firm tested
outsourcing returns to India for about
10% of our clients for the 2004 tax
season. Results have been mixed.
Typically, rules-based work (physical
returns) can be done in India, but
judgment-based work (analysis, tax and
financial planning and review) is better
done in the CPA’s office. Turnaround
time was about three days and the cost
was about 30% less than hiring per diem
help. We learned to be very explicit in
our instructions and to review even more
carefully than is our norm. We intend to
continue to outsource for extensions,
which we find onerous to do.
There are still concerns about the
security of client data. Two new AICPA
ethics rules and a revised rule address
this. They require members who outsource
clients’ work to third-party providers
to inform clients, preferably in
writing, that the firm might do this
before it shares confidential client
information with the third-party
provider. AICPA members are responsible
for all work performed by the service
provider and are required to enter into
a contractual agreement with third-party
providers to maintain and assure the
confidentiality of the client’s
information. (To review the rules, visit
www.aicpa.org/download/ethics/2004_1028_outsourcing.pdf
.)
|
File procedures. A
client’s tax return information is processed
according to uniform handling procedures, so
anyone can quickly locate and complete a return.
This is helpful when the same person can’t do a
client’s work every year. If a client calls with a
question, we can retrieve his or her file in about
30 seconds. Networked client data also may be
filed under “tax return info,” “research and
review notes,” “flagged for follow-up,” “real
estate closings” and “financial planning,” for
example.
Workpapers. These help us
track clients’ estimated tax payments to minimize
tax agency notices of over- or underpayment. We
request copies of clients’ checks or bank
statements showing the cleared check; detailed
explanations on the returns for unusual items
(using the tax software comments box);
verification of IRA and pension rollovers; a
comparison of previous and current 1099s (and an
explanation from the client if there is no new one
for the year); reconciliation of the gross income
on a schedule C with the 1099s; verification the
gross security sales figure entered on the tax
return is equal to the amounts on brokerage firm
1099s; and answers to every question on the
return.
Quality control. We hold a
post-tax-season staff meeting to determine ways to
streamline our process and better serve clients.
One result is that we now offer to meet with
clients in the summer to do a line-by-line tax and
financial planning analysis of their situation as
an added service for which we bill.
Tax return review—content vs. issue.
Each type of review requires a
different discipline. In general, there are
content reviews (the preparer verifies all client
data) and issues reviews (the preparer applies a
tax strategy). We try to provide the best service
possible, but any endeavor has errors and each
firm must choose what to emphasize—weighing a
missing charity receipt against a lost opportunity
for an extra pension deduction for the client, for
example.
Making a postreview correction.
As part of our training process, the
preparer, not the reviewing partner, corrects a
return even if a simple change is called for.
Extensions. Although some
firms say extensions spread the workload over the
year, we feel they create unnecessary work; foster
payment errors, including in the current year’s
estimated taxes; and hinder the planning process.
We try to avoid them. However, extensions are
necessary if a client needs more time to assemble
his or her information or to make payments to a
Keogh, for example. Our tax preparation software
prints the clients’ forms and mailing instructions
and files most extensions electronically.
Estimated taxes. We
prepare estimated taxes and give the client
payment forms for all four quarters. We know the
amounts will change, but many such returns don’t
get done by June 15—and some don’t get done by
September 15. Issuing estimates for the full year
eliminates going into a client’s file again. It
also alerts clients to the approximate amounts to
pay and helps in their cash flow planning.
With the extension payment, we include the
first quarter estimated tax payment, so the client
has to write only one check. If the extension
payment should have been larger, the penalty and
interest will be less because the amount will
apply to the client’s estimated first quarter
underpayment. We can mitigate this by preparing
the return sooner.
Unprotected estimates.
When we do not protect the client
with a set of estimated tax payment forms, we put
the estimated tax payment due dates on our tax
control log as a reminder to follow up before
payments are due during the year. We also log
estimated tax payments for certain long-standing
clients whose needs we know well. In those cases
we mail the client the estimated tax forms about
two weeks before the due date.
The tax return. For
clients whose work we still handle on paper, we
mail the completed return, a file copy, a bill,
the client’s original information and preaddressed
envelopes in which to mail the returns. We do not
enclose separate correspondence with the returns
except for a short personal note from the partner
saying: “Hope all is well. If you have any
questions, please call.” AICPA
RESOURCES |
CPE
2004 Tax Acts: Making Them
Work for Your Clients, a self-study course
(#732780JA).
AICPA’s Individual Income
Tax Returns Workshop, a self-study
course (#735196JA).
AICPA’s Corporate Income
Tax Returns Workshop, a self-study
course (#735197JA).
Publications
Introducing Tax Clients
to Additional Services, by Edward
Mendlowitz, AICPA, 2004 (#090483JA).
e-MAP: Management of an
Accounting Practice Handbook,
AICPA (#XXJA).
Management of an
Accounting Practice Handbook,
vols. 1, 2 and 3, AICPA, 2001
(#090407JA).
Web site
AICPA Tax Resource Center,
www.cpa2biz.com/ResourceCenters/Tax/default.htm
. This resource provides guides and
checklists for preparing and reviewing
all types of returns. For more
information or to place an order go to
www.aicpa.org or
www.cpa2biz.com , or call the
Institute at 888-777-7077.
|
Billing procedures. We
bill clients based on the time and complexity of
the services provided, and we take into account
the number of telephone calls we handle during the
year. We bill extra for specified services as
noted and, of course, for tax audits, which occur
rarely.
Administrative policies.
Only partners are permitted to tell
clients whether they will get a refund or have
additional tax to pay, and then only after the
return is finished. Divulging information
prematurely causes trouble.
Engagement letters.
Although the AICPA recommends the
use of engagement letters across the board, we
don’t use them for long-standing clients or
routine returns. We do use them for larger new
clients or when there will be extensive additional
work. Some firms offer an audit insurance
protection plan to cover the accountant’s fee if
there’s an audit. Audit insurance ranges from 15%
to 25% of the tax preparation fee. It doesn’t
cover penalties and interest.
Privacy notification. CPAs
must annually notify every tax return client about
the firm’s privacy policy under the
Gramm-Leach-Bliley Act. Some accountants send them
with the tax filing instruction sheets. We mail
our notification July 1, and it is part of every
engagement letter.
|
PRACTICAL TIPS TO
REMEMBER
| |
Prepare tax
projections for the current and
next year when you work on tax
returns. That’s the most
efficient time to do them.
When you send
clients organizers and
instruction letters, include a
sentence or two about
extra-billing situations. This
keeps the client informed and,
in some cases, opens a door to
cross-selling other services.
Process clients’
tax return information
according to uniform handling
procedures so anyone can
quickly locate and complete a
return.
Include the first
quarter’s estimated tax
payment with an extension
payment so the client writes
only one check.
Send privacy
notification with the tax
filing instruction sheets or
as part of every engagement
letter.
Hold a
post-tax-season staff meeting
to brainstorm ways to make the
season easier and better serve
clients.
| |
THE BIGGER PICTURE
Looking at any one return or group of
returns can make tax work seem more annoying than
profitable, but tracing the family tree of
corporate clients puts the relationship of
individual tax clients to our overall business in
its true perspective. Every year, 1% or 2% of tax
return clients refers a business client—usually a
small home-based business, a professional
organization or a company filing with the SEC for
the first time. Those accrued business clients are
a benefit the individual tax practice has
conferred. We take satisfaction, too, in
the idea that when we send a client a tax return
we are sending them—for the brief time while they
look at and sign it—the most important thing they
will handle that day. Our job is to give its
preparation the care and attention clients deserve
and pay for. We try hard to avoid ever having an
unpleasantly surprised client call us to ask,
“What happened?” or “What did you do to me?”
I still sometimes get asked what I do for a
living after April 15, and I answer that tax
season does not end on April 15—or even its
official end on October 15. The year-round cycle
of caring for our clients simply starts again on
October 16. Good luck in tax season! |