Everyone knew the day was coming, but it was still sad when Marvin, a longtime client of a midsize CPA firm, passed away. What started as an individual tax return preparation client had grown to include Marvin's S corporation tax return and, later, an audit of that S corporation and three related real estate partnerships and tax returns for the partnerships. The relationship further expanded to include tax returns for separate entities that made deliveries, performed installation services, and wrote warranties. Marvin created trusts for each of his three children for which the firm prepared tax returns. The firm delivered services to Marvin's three children, each of their independent businesses, and all of the grandchildren and their trusts as well. All told, Marvin had been a windfall for the CPA firm.
So it was not a surprise when Marvin's descendants asked the firm to prepare the estate tax return. After all, who knew Marvin's assets better than the firm? Unfortunately, while the firm may have known Marvin and his balance sheet like the back of its hand, the firm missed the deadline for filing an extension for the estate tax return.
How did this happen? The estate's executor, an attorney, took the lead role in inventorying the assets and obtaining appraisals but failed to meet timelines requested by the CPA firm. In addition, the CPA firm partner had a death in her family that took precedence over business matters. When she returned to work, Marvin's estate tax return was not top of mind. Finally, the filing deadline was during the middle of busy season when the firm was preoccupied.
After realizing it had missed the deadline, the firm contacted its professional liability insurer to report the potential claim. A request for penalty abatement was made claiming reasonable cause, but the IRS did not agree and the penalties were upheld.
Arguably, the executor should have known the due date and ensured that an extension was filed. Unfortunately, the family did not agree and blamed the CPA firm. Because of the late filing, elections were missed, penalties were incurred, and an administrative oversight turned into a million-dollar claim against the firm. The entire family took its business elsewhere, and the firm lost one of its longest-tenured and largest clients.
An efficient docket system could have helped the firm avoid this unfortunate situation and a costly professional liability claim.
WHAT IS A DOCKET SYSTEM?
A docket "system" is any method by which a firm keeps track of its tax returns to be prepared. About 35 years ago, it may have consisted of two filing cabinets — one for tax returns that had not been filed and another for returns that had. These days, a docket system is likely to be electronic — either a spreadsheet or third-party software specifically designed to help CPA firms track and monitor the completion of tax engagements. Regardless of a firm's size, it is highly recommended that it maintain some sort of docket system.
WHAT TAX RETURNS SHOULD BE IN A DOCKET SYSTEM?
Every income tax return should be included in the docket system. While it may seem onerous to add each return to the docket system, keeping track of returns individually greatly reduces the risk that a return, and its corresponding deadline, will slip through the cracks.
Be sure to include tax returns for minor children, unfunded trusts, foreign financial accounts, and U.S. filing obligations related to foreign investments. Even tax returns that fall below the filing threshold for the current year should be included in the docket system.
Special note should be made of non-calendar-year tax returns including partnership, trust, and estate tax returns. It should include IRS and state notices, audits, and other items with strict deadlines such as offers in compromise. Don't forget about returns that need to be amended, such as returns for net operating loss carrybacks.
Every state and local tax return should be listed in the docket system. Why? With all the state and local income tax returns some clients file, it is easy to miss one. Moreover, if a client has a large number of state or local returns due, they may not all be filed at the same time as the federal return. State returns not filed by the federal deadline should be tracked along with their due dates to ensure timely filing. Include sales and use tax returns as well, which often have differing due dates.
WHAT SHOULD THE DOCKET SYSTEM RECORD?
Consider including the following in your docket system:
- Name of the return and the form number;
- Due date;
- Extended due date;
- Date the organizer and engagement letter are mailed;
- Date the completed organizer and signed engagement letter are received;
- Tax preparer;
- Tax reviewer;
- Additional reviewer (if required);
- Date follow-up information is requested and questions are asked;
- Date follow-up information is received and questions are responded to;
- Date sent for internal review;
- Date internal review is completed and sent back for revision;
- Date(s) sent for subsequent internal review(s);
- Date subsequent internal review(s) are completed;
- Date tax return is completed;
- Date the completed tax return is sent to the client for review along with an e-filing authorization request;
- Date the tax return is approved by, and e-filing authorization request is received from, the client;
- Date the return is e-filed; and
- Date the governmental body accepts the e-filed tax return.
Other information that may be useful includes:
- Client contact information;
- Date to follow-up with the IRS or state taxing authority;
- Amount billed for the prior year;
- Quote for the current year; and
- Time and expenses incurred to date.
WHO SHOULD ADMINISTER THE DOCKET SYSTEM?
Without proper management of the docket system itself, problems may arise. For example, without appropriate access controls, anyone may change details, thus impacting data integrity. A proper review may not occur, or a return may be accidentally deleted and the deadline missed. Similarly, returns not electronically accepted by the IRS or a state taxing authority may be improperly marked complete.
A member of the firm's administrative staff generally takes the lead in managing the firm's docket system. This may include adding tax returns, responsible staff, and due dates in addition to the date returns are e-filed and accepted by the governmental body. As deadlines near, that same individual may review each professional's client list with him or her to ensure all tax returns and notices are enumerated. Additionally, this person may discuss which tax returns will be filed versus extended and, in some instances, prepare extensions before the deadline.
As work is completed, the engagement team completes the dates the return is submitted for internal review, returned to the preparer, and sent to the client.
ARE THERE ANY OTHER BENEFITS OF USING A DOCKET SYSTEM?
A docket system provides the CPA firm with a comprehensive method of monitoring workflow and completion status for individuals as well as the firm. A docket system generally improves workflow management by identifying and anticipating bottlenecks. In addition, over- and under-utilization of staff can be identified and work reallocated appropriately. In other words, an effective docket system not only helps reduce the likelihood of a filing error but can also make the firm more efficient.
Deborah K. Rood, CPA, is a risk control consulting director at CNA. For more information about this article, contact firstname.lastname@example.org.
Continental Casualty Company, one of the CNA insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program. Aon Insurance Services, the National Program Administrator for the AICPA Professional Liability Program, is available at 800-221-3023 or visit cpai.com.
This article provides information, rather than advice or opinion. It is accurate to the best of the author's knowledge as of the article date. This article should not be viewed as a substitute for recommendations of a retained professional. Such consultation is recommended in applying this material in any particular factual situations.
Examples are for illustrative purposes only and not intended to establish any standards of care, serve as legal advice, or acknowledge any given factual situation is covered under any CNA insurance policy. The relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured. All products and services may not be available in all states and may be subject to change without notice.