How To Open Defanged File

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 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.

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.”

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.

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!