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1997 Tax Tune-Up:
Let the Race Begin

By Robert M. Pielech and Stephen E. Pascarella II

There is still time for last minute preparations
that can make a world of difference.
Disaster planning is one of them.

It's early January and all that can be done to help clients on a transactional basis has been done. The state and local taxes have been paid in December, the decisions about declaring and paying a year-end bonus have been made, and installment payments are all up to snuff. Clients will express their thanks when they see the result. But look around. Are you and your organization ready to make the most of all of the efforts to get your clients ready? Here are matters that you should consider in this very brief quiet time before the race begins.

Personnel Issues

Before leaving the starting gate, your firm should make sure there is a balance between engagement requirements and overall staff utilization. To accomplish this, the total number of hours needed and the total number of staff available to process all returns within the time constraints of the busy season should be projected. Some factors the firm needs to review to achieve this level of balance are--

* engagement size and complexity,

* availability and experience of

* specialized expertise required, and

* timing of work to be performed.

If current staffing levels are not adequate, the firm must decide quickly how additional full-time personnel or seasonal personnel will be employed. Either way, additional time and training will be needed to bring the new personnel up to speed. Care must be exercised, however, not to staff up for the peak period that may last for only a short time span.

During tax season, communications with and among the staff can have enormous benefit. For example, if workload problems develop (they always do), they can be identified and handled immediately. Also, any technical or software update needs or glitches can be addressed. But most important, it is a way to observe how well the staff is holding up under the increased pressure. Therefore, staff meetings should be held at least weekly and attendance should be mandatory.

Your firm should strongly consider a mid-tax-season sanity break, for all partners and staff, even if it means closing down the office for a day. An impromptu pizza party some Friday or Saturday works wonders on morale and staying power. Such a break will refresh the people in your firm and help them better cope with the remainder of tax season.

Disaster Planning

One area that CPAs tend to overlook is disaster planning. Last winter was particularly snowy in the Northeast, and firms had to cope with personnel unable to get to clients or the office. The fur on the animals says it could happen again this year. Is your firm ready with notification procedures and perhaps alternate work sites? Has your firm set a policy to allow individuals to work at home? If so, and a disaster strikes, at least you will have some computers to do the work. Likewise, if the weather looks bad, you may want to encourage people to work at home. If your firm allows work to be done at home, how does that information get transmitted back to your main system? While recovery from disasters is never easy, a work-at-home or telecommuting policy could pay huge dividends should a disaster happen during the filing season.

The procedures relating to and the capacity of your firm's backup computer system should also be considered. When was the last time someone tried to restore data from the backup system? The time to attempt a restoration is when you don't need it, rather than waiting until the storm shuts down the power for a period of time.

A backup photocopying capability should also be in your disaster planning.

Engagement Letters

Engagement letters should be used in all tax work, not just tax preparation. By using engagement letters, the firm formally defines the services to be provided and how the fees for these services will be charged. Will it be, for example, by flat fee or rate per hour plus out of pocket expenses? In addition, by using engagement letters the firm informs clients of their ultimate responsibility for the information contained in their tax returns. Other areas that may be addressed in engagement letters are--

* finance charges assessed for all balances unpaid after a certain time (This may help speed up collections) and

* additional fees incurred if the return is eventually selected for audit (Some firms charge an additional fee each year called audit insurance, instead of when the return is selected for audit).

Finally, the engagement letter should be signed by both the firm and the client with a signed copy retained in the client's permanent file.


Because of the litigious nature of business today, your firm should have a policy of maintaining a written record of any advice given to clients. This documentation can go a long way in resolving any future disputes that may arise. In addition, documenting advice given to a client can help in the actual preparation of the tax return. In many cases, the person who initially prepares the return is not always the same person who gave the advice to the client.

Another area of documentation that can be somewhat lax due to the crush of tax season is in return preparation for individual taxpayers. Workpapers should be prepared that provide an adequate trail from the source documentation to the final figures on the return. In addition, if the return is ever selected for an audit, the workpapers should be sufficient to substantiate the return information. Finally with more firms now using direct input to prepare and process returns, all involved should clearly understand how to properly document the source of all information going into a return. This will reduce the chance of errors which could lead to costly reruns and lost time.

Return Classification

For your firm to be competitive in the preparation of tax returns, it should have a system in place that matches the returns with the lowest qualified staff to prepare the return. There are a variety of methods to achieve this objective. A common approach is the red, yellow, and green classification system, where a green return is the easiest and red the more complex. The yellow return is for the middle-of-the-road preparer, a person with some experience but not yet ready to tackle the hard returns. Another approach is the segregation method. Under this method, the more difficult returns are culled out for the experienced preparers and the rest are left for the remainder of the firm to prepare.

Another area of classification that your firm should consider is whether to have a single or multilevel process to review returns. The firm may identify certain issues such as AMT and passive losses as areas where it wants more than one person to review the returns. Another suggested threshold to use is AGI. Returns with AGI below a certain number require a single review and those with AGIs above that number require a second review. Firms may find it difficult to compete if all returns are subjected to the same levels of review. Remember if the work in support of audit report opinions is based upon the concept of presents fairly (i.e., without material error); surely tax returns must be viewed in the same way. Each firm has to measure its tolerance for errors or bad client data. For example, if a 1099 is missing, will that have a material impact on the return?

Checklists and Organizers

A bigger busy season problem than the actual preparation of tax returns is the struggle to obtain complete and accurate information from the client. One way to avoid this problem is through the use of client organizers. Some practitioners question the value of requiring clients to complete detailed organizers and also provide source documentation. Other practitioners insist that detailed organizers provide clients with a systematic approach to assembling their material. This helps to ensure client tax information is complete, while reducing the time the practitioner needs to prepare the return. The result benefits the client by providing a higher quality return at a lower fee and the preparer by somewhat reducing the likelihood of error and the concomitant malpractice liability exposure. You may think it is too late to implement organizers if you have not yet done so. But perhaps you could try it on a selective basis to judge whether full implementation makes sense for next year.

Checklists are tremendously important not only for the preparer of the return, but also for the reviewer. A preparer may use a checklist to make certain that no information has been omitted and that all specific situations with respect to the return have been addressed. The reviewer, on the other hand, uses the checklist to ascertain that the preparer has considered all aspects with respect to the information used in the preparation of the return. (You can obtain an extensive compendium of over 300 pages of tax preparation checklists and practice guides from the AICPA, order number 059510, for the cost of approximately $80. This excellent tax practice management resource is provided free to AICPA tax section members. The annual cost of tax section membership is $95.)

Equipment and Supplies

Your firm should review its inventory of computers and peripherals. Each new filing season brings new demands on your computer system. It is not too late to make an assessment about buying new computers or updating your existing equipment. The RAM and disk storage capacity that was adequate last season may not be adequate this filing season.

As you renew your software needs and capabilities, make sure your computer system meets the software vendor's minimum requirements. It is better to know now that more RAM is needed rather than in the heat of tax season. Also it is important to know the medium in which the updated software will be distributed this year. If it is going to be on CD-ROM, your firm will need to have a reader that can load the software. Also, if the software is going to come in disk form, your system must have a floppy drive that can read the disks. If the update will be done online, the firm will need an appropriate modem. If updates are coming by way of the Internet, then a test run prior to the start of the filing season would be beneficial.

How does your firm dispose of client records and documentation? For example, those draft copies of clients' returns--do they end up in the wastebasket or do they get shredded? These policies are extremely important, especially if the firm's work is ever called into question. If the firm has been thinking about getting a shredder, now is the time to buy it. It also comes in handy during ticker-tape parades.

An overlooked but definitely valuable piece of equipment to prepare for the tax season is your photocopier. As noted earlier, backup copying arrangements are part of every good disaster plan. But there are quality issues as well. For many CPA offices, the copying machine is used to produce the deliverable to the client--the report or tax return. Your firm will want the latest and best equipment that the budget can afford. Automatic two-sided copies, collating, stapling, and copy speed are among the features to look for in your copier. The quicker the documents can be reproduced, the lower the overhead cost will be, which will translate to an increase in the firm's bottom line.

It may seem so obvious, but who in your firm is responsible for supplies? During the tax season, the demand for supplies is the greatest and reporting that supplies are dwindling should not be kept a secret. There should be a clearly stated policy on whom to notify when supplies are down. Items not to overlook are report covers for the returns as well as envelopes to put the completed returns in. Your firm should consider what preprinted envelopes are going to be used or whether ink stamps will suffice. Your firm will have to decide if it is going to provide all clients with IRS and state tax envelopes. What about toner cartridges for the laser printer or the copiers? Cartridges for the fax machines cannot be overlooked. Client instruction sheets or those little "sign here" stickers are a must to have in order to make the workload flow smoothly.

Software and Staff Training

Is your firm's team of preparers and reviewers ready to use the new software or the software updates that just arrived? Software training should be broken down into three areas. First is the review of all changes made to your existing software to make it ready for the 1997 filing season. For example with many programs being offered in Windows 95 rather than DOS, how will this major change be handled? Other changes to be noted at this time are enhancements made to the familiar programs that were used last year. Who will train the staff on these enhancements so that they will be familiar to all?

Second is to review the new programs that have been acquired to help the filing season run smoothly. One example is additional state tax software that was not part of your inventory last year. Who will have the responsibility to train the staff on these new programs? Also, if the firm has expanded the state programs to be used, how is the prior year's return information to be entered? What about the new due date-tracking program that your firm has just installed? Who will be responsible for keeping that program current and who will need status reports to track engagements?

The third area involves the software not yet acquired but the firm is thinking of buying. That pile of fliers and promotional materials promising tax season nirvana that you stashed in your bottom drawer may be helpful in finding that breakthrough program to solve one of last season's woes. One example might be that CD that contains all state and Federal tax forms, or the one with various rulings, cases, and tax laws, or the planning program that would help when reviewing the current year's return with a client for ideas for tax year 1997. The Internet as a source should not be overlooked. An article in the November issue of The CPA Journal contained an extensive list of Internet addresses for tax information. The CPA Journal's home page (www.cpaj.com) also has an extensive list and linking to tax sources. However, attempting to use these sites should not be left to the last minute. The firm's experienced browsers should try them now to make sure the firm is ready for the downloading that will be required.

Have preparers and reviewers been properly trained on all the complex issues faced last year as well as the complex areas identified as potential problem areas this year? One way to identify these areas is at a staff meeting. During the meeting, the staff should be asked to describe last year's most troublesome tax areas as well as those they think could slow down this year's flow. From this survey, some last minute adjustments can be made to the training program to prepare the staff for what no doubt lies ahead. It will also be helpful to review last year's list to make sure that those areas are properly being addressed.

At this particular staff meeting, perhaps the last before the crunch begins, the firm will want to review the various in-house "experts" to be consulted in highly technical areas as well as the various outside "experts" that the firm uses. Staff should be advised of the firm's procedures on utilizing outside experts to make sure they are consulted only when the firm personnel cannot handle the issue. Outside experts are usually expensive and should be used prudently.

Technology Planning

As part of technology planning, the level of automation that your firm wants to use has to be addressed. First, it must give some thought to the actual tax preparation process to see if there are opportunities to improve. Are input sheets still being used? Should this be changed in favor of direct entry? If direct entry has been adopted for the first year, does the firm have all of the necessary technology and training? In making this evaluation, there may not be enough time to make drastic changes such as switching from input forms to direct entry. To switch and not be properly prepared could be disastrous. If there is not enough time, the change should be made immediately after the tax season is over. On the other hand, direct entry has a lot of advantages. But, the firm should only change if it is properly prepared and the staff adequately trained.

If the firm is going to the direct input method, what other procedures that are presently done by hand might be automated to add efficiency to return preparation. For example, can trial balance information be imported directly from Accountant's Trial Balance or similar software? What about importing information from tax planning software into your tax preparation software? To the extent such automated interfaces can be used, the process should be carefully redefined and the staff adequately informed and trained in the new procedures. How could better use of electronic spreadsheets streamline tax preparation?

Finally, your firm's method of completing tax research should be reviewed for opportunities for improvement. Has your firm already moved to CD-ROM research? What staff training needs might be required for these new research methods? Obviously, significant efficiencies can be achieved by the firm, but only if adequate planning exists prior to the

Post-Tax Season Wrap-Up

Despite the best efforts of all involved, it may turn out that this tax season proceeds abysmally. The staff may perform poorly, the tax software company may not give adequate service, and some clients may be more than troublesome. Here is a list of action items for the firm's tax administrator and others responsible for a smooth tax season to take to make sure the 1998 filing season is the best ever:

1. Keep a pad handy or create a computer file to jot down the big and little items from the 1997 filing season that can be improved for 1998.

2. Immediately after the 1997 tax season is over, hold a debriefing meeting with all those involved in the tax preparation process and brainstorm areas for improvement and items to be added to the list.

3. Make an evaluation of the capabilities, experience, and availability levels of the staff and consider what personnel changes should be made or how the complement should be changed for next year.

4. Review the performance of the software preparation and research packages. If they did not perform to expectations, begin looking for the replacements.

5. Decide which clients should be fired. These are the clients that brought unnecessary liability exposure, less than satisfactory realizations, or just plain grief during tax season.

6. What educational and training needs were identified during tax season? Contact your state society to see when courses that will address these needs will be scheduled.

7. What preparation process changes should be made? Now is the time to look at introducing direct entry preparation, if you haven't done so already.

8. What changes should be made to the way the staff is compensated to optimize incentives, productivity, and accuracy? Consider whether "banking" overtime would benefit the firm and motivate the staff.

9. Should the firm hire an outside tax practice reviewer? An independent tax practice review can identify dozens of practices to improve the bottom line or smooth the work flow of the tax season.

In any event, the time to begin tuning up for the 1998 tax season is late April 1997. That way the firm can get a head start at next year's [rat] race and end up a leader of the pack. *

Robert M. Pielech, CPA, is a partner in Pielech & Pielech, CPAs, New Bedford, Massachusetts. He is a member of the AICPA Tax Executive Committee and a former member of the AICPA task force that developed the AICPA's Voluntary Tax Practice Review Program. He chaired the Federal Tax Committee of the Massachussetts Society and served on its Board of Directors. Stephen E. Pascarella II, CPA, is the managing partner of Pascarella & Trench of Providence, Rhode Island. Pascarella is a member of the AICPA Federal Tax Division and chairman of the Tax Division's Management of a Tax Practice Committee.

In Brief

It's Not Too Late

For its tax tune-up this year, The CPA Journal turned to the current and immediate past chairpersons of the AICPA's Tax Practice Management Committee. Both Bob Pielech and Steve Pascarella hail from local CPA firms in New England. Besides providing editorial advice for the AICPA's book Tax Practice Management, the Tax Practice Management Committee is also responsible for shepherding the Institute's fledgling Voluntary Tax Practice Review (VTPR) program. The advice given in this year's tune-up relates to proper staffing levels; preparing for this winter's blizzard, earthquake, or washed out bridge; effective use of technology--both software and hardware; using a classification system to make sure the work is done at the right levels; the importance of communication among the office team; getting the most out of organizers and checklists; and much more. If you haven't yet taken the steps suggested by Messrs. Pielech and Pascarella, there is still a little time to think and plan out your tax season before the crunch hits. Even a partial implementation may help. If you can't make the time now, save this issue until after tax season and begin planning the 1998 tax season in April 1997.

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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