The tax preparation season usually climaxes in a flurry of activity. Some practitioners have been known to throw good practices to the wind in an attempt to get all the returns out. In this calm before the storm it is very important to make sure you are organized for success. There are many procedures which can reduce the confusion and uncertainty of the busy tax season and increase efficiency. It will take an investment of time--it means putting in place procedures and administrative tools.

Now is also the time to make an investment in your tax clients by thinking about more than this year's tax return. Your meeting with a tax client to gather tax return information may be your only face-to-face meeting all year. Such meetings are a prime opportunity to discuss tax- planning ideas and pave the way for additional services later in the year. Invest some time in thinking about what you should discuss. Some possibilities are presented later in this article.

Obtaining The Tools

A complete notebook of tax practice aids is available from the AICPA. In this notebook are sample engagement letters, checklists, organizers, and other material for use not only with individual tax clients but also with various types of business clients as well as tax exempt entities. Other checklists and tools are published in various tax services and publications or may be available as part of your in-house tax- preparation software. Whatever aid you start with, you should tailor it as specifically as possible to your practice so that you do not become a slave to putting useless information on endless forms or so that the procedure becomes so cumbersome that it is simply not used. All of these aids should be designed to make your practice operate more efficiently and accurately.

Engagement Letters for the 1040 Client

By using an engagement letter, you can explain to the client the basis for fees charged. The basis is usually a certain rate per hour plus charges for out-of-pocket expenses. By defining this in an engagement letter, you are able to put to rest any misconception the client may have that the fee will be limited to some arbitrary amount that may have been discussed during an earlier meeting. Some CPAs have been known to give examples of fees for certain types of returns, a number sticks in the client's mind, and without any further clarification, the client is flabbergasted to receive an invoice for a much higher amount than the one anticipated.

To speed up collections in these tough economic times, you may wish to specify in the engagement letter that a finance charge of one percent per month (or some other reasonable amount) will be assessed against any balance which remains unpaid after 30 days.

Furthermore, in an engagement letter, what is and is not included in the fee charged for preparation of the tax return can be clearly set forth. For instance, many clients who are new to using professional tax preparers may assume that by preparing the return the CPA is taking responsibility for representing the client at no additional charge if the return is eventually audited. This is generally not the case, and the engagement letter should clearly specify that fact.

An engagement letter may also be used to inform clients of their ultimate responsibility for the information contained in their individual tax returns, even though such returns are prepared by a professional preparer. The possibility of the imposition of penalties by the IRS for tax understatements and the like could also be mentioned in the engagement letter.

The engagement letter should not only be signed by the tax practitioner but should also contain space for the client to indicate acceptance and the date on which it was accepted. The tax practitioner should always request that a copy signed by the client be returned to the practitioner's office.

Organizers and Checklists

A tax practitioner will find it much easier to gather information for the preparation of the 1040 by either giving the client a tax organizer to fill out or by filling it out while meeting with the client face-to- face. The use of an organizer insures that items of income and deduction are not overlooked. It also makes it easier to take into account changes in the client's living situation (such as a dependent child moving away from home) that take place from one year to the next.

When a computer service is used to prepare tax returns, that service will often provide a pre-printed organizer for each taxpayer in its system. Some of the software packages for use on in-house PCs and networks of PCs also have an organizer option. However, an organizer can only be of benefit when it is properly completed by the client, or by the CPA working with the client. The danger in using an organizer is that the organizer may become so detailed and complex that a client who actually goes to the trouble to accurately fill it out feels that he or she could just as easily have completed the tax return. As a result, be careful not to include extraneous questions in the organizer and to make sure that all questions are straightforward and do not contain tax terms of art.

The use of internal questionnaires is generally a good practice. Questionnaires can serve to jog the preparer's or the reviewer's memory as to items that should be addressed in the return. Often, there may be items that have been raised in discussions with the client at some point during the year that should be incorporated in the return, but that might get overlooked without the reminder provided in the checklist.

The checklist can also serve to protect the preparer in certain instances. Where either the checklist or the organizer documents that the practitioner discussed items with the client, such as the requirements for obtaining a travel and entertainment deduction, the tax professional has some record that he or she fulfilled all of his or her professional obligations in preparing the return.

You should never implement numerous procedures and checklists that are not utilized in practice. In at least one case (Brockhouse), the IRS has used the professional's failure to follow his established procedures against him when items flowing between an individual tax client and his wholly owned business were not treated consistently in the tax returns.

Tax Permanent Files

Admittedly, it is rather time-consuming to set up tax permanent files when none currently exist for the individual clients of an established tax practice. However, permanent files that are constantly updated for information that comes in each year with the client's general tax return information can prove to be invaluable, particularly with the complexities, such as the passive loss rules, that have been added to the tax law in recent years.

The tax permanent file should contain client background data, wills, trust agreements, other estate planning documents, copies of estate and gift tax returns, basis and other information with respect to personal residences, copies of contracts, buy/sell agreements, divorce or separation decrees, and information with respect to audits of the client by taxing authorities.

It should also contain carryforward schedules for items such as the following:

* Depreciation;

* Installment sales;

* Net operating loss carryforwards;

* Capital loss carryforwards;

* Contribution carryforwards;

* Passive loss carryforwards;

* Basis computations for S corporations or partnerships;

* Basis in investments (particularly mutual funds); and

* Alternative minimum tax credit carryforwards.

Put It In Writing

One area of practice where CPAs are particularly lax is in documenting advice given to clients, either over the telephone or in face-to-face meetings. Documentation of all conversations in which tax advice is provided serves several purposes.

In our litigious society it is advisable to maintain a record of advice given to clients so that, if in the future, the client claims to have relied on your advice to his or her detriment, you can determine, from the notes in the file, what was said.

Some firms use a standard form for recording the conversation. Some practitioners take advantage of the PC on their desk by taking notes while giving the advice or shortly thereafter.

Documentation of advice given becomes even more crucial in the event something happens to the person who had the original discussion with the tax client. For instance, that person may leave the firm for another position or, in the worst case, may no longer be alive by the time the advice is called into question.

Additionally, a memorandum documenting a discussion with a client helps as a reminder to incorporate the advice in the actual preparation of the tax return. In many cases, the person who initially prepares the return is not the more senior person who had the discussions with the client. Unless the conversations are documented, the preparer will not be aware of the decisions made with the client, and they will not be incorporated in the tax return.

The more detail the file contains concerning work done for an individual tax client, the easier it is to bill for specific tax advice provided and to insert enough detail on the invoice so that the client is comfortable that he or she is getting good value for the fees charged.

Effective Planning With Clients

A number of things have happened recently, or may soon happen, in the tax legislative area that could significantly impact individual tax clients and that need to be communicated to most tax clients.

Clients can be alerted either through an update sent to them with their tax organizers or through discussion during the information gathering session for the 1040.

Enacted Legislation

In this still-faltering economy where layoffs are routine, clients need to be aware of the rules concerning withholding on pension distributions which were enacted as part of the unemployment bill signed by President Bush in July of 1992. Clients need to understand that after 1992 anything other than leaving money in a former employer's retirement plan when an employee leaves a job, or else directly transferring the money to another qualified plan or IRA, will be subject to a 20% withholding tax. To the extent the client deposits a plan distribution in a new plan within 60 days, the deposited distribution will not be subject to tax. But the client will still be out of pocket the 20% amount withheld until the tax return is filed and a refund is obtained. Therefore to completely avoid taxes and penalties, the client will have to temporarily "borrow" the 20% held by the government to put into the roll-over vehicle in a timely manner.

Once a taxpayer takes a distribution from a plan, it is too late to avoid the withholding requirement. During the stress of losing a job, it is very possible this consequence would not be effectively communicated to the employee. Thus, while you meet with the client as a routine matter, it is a good time to make sure that he or she is familiar enough with this change in the law.

Pending Proposed Legislation

There are a number of proposals to raise revenues that many members of Congress have been espousing during the past few legislative sessions that may make their way into the law during the next few years. In advising clients, you should bring these proposals to their attention and urge that if it is possible for them to do so, they should take advantage of the more liberal provisions of current law.

The unified credit amount which currently allows gifts made during life (other than those that qualified for the annual exclusion), when combined with the estate amount left to a non-spouse, to escape taxation as long as the total does not exceed $600,000, is a likely candidate for reduction by Congress. This amount appears to be excessively generous to many policy makers, particularly when they consider that unlimited amounts can be given to a spouse tax-free. Those taxpayers who have not taken full advantage of the unified credit amount may wish to do so while it is still available to them. Fully utilizing the credit is especially important to those taxpayers who face the maximum estate tax rates, since those rates are by far the highest rates presently imposed.

Congress is also considering limiting the number of $10,000 annual gift tax exclusion amounts available to any one taxpayer. Thus, if a client has been weighing the advantages of a gifting program to a number of family members or others, he or she may wish to accelerate this program before Congress decides to act in this area. Current law provides, of course, that spouses who consent to split gifts can leave up to $20,000 annually free of gift tax at the Federal level to as many different individuals as they would like.

Always a consideration when clients are thinking about making gifts is the state tax treatment of any gift. Even though a gift will totally escape taxation at the Federal level, not all states follow the Federal rules; thus the gift may create a tax liability.

There is the very real possibility that Congress may soon further reduce the home mortgage amount that will generate deductible interest expense. Presently, taxpayers are allowed to deduct the interest paid on a mortgage of up to $1 million as long as the mortgage is incurred to purchase or improve a first or second home. In addition, the interest on up to $100,000 in home equity loans is also deductible. There are now rumblings throughout Congress that these limits are too high when only a small percentage of the American public can carry more than $200,000 of mortgage debt.

When talking to clients, you should point out the potential for the deductibility limits on mortgage debt to change. With mortgage interest rates at their lowest point in over a decade, and with the decreases in the values of residential real estate that have taken place over the last few years, now may be the best opportunity the taxpayer will have in his or her lifetime to purchase that dream home, lock in affordable mortgage interest rates, and insure that the interest paid on that mortgage is fully deductible.

The Extenders

Taxpayers should also be advised about the status of the so called "extenders" which expired last July 1. These are the tax credits and other benefits that in recent years have had annual expiration dates which Congress has made a habit of extending in each year's tax legislation. They comprise tax benefits in the areas of employer provided educational assistance, research and experimentation, targeted jobs, low income housing, and medical insurance for the self-employed. The bill which would have reinstated such benefits retroactively for another year was not enacted in 1992. While it is possible that another bill for retroactive extension will be passed and approved in the coming year, it is far from a certainty.

You should advise clients that have benefitted from these "extenders" in the past to consider what effect their expiration in 1992 may have on their tax liabilities. Perhaps the fourth quarter estimated tax payment should be adjusted to protect against the possibility that the "extenders" will not be extended. And of course, the impact on 1993 withholdings and estimated tax payments should be considered.

Don't Forget State Tax Planning

State and local taxes continue to take a larger toll. In face-to-face meetings with clients it is important to focus on that area as well. Not only are the states demanding increasing income tax percentages, but also many are enacting estate and gift tax changes that may require revisions of wills and trust statements.

Opportunities Abound During the Busy Season

Workload compression caused by the forced adoption of a calendar year by so many pass-through entities after the 1986 Tax Act has made it hard for the tax professional to feel much more creative than a factory worker during the first months of the year. This makes it more important than ever for the tax practitioner to keep his or her sights on the need for providing meaningful information to clients as well as extracting all relevant information from the clients during this busy time. It is generally the period with the most contact with the majority of the individual tax clients, and it provides you with the opportunity to "wow" clients with substantive planning advice, while providing top quality, comprehensive tax preparation service.

Janice M. Johnson, JD, CPA, is Director of Tax Policy of the NYSSCPA and Technical Editor (Taxes) of The CPA Journal. Ms. Johnson is a frequent lecturer on tax issues and contributor to accounting and tax journals.