Effective tax administration involves planning, and it is never too late. First, a look at some tips on getting a jump on the busy season and effective management of time. Author Woehlke then looks at past and possible future legislation that may impact your returns.

In the spirit of making this tax season your smoothest, this year's tax season tune-up focuses first on workload control suggestions, then on 1994 legislation and client interview matters, and closes with general tax practice issues.

ASAP Workload Control

If you have not already addressed any of the items mentioned in this section, you had better get them taken care of immediately after you have finished reading The CPA Journal.

Organizers. You won't be able to get any of your clients through the tax season if you don't initiate that process. So mail out those organizers pronto. Everyday organizers sit in your computer or mailroom will delay your clients' initial thoughts about tax season. True, they have received their "Holiday Greetings Package" from the IRS. But, they need all the reminders they can get to motivate them to start what, for some, is a painful psychological, not to mention financial, process. For you, organizers are a key tax-processing and quality-control technique; for the client, they are a visible reminder of the annual homage owed the IRS.

'93 Tax Installment Plan. In early January, the IRS will be mailing affected taxpayers a reminder they owe the second installment of the tax increase imposed by the 1993 Tax Act. It is a safe bet these taxpayers will not remember they owe installments of those taxes and will be confused by these IRS notices. Put IRS notices in the hands of confused clients and you get what you don't need in tax season: a barrage of client calls. You can stave off the barrage by sending affected clients a letter explaining what the IRS notice is and reminding them about the installment process. (This letter is also an excellent practice- development communication. It lets clients know you are thinking about their individual needs.)

The IRS issued guidance in Rev. Proc. 94-58 for taxpayers on the '93 tax installment plan. In that procedure, the IRS advises that the installments should be labeled "1993 OBRA Installment" and mailed to the IRS Center where they file their 1994 or 1995 tax return. If no 1994 or 1995 tax return will be flied, the payment may be made to the IRS Center where they fried their most recent tax return.

In addition, taxpayers may apply a portion of any 1994 overpayment to the second installment and any 1995 overpayment to their third installment, so long as the overpayment existed on the due date of the applicable installment. The IRS warns taxpayers, however, if this option is chosen, the IRS may nevertheless apply any overpayment to other outstanding federal tax liabilities.

January 15 Estimates. Finish the work you began in December for clients who file estimates due on January 15. Most of this tax estimate work was undoubtedly completed in December to assure clients their optimal state tax deduction. But there are always some clients for whom state taxes are not a relevant deduction, either because they do not itemize, or the alternative minimum tax may nullify the tax benefit of the state tax deduction. If the tax estimate work for these clients is not yet complete, it should be finished now.

Identify Large Refund Clients. You normally have a good sense which clients are large refund clients: they are either habitually in this category or they had major events occur during the year that may give them large refunds this year.

You can move these people out of the busiest part of tax season and do them a valuable financial favor by encouraging--pestering may be a better term--them into an early meeting with you.

Other Workload Controls

Identify Your Problem Returns. You know them well. These are the returns that have you pondering retirement every year. They are either mammoth, or immensely complicated, or fraught with "hurry up and wait" processing problems. List your problem returns and plan ahead for them. Assign them in advance to the responsible staff person and consult with that staff person to develop a strategy to handle anticipated problems.

Initiate an Effective Staff Communications Program. A brief weekly tax season strategy session with your tax preparation staff can have enormous benefits. These meetings should address--

* software updates and errors,

* workload status,

* technical updates, and

* time-saving tips,

These gatherings should also identify when workload problems are festering. During the meetings, be alert to individual staff members' responses to tax season. Are they holding up under the increased stress?

If you are averse to meetings, you might consider disseminating this information on one-page memos or placing them in a specially created e- mail folder.

Control Staff Technical Question Volume. A frequent sight in CPA firms during the height of tax season is a line of staff persons queuing outside the partner's door to ask technical questions. A staff person's festering technical problems can lead to vast amounts of unchargeable time and workload backlog at the staff level. But when the line forms outside your door, the workload backlog may shift to your office.

If the truth be known, the majority of technical issues faced by staff is solved via mentoring by more experienced staff and partners. While this may be the fastest solution to technical issues, it fails to hone independent, problem-solving abilities and tax-research skills among your staff. On the other hand, if you discourage internal consultation on technical issues, you will either increase your staff's error rate or cause them to spend needless hours "spinning their wheels" in your tax library.

Both extremes have financial repercussions. "Wheel Spinning" inevitably results in work-in-progress writedowns. Over-reliance on mentoring frequently results in uncharged time and underutilized library resources.

You can strike a balance between forcing the staff to develop improved research skills and professional independence on the one hand and efficient use of staff and your time on the other by encouraging staff to research their own technical issues before they come to see you. However, you should also impose a time limit of perhaps 30 minutes research time, after which they should report progress to you, When they report, quiz them about how they used your library's resources to determine if they are indeed developing the research skills you are aiming for.

Review your billing rates to determine if you are properly valuing time spent answering questions. Frequently, when answering staff technical-- as opposed to factual--questions you display your years of experience in an unusually compacted setting. This time should command premium charge rates.

Major Client Interviews. Identify your most important clients and most time-consuming returns and then schedule their interviews. Send them a note with an appointment time and a number to call to change the appointment. Have a clerical person send out reminder cards and make follow-up calls a day or so before the appointed time. Given enough notice, the vast majority of these clients will accommodate your schedule and you will be saved many hours of telephone tag trying to set up the appointment the old-fashioned way. You may find your interview- scheduling efforts so successful you might extend them to all clients next year.

Check Supplies. It may seem trite, but few events during tax season can be more annoying than seeing your entire processing operation come to a screeching halt for lack of a toner cartridge, copier paper, or envelopes. Running out of out-of-state tax forms can put off delivery of a return by weeks. Check your supplies on a weekly or biweekly basis.

Consider Good-Referral Discounts. To generate some additional tax season stress (more business), consider a discount program for those clients who have proven good referral sources over the years. You may also want to consider a senior-citizen discount.

Legislative Update

Legislative Overview. Last year held the possibility of significant new tax legislation, primarily in the form of health-care reform. Other potential sources of new tax rules were the tax simplification bill, and S corporation reform bill. In the final analysis, health-care reform edged out tax simplification and S corporation reform and then in turn was sidetracked. The tax legacy of the 103rd Congress's 2nd session was the "Nanny Tax" Bill, H.R. 4278, and, as of this writing, probably the tax law changes used to pay for GATT that is expected to be passed during a one-day, post-election session.

One important provision that would have been included in health-care reform was the extension (and expansion) of the deduction for 25% of the health insurance premiums paid by the self-employed. This politically popular deduction expired at the end of 1993 and was expected to be extended sometime during 1994. (As of this writing, some in Washington hope to bring up an extension of the current 25% deduction during the "lame duck" session of Congress, but the likelihood of its passage is considered slight.)

"Nanny Tax." "Nanny Tax" is the colloquial term given the employment tax rules applicable to domestic helpers such as house cleaners, nannies, chauffeurs, and gardeners. The press for Nanny Tax reform began with the embarrassing withdrawal of Zoe Baird as President Clinton's first nominee for Attorney General.

The Nanny Tax Bill was the brainchild of Sen. Moynihan (D-NY), the Chairman of the Senate Finance Committee. The bill was a remarkable lesson in how difficult it is to pass legislation at a time Congress is obsessed with other matters even when the legislation has bipartisan, bicameral support. It was indeed unopposed. On October 6, the bill was finally passed by the unanimous vote of both Houses of Congress. The President made the bill effective with his signature on October 22, 1994. When finally passed by Congress, Moynihan quipped: "At long last, after 44 years, we have decriminalized baby sitting." The key provisions of the bill are as follows:

* The threshold for payment of Social Security taxes on domestics has been raised from $50 per quarter to $1,000 per year, retroactive to January 1, 1994. This threshold will later be adjusted for inflation and rounded to the nearest $100.

* Beginning with tax year 1995, these taxes will be reported and paid annually on the employer's Form 1040. For the period of 1994 since enactment, the tax is to be reported on and paid with Form 942, Employer's Quarterly Tax Return for Household Employees.

* Beginning in 1998, payments of nanny taxes must be covered by the employer's estimated taxes or income tax withholding. Until that time, nanny taxes may be paid with Form 1040, without incurring an estimated tax penalty.

* Household employees below the age of 18 are exempt from these employment taxes unless their principal occupation is employment services.

The AICPA opposed inclusion of nanny taxes on Form 1040 because of its concern that tax return preparers will become responsible for reporting and even possibly payment of domestic employment taxes. The AICPA was rebuffed, however, because reporting and payment of nanny taxes with Form 1040 made the bill revenue neutral.

GATT Funding. The GATT train is on the fast track and it's carrying several significant tax law changes. As mentioned, as of this writing, GATT has not passed, but the likelihood of passage is considered so strong that discussion of its more significant tax changes is warranted here. GATT is the General Agreement on Tariffs and Trade. The bill before Congress is not GATT itself but the world trade agreement finalized during the decade-long negotiation under GATT's "Uruguay Round." It is "fast track" legislation and as such is subject to special approval rules. In this case, the GATT world trade agreement must be approved by a simple majority of both Houses of Congress on an "as is" basis, that is, without possibility of amendment.

GATT is expected to reduce taxes worldwide by $750 billion. Nevertheless, world trade in the long run is expected to so balloon that U.S. tax revenues will eventually grow. Despite this long-run prediction, GATT is estimated to lose tax revenues in the near term. To close this revenue gap, the bill before Congress contains a number of significant tax provisions, including the following:

* For tax-year 1997 and later, taxpayer identification numbers will be required of all dependents. In the meantime, for tax-year 1994 the current rule--TINs for all dependents one year of age or more at the end of the year--is in place. For tax-year 1995, returns must have TINs for all dependents born before November 1995, and for tax-year 1996, all dependents born before December 1996.

* Generally effective after the enactment date, the partnership tax rules are changed to make distributions of marketable securities equivalent to distributions of cash, thereby making such distributions taxable to the extent the value of the distributed marketable securities, plus cash, exceed the distributee's basis in his or her partnership basis.

* The interest rate on corporate tax over-payments in excess of $10,000 is reduced from the current 2% over the "federal short-term rate" to 1/2% over that rate.

* The earned income tax credit is slightly restructured to extend the credit to military personnel and exclude persons who were nonresident aliens for any portion of the taxable year.

* For corporate taxpayers investing in tax shelters, the "substantial authority/more-likely-than-not" exception from the substantial understatement penalty is eliminated.

* The bill makes numerous technical pension reforms.

New Matters for Client Interviews

The '93 Tax Act contained a number of provisions that became effective in tax-year 1994. To minimize tax return shock, during their interviews you should counsel affected clients about the following changes:

* Reduction of the travel and entertainment deduction from 80% of qualifying expenses to 50% of qualifying expenses.

* Elimination of the deduction for club dues.

* Enhanced substantiation requirements for charitable contributions.

* Increase in the percentage of social security benefits taxable to higher income recipients from 50% to 85%.

* With limited (but significant) exceptions, the elimination of the deduction for expenses related to travel by spouses and family members on business trips.

* On the taxpayer-friendly side, the allowance of losses from real estate activities if the taxpayer "materially participates."

One other topic worth covering with some business clients not related to the '93 Tax Act is the client's form of business. The year 1994 was a watershed year for the passage of limited liability company (LLC) laws throughout the country. By the end of 1994, 46 states had passed such laws, the only exceptions being Massachusetts, Pennsylvania, Vermont and Hawaii. This new business form offers many significant advantages over older forms of doing business. The key advantage is the unique combination of limited liability, flow-through taxation, and freedom from the strictures imposed by either corporation law on operations or limited partnership law on activities of limited liability owners. Also, none of the artificial limitations imposed by S corporation provisions apply to get flow-through tax treatment.

Many believe all closely held businesses formed in the future will be LLCs. Many partnerships are exploring the conversion into LLC form. On a precautionary note, while several states permit LLCs to have single owners, Texas and New York being the largest, the IRS has not ruled on the taxability of single-owner LLCs. For the time being at least, proprietors should continue to shun the LLC form, unless they are prepared to admit a spouse or other family member as a minimal owner of the company.

General Tax Practice Matters

TPQC. TPQC stands for tax practice quality control. It represents an approach to tax practice that, to an extent, parallels accounting and audit (A&A) practices. At the core of TPQC is a belief that, instead of controlling the quality of a tax practice on a hit-or-miss, trial- and-error basis, a CPA in tax practice should use forethought about those activities that contribute to improving the quality of his or her tax practice. Once identified, those activities or practices should be written in some form of a TPQC document that can serve as a guide to tax partners and staff.

If you do not have a TPQC document, it is probably too late for this tax season. But you can begin the process now to have such a document by this time next year. First, become convinced it is worth the effort for your practice. Talk to CPAs who have thoughtfully established quality control systems for their tax practices. If you cannot easily identify any, talk to those with quality control systems in place for their A&A practices. Some CPAs have A&A quality control systems only because they are required. Others, who may have created such systems merely because they had to, have come to recognize certain intangible benefits in a systematic approach to quality issues in their practice.

Then buy a copy of the AICPA's Guidelines for Voluntary Tax Practice Review (AICPA product # 024016). The book admits that no two tax practices are alike and, therefore, no two TPQC documents need be the same. Nevertheless, the book has several sample TPQC documents, including one for sole practitioners, that can serve as a model for your document.

Once implemented, the TPQC document should help to coordinate the activities of you and your staff and give you a smoother tax season with heightened quality output.

Circular 230 Changes. Circular 230 is issued by the U.S. Treasury Department to regulate those who "practice before" the Treasury Department, which includes the IRS. A copy of the Circular is reprinted in most tax services. Those practicing before the IRS include CPAs, attorneys, enrolled agents, and certain other persons in specified circumstances. Filing tax returns does not, in and of itself, constitute "practice before" the Treasury or the IRS, but representing clients in examinations and appeals and the submission of other documents for clients does.

Until this year, tax return preparation by those "practicing before" the IRS--all practicing CPAs fall into this category--was merely governed by a broadly stated "due diligence" standard. This year, however, the Treasury Department issued Sec. 10.34 of Circular 230 that addresses tax return preparation. Remember that this provision only applies at the present time to those authorized to "practice before" the IRS. Commercial tax return preparers are not governed by this section at this time.

New Sec. 10.34 requires that all tax return positions taken by a tax return preparer must have a "realistic possibility" of being sustained on its merits. This standard, by definition, is met by any tax return position that has a one-third or greater likelihood of success.

These new rules should sound familiar because they closely track recent regulations issued under IRC Sec. 6694(a). That section imposes a penalty of $250 on any tax return preparer who prepares a return with a position that fails to meet the "realistic possibility" standard, unless the position is both "nonfrivolous" and "adequately disclosed."

The most severe penalty for violation of a rule included in Circular 230 is removal of the authorization to practice before the Treasury. This can have a snowballing effect because the Treasury has agreements with regulators of CPAs and attorneys in several states to report violations. These regulators, in turn, may take further disciplinary action. In addition, one of the Circular 230 violations is practicing in association with someone who has been suspended or disbarred from practice before the Treasury. So when the severest Circular 230 discipline is imposed on practitioners, it can affect their professional relationships with their firms.

Have Fun!

We might never choose to admit it publicly, but tax season is fun. It is the time of year most tax practitioners generate the most revenue. (The rest of the year is spent collecting it.) There is a certain camaraderie that emerges when you and your colleagues work together over an extended period, using your skills and talents, to get the job done. And a few grateful clients along the way helps. Many on April 16 swear this is their last tax season, there has to be a better way to make a living. But most will be back next year. Why, because it's fun. Enjoy!

James A. Woehlke, MLT, CPA, is Director of Tax Policy of the NYSSCPA and Technical Editor (Taxes) of The CPA Journal.