more than 50 items to get off to a good start.
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planning for tax season is an important step in both optimizing profits and managing the professional liability risk associated with providing tax services,. pre-tax season training of personnel and proactive review of administrative procedures will improve efficiency through april 15th and beyond.
part 1. what to do now… before the big rush
- 4 ways to help clients prepare
- 5 steps to review e-file requirements and processes
- 4 ways to update engagement letter processes
- 3 must-do’s to review client acceptance and continuance procedures
- 8 steps to prepare the firm for tax season
- 5 ways to help staff prepare for tax season
part 2. what to do during busy season
- 11 items to cover in a pre-tax season staff meeting
- 15 things to include in a control log
- 4 things to remember when testing tax software
- 8 things every tax preparer should do for each client
- 4 ways to better plan for deadlines
- 2 keys to survival
part 1. what to do now… before the big rush
4 ways to help clients prepare
- inform clients of significant changes in tax law through client newsletters. retain a distribution list of such communications, including the dates transmitted to document that the client was informed of these changes.
- alert clients about other filing obligations such as financial crimes enforcement network (“fincen”) form 114, report of foreign bank and financial accounts (“fbar”), state and local income tax returns, and the consequences of non-compliance. ask clients to schedule their appointments to discuss tax planning issues prior to year-end. if a tax projection will be prepared or tax consulting will be performed, obtain a separate signed engagement letter for these additional services.
- contact clients who have historically procrastinated providing their tax return information and consider providing incentives to them for early submission. in addition, provide these clients with deadline dates by which all information must be received. if the information is not received by the designated date, consider terminating the client relationship.
- advise clients about the proposed regulations that will change the partnership audit rules for partnership tax years beginning after december 31, 2017. tell clients to consult with their attorneys about revising partnership and limited liability company agreements in order to address these changes. items to be addressed in a revised partnership agreement and the client letter include but are not limited to:
- who will be designated as the partnership representative
- whether the irs may collect any additional tax, interest, and penalty directly from the partnership at the highest individual tax rate or to take any adjustments into account from the partners in the reviewed year
- for eligible partnerships, whether or not to elect out of the new partnership regime
- who should make decisions related to new elections that will be available, the partnership representative or someone else
- which new tax terms and concepts may require adjustment to partnership operating agreements
5 steps to review e-file requirements and processes
- research mandatory e-filing requirements for federal and state tax returns. preparers who file 10 or more u.s. individual or trust returns are required to use e-file.
- review the information currently on file with the internal revenue service (“irs”) authorizing the firm as an irs e-file provider, or register as an e-file provider with the irs. if information on file with the irs has changed in the past year, update it or reapply as a new e-filer.
- train professional and administrative staff on firm e-filing processes. submit completed returns electronically only upon receipt of both the signed e-file authorization forms and an e-mail acknowledging review and approval of draft returns from the client. retain the e-mail acknowledging the client’s approval of the return in the work paper file and the e-file authorization form in an administrative file. when filing electronically, save acknowledgments from the irs or other tax authorities indicating return acceptance, not just receipt, for the required three years.
- inform clients both in the client engagement letter and cover letter sent with the tax organizer that returns will be filed electronically, and that clients will be required to review and approve draft returns prior to such filing. signed copies of e-file signature authorizations, e.g., form 8879, irs e-file signature authorization and equivalent state forms, must be received before tax returns may be filed electronically. both spouses must sign the engagement letter and e-file authorization form if a joint income tax return is filed.
- obtain a signed form 8878, irs e-file signature authorization for form 4868 or form 2350 or equivalent state form, prior to filing an application for an extension of time to file.
4 ways to update engagement letter processes
- review engagement letters used in the prior year and update, as needed. sources of sample engagement letters include your professional liability insurer, the american institute of certified public accountants (“aicpa”), and paid providers.
- emphasize engagement letter usage for all tax services, including tax planning, tax consulting and tax audit representation services. in 2016, approximately 50% of the tax claims in the aicpa professional liability insurance program reflected a failure to utilize an engagement letter. while cpas may be diligent about obtaining engagement letters for compliance services, experience demonstrates they are less conscientious when providing high-risk tax services such as audit representation, planning, and consulting services. a single engagement letter may not suffice for a client that engages the cpa firm for multiple services.
- review firm policy on issuing engagement letters. while obtaining signed engagement letters is always the preferred risk control practice, unilateral engagement letters sent with tax organizers may be more practical for low-risk individual tax return preparation engagements. a unilateral engagement letter requires signature only by the cpa firm. the client indicates its acceptance with the firm’s terms and conditions by returning the organizer and providing other tax information to the cpa firm.
- inform clients that the firm will not begin preparing tax returns until the retainer fee is paid, if requested, and a signed engagement letter is received, or in those cases where a unilateral engagement letter is sent, the completed and signed tax organizer is received.
3 must-do’s to review client acceptance and continuance procedures
- review the firm’s client list from the prior tax season. consider terminating the firm’s professional relationship with unprofitable, high risk and “problem” clients, such as those who do not provide information in a timely manner.
- identify high-risk clients, such as clients creating a potential conflict of interest for the firm. establish protocols to address potential conflicts of interest that arise during tax season.
- update the firm’s client acceptance checklist and conduct due diligence on prospective clients, such as inquiring why they are changing accountants and conducting an internet search on the prospect. request the prospect’s consent to contact the predecessor accountant. consider obtaining a retainer from all clients, or, at a minimum, new and customarily slow-paying clients, as a condition of engagement.
8 steps to prepare the firm for tax season
- research state law regarding registration requirements for the firm and tax return preparers. registration and licensing requirements vary by state and some states charge registration fees. renew or register with the states that have registration requirements.
- renew existing preparer tax identification numbers and register new tax return preparers with the irs. any firm member who will prepare all or substantially all of a federal tax return must be registered, regardless of whether or not the member signs the return as the preparer.
- update the firm’s tax quality control, and policies and procedures manuals. if you do not have a tax quality control manual, consider creating one to provide guidance whenever tax services are provided.
- review the firm’s controls over confidential client information. emphasize that policies regarding management and use of client information should not be bypassed due to tax deadlines. consider updating your policies for new risks.
- review the firm’s planned response to a data security incident, including its cyber liability insurance coverage.
- review tax return volume from the prior season and staffing requirements for the upcoming season. be alert for bottlenecks that may arise, such as too many staff and an insufficient number of reviewers. explore using data scan software when planning staffing requirements.
- initiate contact with independent contractors that assisted last tax season, determine their availability, and reach an agreement regarding such issues as hours and fees. determine if additional temporary staff will be required and initiate a hiring search. perform due diligence before hiring new independent contractors or temporary staff. consider applicable aicpa ethics interpretations and treasury regulations.
- review tax organizers to ensure that they fully address recent, complex areas of law, and reporting requirements, such as:
- the affordable care act (“aca”)
- filing obligations related to foreign activity, including the fbar and the foreign account tax compliance act (“fatca”)
- the sharing economy, including income from home rentals, driving services, or other peer-to-peer services.
if organizers do not adequately address such issues, consider supplementing them with additional questions or specifically addressing them in documented conversations with clients.
5 ways to help staff prepare for tax season
- provide a training plan for staff and independent contractors, concentrating on changes in local, state, and federal tax laws, including those related to new and expiring tax provisions. include a timeline for completion. consider separate training tracks for staff, managers, and partners, whose responsibilities regarding tax return preparation may differ.
- train all firm members on the importance of protecting client data, both physical and electronic, at all times, and especially during this busy time of the year.
- review library resources and training materials and ensure that up-to-date resources are available to staff. verify that staff has access to electronic tools and databases used as reference materials.
- revise procedures based upon last year’s post-tax-season wrap-up meeting to improve current year processes for managing tax return preparation.
- remind the tax department to amend the engagement letters for changes in scope.
part 2. what to do during busy season
11 items to cover in a pre-tax season staff meeting
- procedures revised after last year’s post-tax season wrap-up meeting
- changes to the organizers, particularly those related to aca, fbar and fatca filing obligations, and the sharing economy
- applicable professional standards including:
- the aicpa statements on standards for tax services,
- the aicpa code of professional conduct, and
- s. treasury department circular no. 230 (rev. 6-2014),
- the firm’s tax practice quality control manual
- tax preparation process and procedures
- firm privacy and security policies including how to respond if a “phishing” email is received
- engagement letter usage, including usage for tax planning, consulting and tax audit representation services
- e-filing procedures
- penalties applicable to taxpayers and preparers
- review the most frequent errors found by reviewers on prior year individual and business income tax returns. remind preparers to exercise due diligence in compiling and assembling tax information, and to communicate clearly with clients about any concerns
- emphasize the importance of documenting discussions with clients
15 things to include in a control log
use a control log, common docketing system, or tax return tracking software to help avoid missed deadlines.
- include all tax returns and related forms, such as those related to minor children, unfunded trusts, foreign financial accounts, foreign earned income, and state filings, even if the client falls below the filing threshold in the current year.
- update the control log for responsible client parties.
- memorialize the following information in the control log:
- original due date and extended filing due dates for each tax return
- information receipt date
- date(s) additional information is requested or questions asked
- date(s) of client response(s) to additional information requested
- completion dates by preparers and reviewers
- approvals by the firm and client
- assembly, delivery, mailing, filing and acceptance dates
4 things to remember when testing tax software
test new or updated tax software to ensure that it is working properly and test integration with other applications.
- check the software website for updates and downloads throughout the tax season. determine if any programming errors noted last year or earlier in the tax season have been corrected.
- restrict and monitor access to tax software and client tax returns to defined, authorized users.
- review new forms issued by the irs and instructions concerning how to enter information in the software for the accurate completion of the forms.
- train all tax professionals on the use of the software, new capabilities and the most efficient way to use the programs.
8 things every tax preparer should do for each client
assign clients/tax returns to preparers and reviewers based upon their experience and training. consider having each preparer:
- review the prior year workpaper file and permanent file for each client.
- set up the current year file, update client profiles, and check data transferred from last year’s data files.
- organize workpaper files with an index, checklists, and applicable notes from last year’s files, including net operating loss information, credits, carryovers, and so forth.
- check tax form instructions for changes in tax laws or regulations, changes to tax forms, and additional forms to file.
- check descriptions, formats, and formulas in document templates created from support schedules for the prior year and update them for necessary changes. notably, professional liability claims may arise from mathematical errors due to incorrectly updated spreadsheets.
- identify clients that have undergone significant change (e.g., clients’ altering terms of debt may result in cancellation of debt income) or that will be significantly affected by tax law changes implemented or expiring in 2017. schedule a meeting with the assigned partner/manager to discuss the impact of the change (e.g., changed filing status, preparation of returns declaring foreign or out-of-state income).
- review client data promptly when received, make inquiries if any information appears to be incorrect, incomplete, or inconsistent, and document discussions with clients. awkward situations may arise when information that the cpa has had for months is not reviewed until close to the deadline, and either required information is missing or additional information is requested.
- use irs e-services to verify estimated tax payments made by clients in past and current years by submitting transcript requests via the irs transcript delivery system. many states provide firms with a similar ability to verify state payments.
4 ways to better plan for deadlines
as deadlines approach, firm members may become overwhelmed and proper reviews may not be performed. consider the following:
- train staff to perform “tick and tie” reviews of simple returns during the busy season.
- review information from the client upon receipt and follow up with the client in writing if the information is missing or incomplete
- if the final information required to complete the return is minor and will not be received until close to the deadline, consider preparing an initial draft return, including review and filing for an extension early.
- be prepared for phishing emails. when cpas are tired and stressed, they are more likely to click on an infected link or open an attachment that contains a virus.
2 keys to survival
- if a procedure is not working, change it. procedures were designed to accomplish certain tasks in an efficient manner. if such efficiency is not being achieved and a better idea has been proposed, try it.
- all tax work should be routinely monitored to help prevent errors, and in turn, professional liability claims. most tax-related professional liability claims arise from inadequate review of client data and completed returns, rather than inadequate training.