don’t let clients dictate tax workflow

ask the right questions and stick to your processes.

who makes the errors in your firm? staff obviously, but that’s half of the answer. clients are a major source of tax return errors. clients cause errors in three ways:

errors of omission
errors of commission
errors in attitude

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every tax season, we finalize and deliver returns only to hear from the client, “i think i might have forgotten to tell you that we had a baby last year.” does this happen to you? this is a client error of omission. unintentionally, clients withhold important information.

once, a client forgot to tell us about a 1031 exchange until we gave him a draft showing a $20,000 balance due. this wasn’t totally the client’s fault. the preparer might have noticed this from the line on the settlement statement showing the proceeds going to the facilitator. of course, we needed more information to complete the return. this resulted in more wasted work in progress (wip).

client errors of omission can be reduced by asking better questions.

i’m not a big fan of giving our entire client base organizers. organizers waste more time than they save. the amounts clients enter in the organizer are frequently different from the amounts on the actual tax forms. we get to prepare a three-way reconciliation between the tax return, the tax forms and the organizer. if the organizer amounts differ from the tax forms, we must ask more questions to resolve the differences. wip goes up, turnaround time increases and capacity shrinks. the one section of the organizer that is essential is the basic name and address section along with the yes/no questions about changes between years.

while only sending those pages to clients has been somewhat successful, we found a better solution in the software app we created and coded ourselves. now, we can also ask questions and receive client answers all in one place. we can also create templates with commonly asked questions. with a few mouse clicks, we can ask about addresses, new dependents and cryptocurrency transactions. we have a standard question to verify direct deposit. even better, we have standardized the wording of the questions so that all preparers are using the same wording, using language we know elicits correct responses from clients.

why is wording so important? if your questions use jargon or don’t directly ask for what you want, you get to ask the questions a second time, adding to wip and increasing turnaround time.

for example, do you ask for stock basis like this?

“what was the adjusted basis in the ford stock that you sold in april?”

how many of your clients understand the term, “adjusted basis”? pretty much none of mine do.

we ask instead, “how much did you pay for and when did you buy the ford stock that you sold in april?”

depending on the client, we’ll attach a copy of the page from the brokerage statement showing the sale. also depending on the client, we might add, “you may wish to contact your financial advisor about this. he will have the amount and date.”

ask for the answer you desire.

another example is this bad way to ask for personal property taxes:

“did you pay any personal property taxes last year?”

what’s wrong with this? it’s a yes/no question. do you want a yes/no answer? you want a dollar amount. this is better:

“how much did you pay in personal property taxes on your car last year?”

clients also commit errors of commission, which means they mislead us. in other words, we ask for something and they give us something else. a common example is a client telling us that he owns an s corporation, but we find out when the irs rejects the 1120-s that he doesn’t have an s corporation. he has a single-member llc instead, and we need to prepare a schedule c. then he gripes when we charge for the 1120-s.

client errors of commission are not normally intentional. they mislead us out of ignorance. set up some firm procedures around common client mistakes. ask questions anticipating potential errors.

the s corporation issue above can be resolved by asking new clients for the s corporation acceptance notice from the irs. do they normally have this? not if they’ve been in business for a few years. however, if they have a new business, this will likely work. for the older businesses, if you have copies of a few years’ 1120-s, you are probably safe assuming the s corporation acceptance. if that turns out to be wrong, you have documentation that you asked for the irs acceptance letter.

another way clients mislead us is not providing tax documents that they have received. for instance, a client’s documents may be missing a w-2 form or a mortgage interest form that they had in a prior year. they should know a form is missing but they don’t.

the way to uncover most of these situations is reviewing the current return side by side with the prior year return. i can find 90 percent of tax return preparation errors without looking at the source documents. if something changes materially between years, it is likely wrong. not always, but all material changes should be investigated. a preparer’s self-review process should include the year-to-year comparison.

the preparer should be looking for variances before the first list of questions goes to the client. this prevents second and third lists of questions. missing w-2 and 1098 forms should be in the first list. otherwise, the preparer will waste time compiling a second list, increasing wip and increasing turnaround time.

decrease client errors of commission by recognizing when they will likely occur and asking questions to uncover them. the year-to-year tax return comparison is a powerful tool.

finally, clients cause errors through their attitudes toward us. do you make more errors for clients you like or difficult clients? difficult clients cause unnecessary stress, which leads to errors. a pro golfer misses a short putt on the 18th green at the masters. he makes that putt 999 out of a thousand times, but in the masters, the stress of a few million people around the world watching gives him the yips.

because of the unbridled joy in serving difficult clients, we are also reluctant to spend that extra 10 minutes looking for great ways to save them money. when every second thinking about an ungrateful client brings pain, we minimize the pain by minimizing the time.

a few months ago, i terminated a client where we billed about $20,000 per year. we prepared a few business tax returns, a few trust tax returns and a few individual returns. monetarily, the family running the business should have been good clients. however, they were difficult people to serve. they didn’t take advice, refused to do real tax planning and then complained when they owed money. they were the typical make-a-decision-and-then-call-for-affirmation clients. they wanted to close their company books on december 18 and ignore the rest of the year. the final straw came when i delivered a tax bill that could have been avoided with a little tax planning. one of the owners told me, “you don’t know who you’re talking to.”

i did know. i was talking to an ex-client.

these are the clients who lead us into making decisions we regret. they are the ones who won’t accept no for an answer and deny their decisions and responsibility after the fact. they are the ones who cause malpractice claims. they are the ones who end careers and firms.

i am fortunate that i can walk away from bad clients. that fortune isn’t blind luck. we have a continuous pipeline of new clients coming in. there is no one client or small group of clients who can sink our firm or even cause serious pain by leaving.

marketing is the cure for difficult clients. when a client can’t hurt you by leaving, you are truly independent. each year, i cull my list of clients who have left us. what struck me about many of the clients who left were the notes on the client records that often read, “prefers paper.” many of these people left because we deliver almost all tax returns electronically. i’m not happy about losing clients unless i lose them for the right reasons.

we are not going to deliver tax returns on paper to suit a small number of clients. why? wouldn’t this be great client service – customizing our service to the needs of the client? no.

delivering tax returns on paper requires a whole second set of workflow steps. we know that our admin staff spend about eight minutes delivering a return electronically. they spend nearly 20 minutes delivering one on paper. over 2,000 tax returns, the 12 minutes becomes significant.

we don’t let clients dictate our workflow processes. those clients leave. many of the serious client issues that we’ve had over the years originated with clients overriding our processes. they wanted us to do something differently from what we normally do. that causes errors – serious ones.

paper returns are just one area clients try to override our processes. some bring in tax documents in three-ring binders with each document sheathed in plastic. they then tell us, “i have perfectly organized the documents, and i expect you to keep those documents in place exactly as they are. i don’t want any pages removed.” our admin staff will spend a minimum of 15 extra minutes scanning the documents. i can’t imagine letting a hundred clients do this to us. every one of those returns would be unprofitable. the extra time increases wip and turnaround time for our other clients. accounting firms are businesses. we are not charities or public utilities. we exist to make money.

clients who insist on working outside our workflow procedures are unprofitable clients and cause errors by taking us out of our familiar workflow. we are not required to do business with people who are unprofitable clients. they reduce the level of service we provide to other clients by taking up inordinate amounts of time.

not every human being can be your client. select carefully and take great care of the good ones, who respect your time and processes. say goodbye to the people who aren’t going to be good long-term clients. send them to your competition. let them crush someone else’s turnaround time.