how many tax preparers do you need?

also: why error tracking is vital.

by frank stitely
the relentless cpa

we’ve discussed planning for tax season in terms of how many full- and part-time preparers you need. now, let’s discuss this in terms of capacity and turnaround time. let’s ask why we should ever hire additional tax preparers at all, because hiring additional people only costs more money.

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we’ll start with a really ridiculous example and then get realistic.

let’s assume we have 1,000 tax returns to complete during tax season, and we have only one preparer, who can prepare five returns per day. if everything goes perfectly, our time to complete these returns will be 1,000 / 5 = 200 days in the best case.

note that 200 days isn’t our turnaround time. on average, it will not take 200 days to complete a tax return. turnaround time will be determined by when the returns enter our system. if only five returns per day come in, our turnaround time will likely be near one day. then tax season will last 200 days.

however, given a normal tax season distribution of returns coming in the door, our turnaround time will not be good. for 1,000 tax returns, we can reasonably guess that, at some point, we will have 400-plus returns in our system at any one time. that makes our turnaround time 80 days. even the israelis and the palestinians would agree that an 80-day turnaround won’t retain many clients.

even using the best possible scheduling of client work, we won’t improve our turnaround without adding additional resources. we can use a little simple math to reduce our turnaround time toward a goal.

let’s assume that we desire a 15-day turnaround at the worst point in tax season. if we know our maximum returns in progress will be 400, and that preparers can complete five returns in a day, we can easily solve for the number of preparers necessary to get turnaround time down to 15 days.

using the lean equation, we can solve for the capacity needed using our maximum returns in progress of 400 and our desired turnaround time of 15 days. the lean equation yields 15 = 400 / capacity. capacity = 27 rounded to a whole number. my staff confirmed this, because no one trusts me to do math since i started screwing up the math on client invoices. true story.

because we now know we need the capacity to prepare 27 returns in a day to get our 15-day turnaround, if we divide the capacity of 27 by the five returns each preparer can get done in a day, we get six preparers to achieve a 15-day turnaround time.

now you see how we can use the lean equation to determine how much capacity we need to achieve a desired turnaround time. take a walk, and then come back with fresh eyes. i’ll be waiting here.

time for a quick recap. grab an adult beverage. we have done some heavy lifting so far, and we aren’t done yet.

you can drive profitability and client retention by manipulating the variables in the lean equation. decreasing wip and/or increasing capacity decrease turnaround time, thereby creating happier clients and creating greater profitability by getting more work done in a given time.

i propose that increasing quality drives client retention. in this section, i’ll show how increasing quality not only drives client retention, but drives profitability as well.

there are a bunch of ways to look at increasing quality, including:

1. cosmetic attributes of client deliverables (misspellings)
2. total client experience with your staff (tax preparers need to shower occasionally)
3. level of services provided, such as tax planning for high-income individuals
4. decreasing tax return errors and thus letters received from tax authorities

because our topic is project management, i’ll stick to the last one. let’s discuss error reduction and its role in driving client retention and profitability.

the concept – that work with fewer errors results in higher client satisfaction and retention – should be obvious. we can, however, approach error reduction in a systematic, reproducible and consistent manner.

here’s how my firm classifies errors discovered in the review process. there are four types of errors we track. you may come up with different types, but we’ll use ours as an example.

1. data entry mistakes. we consider these the most serious of errors as they should be caught 100 percent of the time during self-review. data entry mistakes are mistakes in the numbers. if federal withholding is wrong, that is a data entry mistake. data entry mistakes cause cp2000 letters from the irs. nothing causes more serious issues with clients than irs letters caused by bad data entry.
2. cosmetic errors. these are errors that don’t affect the numbers on a return, but need to be fixed. misspellings fall into this category. bad or incomplete 1040x explanations fall into the cosmetic category as well.
3. concept errors. these are errors made from a lack of knowledge. an example of a concept error is counting s corporation owner-guaranteed loans as part of basis.
4. these aren’t errors at all. often, we ask the preparer a question like, “did you consider making an end-of-year salary accrual?” we also use comments as a place to say nice things like, “great job spotting the points on that settlement statement!”

data entry errors and concept errors are objective. if mortgage interest is wrong, that is beyond dispute. if basis was calculated incorrectly, there is a correct answer and only one correct answer. cosmetic errors are subjective in that different preparers and reviewers may have different opinions for the best way to word a 1040x explanation. this is no objectively correct answer.

use error tracking to increase quality by measuring error rates. because this is likely a new concept for you, the first year will be your base year. expect to be shocked. i was.

you will likely find that preparers make in excess of one data entry error per return.

you will likely find a higher data entry error rate on personal returns than for business returns. business returns have to balance.

if the balance sheet doesn’t balance, and schedules m-1 and m-2 don’t tie out, that is normally obvious before a business return gets to review. these errors trigger tax software diagnostics. but maybe not in your case. if you aren’t strict about preparers eliminating diagnostics before review, you’ll have a higher error rate for business returns.

better self-review from preparers reduces data entry error rates. mandatory checklists are a fine tool to assist in stomping out data entry errors. our checklists emphasize areas likely to cause irs cp2000 letters. verifying federal and state withholding is a must checklist item, as is the verification of estimated tax payments. now, if we could just get clients to verify the estimated tax payments that they give us.

for us, concept errors are pretty much equally distributed between personal and business returns. expect to see a lot of concept errors from newbies. also, expect those errors to decrease as they gain experience. the answer to concept errors is quite simply more training. not spending on training makes me nauseous.

preparers make lots of cosmetic errors, and this should be no surprise. we are numbers people. we make 10-key calculators scream, but don’t do well with i before e except after c, and the exceptions to that rule that seem to outnumber the non-exceptions.

reducing cosmetic errors requires better self-review just like data entry errors. we teach preparers to review every schedule looking for misspellings and grammar errors. despite your best efforts, accountants are still going to make these errors. with some luck, you’ll find someone in your office with a knack for spotting these.

i track errors by preparer, including year-to-year improvement. you get what you measure, in this case quality improvement.

imagine giving an employee review with real data about error rates – no more assumptions about the quality of an employee’s work, just real numbers. that’s called holding people responsible for results. we cite error rates in employee reviews and review the rates in staff meetings.

“so, frank,” you ask, “given your fetish for error rate tracking, why don’t you create financial incentives to reduce error rates?”

we did just that a couple years ago. we have a group of part-time preparers who get paid based on a percentage of the client fee for tax returns. because they get paid based on returns completed and not for accuracy, we perceived a quality issue with their returns. we weren’t paying for quality. we were paying for quantity.

and quantity was what we got from some of them. we spent more time reviewing some returns than we would have spent preparing them. we gave one preparer the nickname livan hernandez.

livan hernandez was a major league baseball pitcher who was always near the top of the innings pitched list. however, he didn’t win a lot of games for his team, because his innings were almost always bad. one of our preparers was livan hernandez bad. yet she was paid the same amount for bad-quality returns that good preparers got for good-quality returns.

what if we paid a bonus for returns with no data entry errors? data entry errors are the most serious errors, and we can objectively measure them. so we instituted a 5 percent bonus for tax returns with no data entry errors. sheer genius on my part. a nobel prize for economics would surely come my way.

our financial incentive to increase the quality of tax return preparation worked nearly as well as cold fusion, which is to say not at all.

i didn’t even make the list of finalists for the nobel prize. overnight, our preparers became bill clintons, willing to debate the meaning of “is.”

“i didn’t make a mistake on the federal withholding. it imported incorrectly from the scanning program. that’s not my error. it was the computer’s error.”

“that wasn’t a data entry error. it was just an innocent mistake. i didn’t intend to make the error.”

“this affects my livelihood! i can’t afford this.”

you get the idea.

the incentive plan was a grand idea turned into a time-sucking, open wound of a disaster. we spent more time debating data entry errors than the founding fathers spent debating the u.s. constitution. of course, we had all kinds of extra time during tax season to engage in this.

the next year, we got rid of the bonus. the part-time preparers got paid less without the available bonus, but the debate stopped. how many of your hr manager friends know that you can eliminate griping by reducing compensation? i should get the nobel prize for discovering that.

even without the bonus, error rates decreased. you get what you pay attention to. we focused on errors. we got fewer errors.

i am still working on the financial incentive. my current thinking combines artificial intelligence with drone strikes. there are just these pesky laws against torture to get around.

we have now covered reducing error rates to retain and create happier clients. lower error rates also drive profitability.

what happens when a reviewer discovers an error in a tax return? somebody gets to fix it. hopefully, you make the preparers fix errors, but one way or the other somebody gets to waste time fixing something that should have been done right the first time – like a twice-baked potato. gordon ramsay should have just baked the damn thing right in the first place.

let’s quantify the cost of errors. how much time does a typical data entry error cost? first, the preparer has to fix the error or errors, and then the corrected return must be re-reviewed. do reviewers really need to re-review a return after correction?

how many times have you asked for a change to a return, gotten the revised return back and noticed that nothing changed? the preparer then sports a pathetic facial expression.

“well, i entered it into the software.”

apparently, there is an irs regulation that states a tax return doesn’t have to be correct if you believe you have entered all of the data correctly. believe, and it shall be true. of course, reviewers must re-review alleged corrected returns.

optimistically, the preparer spends 15 minutes on average making corrections, and the reviewer will spend another 15 minutes making certain the errors got corrected.

so, you think 15 minutes per person per error is too much? how much time does it take to put down what you’re working on, pick up another return and get your brain back into that return? then you have to make the corrections and review that your alleged corrections were done correctly. you will easily spend on average 15 minutes correcting a return. of course, some errors will take less time, and some more, but on average 15 minutes is about right. same for the reviewer.

if we prepare 1,000 tax returns with an average error rate of 1.25 per return, we get to correct 1,250 errors. preparers will spend 300-plus hours making those corrections. if you’re paying a preparer $52,000 per year, you get to spend $7,500-plus on corrections. to make it worse, preparers should be preparing new returns and not corrections. you lose twice.

a reviewer’s time is even more expensive. messed-up returns cost you money as well as clients. so, reducing errors helps drive profitability as well as creating happier clients.

here is a quick recap. effective projection management drives client retention and profitability in two ways: decreasing project turnaround time and increasing quality.

you decrease turnaround time by managing the right side of the lean equation.

turnaround time = wip / capacity

decrease wip and/or increase capacity to reduce turnaround time.

increase project quality by tracking the types and quantity of errors. hold preparers and reviewers responsible for decreasing errors.

posted on october 2, 2019