Planning for the upcoming tax season is an important step in managing the professional liability risk associated with providing tax services. The following pre-tax season checklist provides several suggestions firms should consider in planning for this work.

What to do now?

Help clients prepare

• Inform clients of significant changes in tax law, including those related to the Patient Protection and Affordable Care Act (ACA) and same sex marriage.
• Alert clients in firm newsletters about other filing obligations such as Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), state and local income tax returns, and the consequences of non-compliance.
• Ask clients to schedule an appointment to discuss tax planning issues prior to year-end.
• Review the list of tax clients from the prior season. Consider terminating the firm’s professional relationship with unprofitable, slow-paying, high risk and "problem" clients. Our publication, Clients: Knowing When to Walk Away identifies other factors that should be considered when deciding whether to continue a client relationship. Client Termination Letters explains why issuing a client termination letter to former clients is important and what should be included in such a letter.
• Use a client acceptance checklist and conduct due diligence on prospective clients, such as inquiring about the reasons for changing accountants. Request the client’s consent to contact the predecessor accountant. Consider obtaining a retainer fee from new tax compliance clients as a condition of engagement. Our publication, Is This Client the Right Fit For Your Firm?, contains other criteria to consider in balancing the risks and rewards of continuing a relationship with an existing client or accepting an engagement with a prospective client.

Help staff prepare

• Provide training on changes in the tax law, including those related to the ACA and same sex marriage, as well as expiring tax provisions.
• Renew existing preparer tax identification numbers (PTINs) and register new tax return preparers with the Internal Revenue Service (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 returns as the preparer.
• Research state law regarding registration requirements for tax return preparers. Registration and licensing requirements vary by state, and many states charge registration fees. Renew or register with the states that have registration requirements.
• Tax return preparers who are not both employed and supervised by an attorney, CPA or enrolled agent must be registered tax return preparers.
• Review the Statements on Standards for Tax Services, Treasury Department Circular No. 230, tax quality control procedures, tax preparation process and procedures, and the penalties applicable to taxpayers and preparers with all tax personnel.
• Review the top errors found by reviewers on prior year individual and business income tax returns with preparers. Remind preparers to exercise due diligence in compiling and assembling tax information, communicating clearly with clients about any concerns, and documenting discussions with clients.
• 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. Systems should be tested while in operation.

Review e-filing requirements and processes

• Research mandatory e-filing requirements for federal and state tax returns. Preparers who file 10 or more individual or trust returns are required to use e-file. Train staff on e-filing requirements.
• Review the information currently on file with the 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. The application approval process can take 45 days or more.
• Inform clients either in the engagement letter or in the cover letter sent to clients with the tax organizer that returns will be prepared electronically, and that clients will be required to review and approve draft returns and sign copies of e-file signature authorizations, e.g., Form 8879 and equivalent state forms, before tax returns can be filed electronically. Both spouses must sign the form if a joint individual income tax return is filed.
• Train professional and administrative staff on processes the firm adopts for e-filing engagements. Do not submit completed returns electronically until the client has provided both the signed e-file authorization forms and an e-mail acknowledging the client’s review and approval of draft returns. Retain the e-mail in the workpaper file. When filing electronically, save receipts from the IRS or other tax authorities acknowledging that the return was accepted for processing.
• Obtain a signed Form 8878 or equivalent state form prior to filing an application for extension of time to file.

Prepare the firm to meet the increased demand

• 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. Consider the workload impact of using data scan software when planning staffing requirements.
• Initiate contact with independent contractors that assisted last tax season, determine their availability, and reach a tentative agreement regarding such issues as hours, fees, and benefits. 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 American Institute of Certified Public Accountants (AICPA) ethics interpretations and Treasury regulations, including those applicable to:
• Outsourcing and supervising independent contractors
• ET Section 191, Ethics Ruling # 112, Use of a Third-Party Service Provider to Assist a Member in Providing Professional Services,
• ET Section 291, Ethics Ruling # 12, Applicability of General and Technical Standards When Using a Third-Party Service Provider,
• ET Section 391, Ethics Ruling #1, Use of a Third-Party Service Provider to Provide Professional Services to Clients or Administrative Support to the Member,
• Disclosures or uses for preparation of a taxpayer's return (Treas. Reg. 301.7216-2(c)), and
• Providing attest and non-attest services to the same client (AICPA Ethics Interpretation 101-3)
• Create a tax training plan for staff and independent contractors, including a timeline for completion. Because their responsibilities relating to tax return preparation services are likely to be different, consider separate training tracks for staff, managers, and partners.

Update engagement letter processes

• Review firm policy on issuing engagement letters. While obtaining signed engagement letters is always the preferred risk control practice, unilateral engagement letters mailed with tax organizers may be more practical for low risk individual tax return preparation engagements. Obtaining signed engagement letters is recommended for all other tax engagements.
• Review engagement letters used in the prior year and update, as needed. Compare these to resources available from professional liability insurers, the AICPA, and professional publishers.
• Inform clients that the firm will not begin preparing tax returns until a signed engagement letter is received, or in those cases where a unilateral engagement letter is sent, the completed tax organizer is received.
  

What should be done in January?

• Schedule a pre-tax season staff meeting. Revise procedures based upon last year’s post tax-season evaluation and comments to improve the tax return preparation process. Review firm privacy and security policy and procedures with all employees to safeguard client data.

• Assign clients/tax returns to preparers or 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's 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, net operating loss information, credits, carryovers, and so forth.
• Check tax form instructions for changes in tax law 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.
• Identify any clients that have undergone significant change (e.g., client’s altering terms of debt may result in cancellation of debt income) or will be significantly affected by tax law changes implemented or expiring in 2013, and schedule a meeting with the assigned partner/manager to discuss them. Consider how this may affect current year engagements (e.g., changed filing status, preparation of returns declaring foreign or out-of-state income).

• 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.
• Review client data promptly when received, make inquiries if any information appears to be incorrect, incomplete, or inconsistent, and document discussions with clients.
• 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 foreign financial accounts, foreign earned income, and state filings, even if the client falls below the filing threshold in the current year.
• Test new or updated tax software to see if it is working properly and test how it integrates with other applications.
• Check the software website for updates and downloads. Determine if any programming errors noted last year have been corrected.
• Restrict and monitor access to tax software 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 form.
• Train all tax professionals on the use of the software, new capabilities and the most efficient way to use the programs.
• Update tax return tracking software for responsible client parties and extended filing due dates of each tax return. Ensure that the tracking system monitors the status of each return, including information receipt date, receipt and completion dates by preparers and reviewers, sign-offs by firm and client, as well as assembly, delivery, mailing, filing and acceptance dates. Retain electronic confirmations or certified mail receipts for the firm’s records.

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.
Tax season is busy, so preparing for it now will reduce the stress experienced in January. Pre-tax season training of personnel and review of administrative procedures will reduce the burden through April 15th and beyond.

Resources

• Is This the Right New Client for Your Firm?, Deborah K. Rood, Journal of Accountancy, July 2013, http://www.journalofaccountancy.com/Issues/2013/Jul/20137770.htm
• Clients: Knowing When to Walk Away: http://www.cpai.com/show-article?id=373
• Client Termination Letters: http://www.cpai.com/show-article?id=78
• Preparing and Using Engagement Letters and sample engagement letters are available to CNA policy holders at https://www.cpai.com/members/access.jsp
• Tax Practice Guides and Checklists, including sample engagement letters and organizers, are available at no charge to members of the AICPA Tax Section at: http://www.aicpa.org/INTERESTAREAS/TAX/RESOURCES/TAXPRACTICEIMPROVEMENT/Pages/default.aspx

October 2013

By Accountants Professional Liability Risk Control, CNA, 333 South Wabash Avenue, 36S, Chicago, IL 60604.

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The purpose of this article is to provide information, rather than advice or opinion. It is accurate to the best of the authors’ knowledge as of the date of the article. Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional. In addition, CNA does not endorse any coverages, systems, processes or protocols addressed herein unless they are produced or created by CNA. CNA recommends consultation with competent legal counsel and/or other professional advisors before applying this material in any particular factual situations.

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