Thinking Outside the Typical Client Profile in Tax Engagements

Co-Editors: Steven F. Holub, CPA, MBA, and Kenneth M. Parker, CPA

Practice Management

CPA firm tax practice leaders often have a stated or understood (at least to themselves) relatively narrow profile for busy-season individual tax return engagements, due to the firm’s owners’ experience and competence, its mix of individual and business clients, and other factors. Tax practice leaders should consider whether their firms have appropriate processes and procedures in place to handle engagements that fall below this range in complexity and price.

Why Serve This Market?

A firm’s traditional individual tax engagement client profile likely includes preferred criteria for acceptance or continuance, including a minimum price and the client’s willingness to cooperate with the firm’s method of conducting its individual tax engagements. The client in this traditional engagement provides information and expects tax return delivery according to the firm’s schedule, uses the firm’s preferred communication methods, and pays the firm’s standard prices without complaint. This client might, for example, return a completed organizer with all tax information documents, respond promptly via phone or email to questions, and promptly pay the firm’s standard prices.

Notwithstanding these preferences, busy-season tax practice for most firms often includes a mix of information gathering and tax return delivery processes, including mail, email, portal, phone conversations, physical pickup and delivery, and interviews. The engagements likely vary in scope and complexity, with some requiring little more than inputting data from tax information documents and others requiring interpretation of complex facts in light of changing tax laws. A firm’s fees for its tax services may range from “free” for a child’s return to thousands of dollars for a return with complex business or investment activities. Accordingly, a firm’s tax engagements in any given season run the gamut from those for low-touch, low-fee, drop-off clients to high-touch, high-fee, interview clients—and all points in between.

While CPA firms should ensure that individual tax engagements are not beyond their competence and other resources, they should also consider engagements that fall below their traditional criteria (e.g., for simpler or less expensive returns). Any firm may on occasion serve such a client, by choice or otherwise. The firm may simply have misjudged a prospective client’s compliance needs or financial means during its acceptance processes and procedures, or a longtime client’s tax or other financial circumstances may have changed through, for example, a career change or retirement. In addition, changes in environmental factors, such as the recent financial downturn or the IRS’s unenrolled tax return preparer program, may increase or reduce competition so that a firm may choose to serve this market.

Whether these engagements are accepted due to error or intent, a firm’s tax practice should have a system in place to adequately and profitably serve these “not-quite-target” tax clients. Additional or alternative processes and procedures may need to be integrated into the firm’s existing ones so that the firm’s overall tax practice is strengthened rather than diluted. A saying popularly attributed to the Chinese philosopher Confucius warns, “The man who chases two rabbits catches neither.” Tax practitioners are already well-schooled in chasing several types of rabbits one at a time; the challenge is to chase (and catch) one more type of rabbit.

Tax Practice Processes

While each firm’s circumstances are unique, the broad areas in which alternative or adapted processes and procedures may be necessary are:

• Acceptance/continuance;
• Classification;
• Staffing and assignment;
• Information gathering and preparation;
• Review, filing, and delivery; and
• Pricing and payment.

Acceptance/Continuance

Engagement acceptance and, to a lesser degree, continuance processes and procedures for a firm’s traditional tax clients tend to center on the firm’s practice leaders, who often tailor this process to each client’s circumstances. While welcoming to the client, this approach lacks efficiency and is not practical if the firm’s goal is to serve a more diverse (and likely numerous) not-quite-target clientele. The author’s firm uses an alternative approach centered on a set of streamlined forms for client information and engagement acceptance/continuance that administrative or professional staff can complete quickly.

Because the not-quite-target client may be more likely to show up “cold,” the acceptance process should include thorough identification procedures, including inspecting and copying identity and citizenship documents such as driver’s licenses, Social Security cards or other tax documents, and passports for clients and any dependents. The author’s firm has found that incorporating these additional procedures into the existing acceptance/continuance process reduces errors such as e-filing mismatches and incorrect dependent claims.

Classification

Classifying engagements between simpler and more complex returns is a key step in efficiently and effectively integrating the not-quite-target client engagements into a firm’s practice, and it needs to happen early in the process so that the engagements can be assigned and routed appropriately. The author’s firm does so by assigning an “A,” “B,” or “C” rating to each engagement based on a relatively small number of factors.

In short, engagements connected to significant clients or including multiple and/or complex investment or business activities are rated A or B, and those without any such criteria are C engagements. A key part of efficiently serving not-quite-target clients is to accurately classify their engagements as B or, more likely, C. The author’s firm rates engagements at three points during its work flow:

1. Immediately prior to busy season, practice leaders finalize the rating criteria and assign expected ratings to continuing engagements in the tracking system. (This step is performed for new engagements as part of client acceptance.)
2. As information is received during busy season, administrative staff record the ratings for continuing engagements on the routing sheet that accompanies the engagement file.
3. During an engagement, the preparer and reviewer use the rating criteria to determine whether it should be reassigned.

Staffing and Assignment

While a firm’s traditional clients may show up unannounced, and the not-quite-target client may make an appointment, the latter is more likely than the former to prefer “walk-in” service. The higher customer traffic that can be expected when serving this market suggests a firm may need additional administrative and professional staff available to handle the increased workload. The author’s firm has found that demand from not-quite-target clients tends to ramp up (and down) earlier in the season than from traditional clients, allowing an earlier start and more consistent work flow throughout the season and resulting in better use of existing staff. Notwithstanding, adequate staffing during the early part of busy season is critical.

Because a return for the not-quite-target client tends to be simpler (i.e., a C or, less often, B engagement), preparation of such a return is well-suited to paraprofessional and less experienced professional staff, and final review and approval can likewise be delegated to nonexecutive experienced staff.

Information Gathering and Preparation

While gathering information to prepare a traditional client’s tax return may often be customized to fit that client’s needs, efficiency and speed are the primary goals when gathering the information to prepare the not-quite-target client’s tax return. Asking these clients to prepare a comprehensive organizer is usually overkill (as well as fruitless in most instances) since these returns for the most part include only a fraction of the information an organizer requests. In addition, the information needed is usually within a relatively few annual tax documents received by the client from third parties and that are otherwise obtained during client acceptance and continuance processes and procedures. To streamline information gathering and return preparation, the author’s firm usually accomplishes most of this work for the not-quite-target client in a single interview session with the assigned or on-call return preparer for that engagement.

When the client first arrives, administrative personnel gather selected information as part of the engagement acceptance/continuance process by having the client provide or update contact and dependent information, including copies of any changed or newly issued identification or citizenship documents. Next, the preparer interviews the client and prepares the return during the interview. A client who has scheduled an appointment meets with the return preparer assigned to his or her engagement, while a drop-in client meets with the first available staff preparer.

The firm uses a short checklist of questions for each client in engagements for which abbreviated procedures seem appropriate (e.g., C engagements). The checklist is intended to cover only the narrow range of tax issues that can be expected with such engagements and to identify any issues requiring expanded procedures. The checklist is used as a reference by the preparer during the taxpayer interview, and preparers are required to consult more experienced or senior personnel to resolve any issues encountered during the client interview.

Resolving tax issues during the interview is key to speed and efficiency in this stage of the process because it allows early completion of three important milestones of the tax return engagement:

1. The client is available to participate directly in gathering and interpreting all information needed;
2. The client can review, question, and understand the results (including the refund available or the balance due) immediately and begin to make arrangements accordingly; and
3. The preparer is able to obtain the client’s signed engagement letter, consents to use and/or disclose tax information (if applicable), and e-file authorization (or opt-out) during a single session.

Review, Filing, and Delivery

Because of the emphasis on screening and rating engagements, thoroughly gathering information, and securing client involvement earlier in the process, as well as the less complex nature of these engagements in general, an experienced, nonexecutive professional should be able to ensure that the engagement has been correctly classified, review the preparer’s work, and take corrective action if necessary. This review should be accomplished promptly upon completion of return preparation, to allow timely feedback to the preparer and involvement of the client (if applicable) in any corrective action.

Immediately following the review, the file may be routed to processing for the return to be e-filed (or bound if it is to be filed as a paper return). While each firm needs to tailor its processes and procedures to its own situation, the author’s firm has found that a 24-hour turnaround for review and delivery to processing is workable. Quick turnaround also reduces client follow-up phone calls and emails.

Once an e-filed return has been accepted (and any bank products have been released) or a paper return has been bound, administrative staff should prepare copies for the client and contact him or her with pickup or delivery instructions as usual.

Pricing and Payment

While a discussion of price for tax return engagements is beyond the scope of this column, some general observations are worth noting. Pricing a tax return engagement for the not-quite-target tax client requires recognizing that this client is more accustomed to a price-per-form method (or, increasingly, a fixed software license fee) than an hourly or value-based billing approach. The author’s firm has found that the method is less of an issue (most clients do not like formula-based pricing in any form) than is continuity of the price from one year to the next and the overall amount. Of course, tax returns for the not-quite-target client are generally simpler and command a lower price; however, an efficient process can still yield a profitable practice.

A positive aspect of serving the not-quite-target tax client is earlier payment. While many of the more complex (e.g., A and B) tax engagements may require several days (or longer) to prepare, review, and deliver to the client, the author’s firm has found that clients are satisfied with the streamlined process that is used for simpler returns and are content to pay their fees at completion of the taxpayer interview. This is days or weeks earlier in most cases than traditional tax clients and significantly increases cash flow in the early part of busy season.

Many not-quite-target tax clients expect and appreciate access to bank products such as instant-issue checks, Automated Clearing House direct deposit, or debit cards to receive tax refunds and pay tax return preparation fees. The author’s firm has found that a significant minority of its not-quite-target tax clients regularly use these products. This may be an unfamiliar business practice to many CPA firms, and it does require additional training and control procedures to comply with the requirements for disclosure and use of tax information and with applicable banking laws; however, experience shows that these hurdles are not insurmountable.

Profitable Opportunity

CPA firms of all sizes regularly serve individual tax clients for whom their traditional tax engagement processes and procedures are a poor fit. This leads at best to an inefficient use of the firm’s resources and at worst to a dissatisfied client. By standardizing and delegating appropriate elements of a firm’s individual tax engagement acceptance/continuance, information gathering, preparation, and review processes and by using a classification system to rate engagements and inform assignment decisions, a firm’s tax practice may become more efficient and sufficiently flexible to profitably serve a broader range of clients and to adapt more easily as the needs of existing clients change.