Pre-Tax Season Checklist

November 2009

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:

• Review your list of tax clients from the prior season. Consider terminating your professional relationship with unprofitable, slow-paying, and "problem" clients.
• Review the last several issues of your firm newsletter. If clients have not already been informed of significant changes in state and federal income tax matters, either send out an updated newsletter to do so, or include comments about these tax changes in the cover letter to be sent out with tax organizers. Indicate that clients should contact your office to set up an appointment to discuss tax-planning issues prior to year-end.  
• Review firm policy on issuing engagement letters. While obtaining signed engagement letters is always the preferred risk control practice, unilateral engagement letters sent out with tax organizers may be more practical for low risk individual tax return preparation engagements. Obtaining signed engagement letters is recommended for all business clients, trustees, executors or personal representatives, and high net worth individual clients.  Inform clients that the firm will not begin preparing a return until a signed engagement letter is received or a completed organizer is received from those clients who receive unilateral letters.
• Review tax return volume from the prior season and expected staffing requirements for the upcoming season. Initiate contact with independent contractors that assisted last tax season, determine their availability, and reach a tentative agreement regarding hours, fees, benefits, and the like. 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 the requirements of the AICPA ethics interpretations dealing with 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, and ET Section 291, Ethics Ruling # 12, Applicability of General and Technical Standards When Using a Third-Party Service Provider) to assist in providing client services and AICPA Ethics Interpretation 101-3 regarding providing attest and non-attest services to the same client. These interpretations are available on the AICPA website at https://www.aicpa.org/about/code/index.html.

• Revise procedures based on last year’s post tax-season evaluation and comments to improve tax return preparation process.  Review security procedures with all employees to safeguard client data.

• Review research library 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 and have them tested in operation.
• Create a tax-training plan for both staff and independent contractors, including a timeline for completion. Consider providing separate training tracks for staff professionals, managers, and partners since their responsibilities with regard to tax return preparation services are likely to be different. Review tax quality control procedures, tax preparation process and procedures, and the application of tax preparer penalties with all tax compliance personnel.
• Assign tax returns to preparers or reviewers based on 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 returns in your system, update client profiles, and check data transferred from last year's data files.
• Organize workpaper files with index, checklists, applicable notes from last year's files, NOL/credits carryovers, etc.
• 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 templates (Word, Excel, etc.) created from the prior year's support schedules and update them for necessary changes.
• Identify any clients that have undergone significant change or will be significantly affected by tax law changes in 2009 (e.g., divorce, change in income, sale or reorganization of business, buying a home), and set up a meeting with the assigned partner/manager to discuss them.  Consider how this may affect the current year's engagements (e.g., need for tax planning prior to year end, changed filing status, preparation of returns declaring foreign or out of state income).
• Test new or updated tax software to see if it is working properly and test how it integrates with other applications (e.g., importing organizers, converting to XML for e-filing, etc.). Check software licensing agreements to ensure your firm is in compliance with their terms.
• Check the software developer's website for new updates and downloads. Determine if any programming errors noted last year have been corrected. Train all tax professionals on the use of the software and its capabilities. Restrict and monitor access to your tax system to defined, authorized users.
• Revise tax quality control procedures as needed. Reviewing client data promptly when received. If you do not use tax return tracking software, use a control log or common docketing system to help avoid missed deadlines.  It’s important to routinely monitor the work performed to help prevent errors, and in turn, malpractice claims. Most tax malpractice claims arise from inadequate review of client data and completed returns, not inadequate training.
• Update your tax return tracking software (e.g., a due date and task reminder system), for responsible client parties and extended filing due dates of each tax return. Ensure that the tracking system is monitoring the status of each return, including information receipt date, receipt and completion dates by preparer and reviewers, sign-offs by firm and client, assembly, and delivery/mailing date. Obtain certified mail receipts for your records.
• Consider becoming an authorized IRS e-file provider. As an Electronic Return Originator (ERO), you can transmit tax return information directly to the IRS. Train staff on the requirements and the processes you adopt for e-filing engagements (e.g., obtain completed and signed Form 8878 or 8879 from the taxpayer before the application for extension of time to file or tax return is transmitted). When filing electronically, it is important to save receipts from the IRS or other tax authorities acknowledging that the return has been accepted for processing.
• Research the e-filing requirements for income and other tax returns applicable to the states for which you'll be preparing tax returns. As of November 2009, 20 states have mandatory e-filing requirements. Train your staff on these e-filing requirements, and disclose that you'll be electronically filing returns in your engagement letter or in the cover letter sent to clients with the tax organizer, and note that they will be required to provide signed copies of e-file signature authorization, i.e., Form 8879 and state equivalents, before their tax returns can be filed electronically. Do not submit returns electronically without first obtaining these signed forms. Both husband and wife must sign the form if they are filing a joint individual income tax return.

November 2009

By Accountants Professional Liability Risk Control, CNA,   333 South Wabash Avenue, 39S, 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.

Any references to non-CNA Web sites are provided solely for convenience, and CNA disclaims any responsibility with respect to such Web sites.

To the extent this article contains any examples, please note that they are for illustrative purposes only and any similarity to actual individuals, entities, places or situations is unintentional and purely coincidental.  In addition, any examples are not intended to establish any standards of care, to serve as legal advice appropriate for any particular factual situations, or to provide an acknowledgement that any given factual situation is covered under any CNA insurance policy.  Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured.  All CNA products and services may not be available in all states and may be subject to change without notice.

IRS Circular 230 Notice: The discussion of U.S. federal tax law and references to any resources in this material are not intended to: (a) be used or relied upon by any taxpayer for the purpose of avoiding any federal tax penalties; (b) promote, market or recommend any products and/or services except to the extent expressly stated otherwise; or (c) be considered except in consultation with a qualified independent tax advisor who can address a taxpayer’s particular circumstances.

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Reference:
State e-filing requirements can be accessed from the IRS web site at: http://www.irs.gov/efile/article/0,,id=130685,00.html