A big problem for almost every accounting practice is the tax season workload compression. It is what it is, but it doesn’t have to be. Here are some suggestions on how to pull work out of tax season and push it into November and December to better handle the extra work.
Before I start, I want to say that early on in my career I’ve done everything here during tax season and at some point I got a revelation that I could do many complicated one time transactions pretty much as soon as I knew about them, and it was much better pushing it into a less busy time. Not only that, but it resulted in added billings since this work was done independent of the tax return preparation process and clients were fully aware of the work we put into it. Here are some of the things that I now have done no later than November or December of the year it occurred in. Ideally they should be done as soon as you find out about it.
Here are some illustrations of work that can be pushed out of tax season into less stressful periods.
- Sale of a business, vacation home, rental property or a residence;
- Section 1231, 1245 and 1250 transactions;
- Intangible allocations for a sale or purchase of a business;
- Section 754 step up;
- Starting or closing a business;
- Section 1244 losses, 1202 gains, Opportunity Zone rollovers or ESOP substitute stock dispositions;
- Liquidation of an S corporation that sold its assets with a large capital gain where the client has high basis in the S corporation (actually, in this situation, the liquidation should take place in the same year as the asset sale);
- Disposition of S corporation stock where there was a built-in gain that will have to be reported;
- Sales of partnership and LLC interests with negative basis;
- Changes in partners, members or S shareholders that took place during the year;
- Payment of personally guaranteed debt;
- Grantor trust flow through amounts and verification that the trust did not get and use its own TIN;
- Termination during the year of the grantor’s right to affect transactions that made the trust a grantor trust;
- Get copies of divorce and separation agreements when executed to ascertain possible basis adjustments and estimated tax payment allocation;
- Employment severance payments;
- Deferred compensation agreements or payments and possible Section 409A issues;
- Employee exercising incentive stock options or non-qualified stock options or receiving and/or selling restricted stock;
- Donations of art, collectibles, real estate or other property with a value over $5,000;
- Sale of long-held stock where client does not know their basis;
- Qualified business interest modeling;
- Partnership. LLC and S corporation basis calculations;
- Change of domicile where there will be split year state tax returns;
- Gift transactions that will be reported on a Form 709 where business interests are transferred to family members and the valuation and basis will need to be reported (if valuation discounts were taken, then an appraisal should be strongly recommended).
There are many other situations, use this list as an awareness alert.
While I’m at this, here are some things you can have clients do that would reduce the time to prepare their returns:
- Suggest clients consolidate brokerage accounts to simplify the data entry and review of their returns.
- If clients own securities in their own name, suggest they transfer them to a brokerage account reducing the 1099s they will receive.
- Likewise suggest that clients reduce the number of mutual funds they have, even within a fund family to reduce separate reporting of each fund’s 1099.
- Clients that maintain custodial accounts for minor children should be told that they should try to choose investments that will not trigger the Kiddie Tax.
- Clients that invest in publicly traded partnerships or hedge funds that typically send K-1s late or that send 10- to 30-page K-1s should be told they need to consider getting out of them if they involve small amounts in relation to their entire portfolio. Likewise with out-of-state partnerships that do not file with their state, which might preclude e-filing in their state. Not investing in these will also simplify the client’s tax preparation and greatly reduce your time. For clients to which this applies, it would reduce next year’s tax preparation burden if they get out of the publicly traded partnerships or hedge funds before the end of this year. The same would apply for clients that invest in foreign stocks with withholding as that will require extra forms to be included in their return.
- If a client has children working summer and vacation jobs from which they will not have sufficient income to require filing a tax return, especially at the state level, have them fill out a W-4 that indicates there should be no withholding. This would reduce the preparation process starting next year.
- Alert clients about foreign bank account and trust reporting and have them obtain the needed information, so the preparation process won’t be delayed.
Each of the above will push work out of tax season into a slower period, greatly relieving tax season work compression, but it needs to be acted upon now. In order to accomplish a lot of the above, you would need to keep in touch with your clients so you could find out about the changes in their situation while you will be able to do something about it. Doing something now to reduce the oppression of tax season compression is part of the big picture of running an accounting business.
Do it now! The ball is in your court.
Do not hesitate to contact me at email@example.com with your practice management questions.
Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, and “Managing Your Tax Season, Third Edition.” Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com along with the Pay-Less-Tax Man blog for Bottom Line. Ed is an adjunct professor in the MBA program at Fairleigh Dickinson University teaching end user applications of financial statements. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 743-4582 or firstname.lastname@example.org.