Learn How CPA Firms Will Increase Their Net Income on 1040 Tax Returns Without Raising Fees or Reducing Expenses.

One of the constant problems for CPA firms with individual clients is getting all of their information in time to prepare, review and file their return before the October 15^th deadline no matter how many times they are asked for their information. I once worked at a firm that had an individual client that was the last tax return the firm filed by the October 15^th deadline three years in a row.

When clients delay providing their personal tax information until after August 1^st, the extra time and expense spent on the tax return can turn a profitable job into a loss for the firm. At a minimum, the client has forced the firm to use “tax season” time to prepare a return that could have been completed in June or July.

In a good economy, the firm might charge the client for the additional time (or use of tax season time) and effort spent on the tax return. But since the economy has been bad for several years, clients have become highly resistant to material price increases. In addition, the economy has caused many clients to see the creation of their tax return as a product rather than a service. Therefore, they simply do not see the difference in which CPA firm prepares their personal tax return.

In many cases, the firm should simply fire a client that does not value your time. It is not worth working with a client that does not value what you do. The firm will never make enough profit to justify the time spent on a 1040 client that causes grief for the firm.

But many tax partners will not do that for the following reasons:

• They are focused on gross revenue rather than net income.
• They want to keep their book of business high in case they ever leave the firm.
• They don’t want to admit defeat in making the client profitable.
• They don’t want to deal with the hassle of firing the client.
• They can force a manager and staff to deal with the client instead of handling the situation.

Solution

But there is a solution to the problem that I see starting to gain some traction.

Under normal circumstances, the only information an individual taxpayer might receive after April 1^st (of the year following their tax year) for their tax return is a Schedule K-1 for their interest in a partnership or an S Corporation. Therefore, the taxpayer has no reasonable excuse for providing their other tax information to the firm after May 31^st. As a result, I expect that CPA firms will start sending engagement letters in January 2015 that include the following paragraph (but in a nicer tone of voice).

We want all of your personal tax return information by May 31^st. Unless your situation is very unusual, there is no reason (except for Schedule K-1s) for your information to come to us after that date. Therefore, if any or all of your personal tax information (except for Schedule K-1s) arrives to us after May 31^st then your tax return preparation fee will automatically be increased to the greater of $1,500 or 130% of last year’s tax return fee. 

Many people might look back at the title of this article and think this paragraph in increase of the client’s fees. No, it is not. It is simply giving the client a choice. The client knows in January that he has the option of avoiding the increase in fees by providing the information by May 31^st. In addition, by putting the issue in writing, the firm has changed the discussion on the fee increase from a “negotiable item” to firm policy. Therefore, the client realizes that ranting about the increase will not change his bill.

Ok, but how does the firm make more money if he provides the information earlier?

Although most tax departments are now busy throughout the year, they are not 100% chargeable from May to July. Therefore, the firm makes more money because they are able to give the job to the preparer and reviewer at the proper billing rate and take advantage of previously unproductive time. In addition, the additional time allows for projects to be set aside if questions need to be asked of the client instead of having to wait on their responses because of the tax deadline. Therefore, the firm makes additional net income because they are more efficient in the use of their time during the year.

As with many new ideas, there will be partners and firms that shy away from this idea. They will be afraid that they may lose clients that are not happy with this additional requirement. However, I would ask them the following question. How profitable can an individual client be that can’t get you their information five months after the end of the year? You can always select which clients get this letter (i.e. by level of fee). But to ignore this type of idea will only continue to shrink the margins that you make on these returns.

One of the reasons that more and more local CPA firms have been acquired by the regional firms is that they were not willing to accept that they were working harder to earn less until it was too late. As times, technology, and the economy change, it is up to CPA firms to change with them.

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Bill Meador, CPA, JD

Bill Meador is a CPA and lawyer who has worked in the tax departments of public accounting firms for over twenty years. He created this blog to make Big 4, national, and local tax preparers lives easier. If you like the blog then tell your friends and keep on the lookout for the Tax Preparer Skills Guide which will teach tax preparers the tax, technical, office and social skills needed to succeed in a public accounting firm.

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