1040 Central operating manual.

Individual tax return preparation is frequently viewed as possessing the following characteristics:

* Uncontrollable as to when and how done: For most offices, individual tax return preparation provides as much as 10% (or more) of annual office revenue, 60% of which is performed in a three- to four-week period. While the due date of April 15 is virtually unyielding, clients deliver their information with seemingly complete unpredictability, and the availability of staff to do the work when needed, follow up on review notes and obtain guidance from management personnel is haphazard at best.

* Intensive concentration of management time: While staff-to-partner ratios in many aspects of tax work are in the range of 3:1, 4:1, 5:1, etc., individual tax return preparation is usually 1:1 or 2:1. This is a very poor use of management time during the most critical period of the year (and the best time for new client and work opportunities).

* Fill-in work between larger, more interesting engagements: Individual tax return preparation frequently tends to be overshad-owed by major engagement pressures and deadlines.

* Long time frame and excessive time and charges to complete: The time between the date tax information is received and the date returns are mailed often is several weeks or months. During this period, missing information, multiple handling of returns and resulting reorientation to the facts, delays in follow-up on review and staff unavailability may occur, adding hours to the return preparation process.

Selection of facility

The single most critical feature of an effective 1040 Central is selection of a facility in which all engagement personnel may work together (one room) and are physically segregated from other firm personnel. (This might be likened to the typical audit field environment.)

For engagement personnel, working together in close quarters affords effective supervision, immediate and consistent on-the-job training and fewer nonengagement-related interruptions. For 1040 Central management, a larger measure of control over the field environment is achievable. And for return signers (members, managers, etc.) and all other firm personnel not on the engagement team, access to and influence on specific staff behavior, style and order of work is prevented, thereby allowing orderliness and efficiency as well as minimizing stress.

Each office will need to address this feature within the confines of its own practice office. However, since selecting the proper facility will ensure gaining certain efficiencies (listed below), additional rental cost or construction modification will be justified.

* Greatly shortened learning curves, resulting in tremendous cost savings.

* Reduction in the number of times a return is handled.

* Adherence to a policy of first-in, first-out (FIFO).

* Control of management over staff focus on the engagement.

* Management awareness of progress, since hours put in correlate with returns completed.

* Immediate knowledge and implementation of tax matters and their handling.

* Less stressful, more enjoyable work environment, due to camaraderie and team spirit.

Space arrangements should be made immediately. Lead times to make space available will vary widely; however, the amount and nature of the space can be determined only after a complete inventory of the returns to be prepared is made and the resulting number and levels of personnel set.

Equipping the facility

A list of equipment should include:

* Number and specifications of computers.

* Printer(s).

* Copier for low-volume usage.

* Computer phone/network lines.

* Number of tables and chairs.

* White board or chalkboard for notices, procedures, progress reports, etc.

* Adequate ventilation (many people and machines in one room generate a lot of heat).

* Separate computer server for calculating returns (to save preparer time).

* Sufficient file cabinets or shelving to store work in various stages of progress (see the "Inventory control" section, below).

* Adequate telephones (i.e., one for reviewers and one for preparers).

* Lunch/break area (encourages staying together and out of the regular office areas where staff might get distracted from 1040 Central engagement duties).

* Refrigerator, coffee pot, etc.

* State tax services (forms and instructions).

* Moody's/Standard & Poors stock guide.

Personnel job descriptions

The following positions and duties will be needed in 1040 Central:

* Engagement supervisor: This position offers good experience for management development. The engagement supervisor generally is a permanent tax department senior or manager, whose responsibilities include overseeing all aspects of the engagement from planning in June, recruitment, training, computer software and hardware, and continuous on-site supervision throughout the preparation season; identifying issues requiring policy decisions and implementing directives of the tax coordinator; advising preparers and reviewers on the specific handling of client facts and instructing them as to when research is appropriate; conducting the research (so preparers and reviewers can continue to focus on production and minimize "wheel spinning"); resolving disputes; bringing violations of operating rules by nonengagement personnel to the attention of the tax coordinator; being the "last word" on-site on all matters; supervising and directing the inventory control clerk; acting as liaison with software representatives.

* Reviewers: Usually permanent personnel with two or more seasons of experience or seasonal personnel with several years of experience and sufficient demonstrated knowledge and inquisitiveness to identify needed corrections and opportunities for improvement in accuracy and completeness.

"Reviewers" is somewhat of a misnomer; through leveraging via preparers (who assemble and organize client data into the form of a tax return), these persons produce several returns in the time conventionally spent producing one return.

Reviewers draw returns on a FIFO basis from the work-in-process (WIP) table (returns that have been completed by preparers to the best of their ability), perform 100% on-screen review and tracing to client information, and enter notes on-screen as to errors found or questionable issues. Direct interaction with preparers on matters that have learning value or items requiring clarification is encouraged. Otherwise, on completion of a review, the return file is put on the respective preparer's "re-prep" table (if there are review notes) or on the "deliver to signer" table (if no corrections are required).

* Preparers: Temporary personnel who are usually specially trained, but often nondegreed, who possess basic ability, motivation, detail orientation and tax return preparation training. The preparers are assisted later in the season by first-and second-year staff accountants and/or technicians.

"Preparers" is also somewhat of a misnomer, as they must, to the best of their individual ability, organize and assemble client data into the form of a tax return, identify and obtain missing information, ask for on-the-spot guidance when needed, organize the supporting file in an order or format consistent with the order in which it is to be reviewed, and submit the completed file to the WIP table, while taking care to respect the FIFO policy.

Before requesting a new project from the control clerk, the preparer should handle any "re-preps."

* Inventory control clerk: Likely to be a temporary position for a person with minimal clerical skills, whose responsibilities include:

1. Obtainign returns from various drop-off points throughout the office and evaluating completeness of the file (completed route sheet, inclusion of prior-year jacket and existence of some current-year information); entering returns into raw material inventory sorted by FIFO and degree of difficulty (as entered on router) and verifying the accurate assignment in the system to the appropriate signer.

2. Monitoring and updating milestones so that nonengagement personnel may check the status of returns in process.

3. Delivering reviewed return files to signers for their review (on screen).

4. Obtaining signer-reviewed returns from same drop-off points and placing them on the respective preparer's "re-prep" table (if there are review notes) or on the "ready to print" table (if no corrections are required).

5. Printing returns when all reviews are completed and delivering them to the clerical pool for duplication and assembly.

6. Optionally, the inventory control clerk might also perform duplication and/or assembly functions, depending on other workload volume.

Personnel qualifications and configuration

The only prerequisites for a preparer are a high school diploma and a desire to acquire a special and valuable skill; any previous experience or training is a plus. Keep in mind that the preparer's function does not need to be performed by a "professional." It is a function of organizing and assembling of data, evaluation and entry into tax software, and does not require four years of college and certification. It is a wonderful opportunity for young staff members to gain experience.

The greatest amount of staff fluctuation is afforded in the preparer group. Many strategies may be developed to find people to meet this need. One good method is to send one motivated client support person to commercial tax preparation training in the fall. The firm could pay for the training or reimburse the cost on the condition that the trainee finish at or near the head of the class. Further, this person should be directed to identify and recruit other top students. Another approach is to develop a referral relationship with the instructors of such training courses.

By whatever means selected, it should be much easier to find good, motivated people with this skill or potential than it is to find conventional alternative career path candidates.

Reviewers may be promoted from the ranks of the preparers or may be permanent tax or audit personnel with two or more seasons of tax preparation experience.

There should be one reviewer for every two to three preparers. The preparers and reviewers act as two pools without any attempt to assign them to any kind of subgroup. This allows the necessary flexibility for FIFO treatment of the "inventory."

The engagement supervisor and inventory control clerk will control the level of work difficulty for each preparer and reviewer. Such determinations will be afforded by constant observation of advancement by each preparer and reviewer. This is a very important quality control.

Recruitment

Identification of personnel for 1040 Central ideally must be completed by August 31 of each year, to allow time for enrollment in tax courses and to fill any staff shortages.

Before the correct number and type of people can be identified and the number of work weeks they will be assigned to 1040 Central is decided, the inventory of returns and scheduling portions of the engagement must be completed.

As mentioned earlier, the focus for recruitment is primarily on preparers. Newspaper ads and word of mouth are convenient means to find good candidates; however, confidentiality is paramount. For this reason, it may not be wise to hire clients, client personnel or clients' relatives.

Compensation will generally represent a premium rate of pay for seasonal preparers (relative to their education and experience). Hourly rates are likely to be in the $10 to $15 range.

Once 1040 Central is established, a high retention rate of personnel from prior years can be expected.

Training

* Basic training for preparers: As mentioned earlier, a very efficient and high quality basic training is provided by commercial tax preparation businesses and equivalent courses. Otherwise, prior on-the-job experience is probably the only alternative. It is not efficient to attempt to develop inhouse training of this kind.

* Software training: Basic training courses provided by the current software vendor should be used, if available. Otherwise, a half-day seminar could be organized by the engagement supervisor. Try to arrange firmwide coordination of this type of training with the firm's tax director.

* Technical and software updates for preparers and reviewers: The engagement supervisor should develop and instruct a half-day technical and software update in early January (perhaps the first Saturday). Try to arrange a firmwide preparation meeting for engagement supervisors.

* 1040 Central practices and procedures: The engagement supervisor should be responsible for this task. It may be incorporated into the half-day update, be handled on the job "on the fly" or a combination of both.

* Engagement supervisor: This person must be identified at the earliest possible date (ideally in June), and then participate in every aspect of development of the engagement. CPE should include in-charge and management training as well as substantial technical tax training and experience.

Scheduling

Scheduling should be done in a manner similar to that of a large audit engagement. First the nature, complexity and timing of the workload must be determined. The inventory of returns (discussed later) is the first building block for the schedule. The general layout of the schedule starts around February 1 with a skeleton crew or advance team. This will vary by office depending on the size of the engagement; for example:

* Part-time supervisor and one full-time reviewer (who also initially is a preparer).

* Fully committed supervisor (who also initially is a reviewer) and two preparers.

* Supervisor, one reviewer and three preparers.

As the season progresses, additional preparers and reviewers enter each Monday. Staffing should reach its full complement on the Monday around March 15. Once people enter the engagement team, every attempt should be made to assure that they remain entirely on the engagement through April 15. A severe learning curve is experienced by each newly arriving team member which, once invested, must be capitalized on in order to enjoy the overall efficiency that is anticipated. Also critical is the close and immediate working relationship that results in effective on-the-job training and supervision. (Again, this may be likened to a well-run audit engagement.) A reasonable accommodation might allow follow-up on uncompleted engagements during evening hours, but no unscheduled new tasks (whether or not such person has familiarity with the client) should be permitted. Obviously, there must be some flexibility for demanding circumstances, but such matters should be addressed directly by the 1040 Central engagement supervisor, the office tax coordinator and the chief operating officer (COO) (or his designee). The standard applied in this situation should be no less (and no more) than that applied to key client audit engagements.

Especially critical is the scheduling of reviewers. They will typically be most in demand throughout the year, but especially in the busy season. Delays in their schedules or miscalculations as to when they will be needed will result in substantial unanticipated backlogs on the WIP table, which in turn will lengthen the turnaround time in 1040 Central and delay valuable feedback and training of preparers. The engagement supervisor should stay in communication throughout the year and especially in the weeks leading to entry on the engagement, to avoid surprises and to resolve conflicts at the earliest possible time.

To some degree the supervisor, with advice and counsel from the tax coordinator, will be able to mitigate delays and miscalculations by "field promotion" of the most advanced preparers to the ranks of the reviewers. Flexibility is very limited, however; unless there was already coincidentally a surplus of preparers, they will need to be replaced. After the fieldwork is engineered and scheduled, the indirect efforts of planning, recruiting, training, preparing of facilities and equipment, clerical support and supplies, delivery of client organizers, prescheduling of client interviews and other engagement management functions should be entered in the engagement schedule.

Inventory of returns

In the initial year the 1040 Central is to be established, the only reliable approach to determining staffing needs on a day-by-day, week-by-week basis is to make a list of all returns from the prior year, list staff hours and signer hours, grade the returns by degree of difficulty and total the hours by week that were performed that year. This is a major task that should be scheduled in the summer and may take many hours to complete. A substantial cost is justified in doing a complete and precise analysis of the inventory.

In subsequent years, the inventory should be continuously updated and refined. Modifications in hours, budgets, degrees of difficulty and performance periods are constantly needed.

The supervisor should run reports weekly (daily in the last two weeks of the season) to indicate the number of returns completed, in progress, ready for review and awaiting signer review, to monitor progress and consider actions (such as moving people in or out of 1040 Central, shifting assignments between reviewer and preparer or by degree of difficulty or to appeal to the signers for further action outside 1040 Central).

Inventory control

A log of all returns to be prepared during the season is initiated and updated throughout the season. All returns in this tax register must be assigned to the member/manager responsible for signing the return before the start of the busy season. The tax register should be used to monitor the status of each return. Signers may check the status of individual returns through the system. Milestones must be set up to correspond to each step a return goes through. They must be updated as the return progresses through the system by the person performing each step in the process (control clerk, preparer, reviewer, signer). It is critical that milestones be accurately maintained at each step of the process.

When a return is received for processing in 1040 Central, the inventory control clerk has the responsibility of verifying that the proper signer is assigned, updating the milestone to "login central" at the appropriate difficulty level, and putting the date received on the route sheet. If the route sheet does not contain the signer name, difficulty level and client number, it should be sent back to the signer before the date received is indicated on the route sheet.

All 1040s done in the office must be subject to preparation in 1040 Central. To allow exceptions may result in too many returns being handled outside the system. There is no acceptable reason for excepting a return from the system.

Returns should be collected through a central point or points. They should meet a minimum standard of readiness to be submitted to 1040 Central: not necessarily complete or organized, but with a properly completed router and last year's jacket. The responsible signer should be permitted the option to organize the client data prior to submittal or submit it as is. In succeeding years, signers will gain a feel for which approach is most efficient overall on a case-by-case basis.

The control clerk should monitor to assure FIFO treatment of all work. Pressure from within or without should be brought to the attention of the supervisor. Special priorities may be occasionally accommodated, but only the supervisor should orchestrate them.

Locations should be provided (tables, shelves, etc.) for:

* Raw material sorted by degree of difficulty and in order received.

* Preparer WIP (returns that have been completed to the extent possible but are missing data or answers to questions).

* Reviewer WIP (completed by the preparer and awaiting review).

* Repreparation WIP (reviewed and awaiting rework by the preparer who prepared it).

* Rereview WIP (reworked and ready for review note clearance).

* Returns ready to be printed.

* Return files ready for on-screen review by signers (delivered periodically by clerk).

* Returns ready for delivery to clerical staff.

Global budget

From information developed from scheduling and the inventory of returns, a global engagement budget should be compiled, reviewed and approved by the tax coordinator and COO.

When inventorying the returns, the prior-year fee should also be tabulated. If possible, the signer's time and charges, and the processing fee, should be broken out in order to segregate the dollars that relate to the newly configured 1040 Central. This makes possible the engineering of savings, not merely waiting to see if savings result.

Also, a means by which savings in signer time may be identified should be developed. This savings is one of the most important goals of 1040 Central.

This is also the starting point for accelerating work forward in the season. By detailed review and analysis, as well as pursuit during the season by the supervisor and tax coordinator, work can be "inched" forward year by year. By finding those "guilty" signers who put off submitting returns because they are busy or because a K-1, etc., is missing and by encouraging prescheduled clients to come in three days to one week sooner this year than the prior year, compression at the end of the season can be gradually relieved. This is a process of continuous improvement.

Management of the "engagement"

Key to this new paradigm is to view 1040 Central not as a department and not as hundreds of small engagements, but as a single large engagement. It is not necessary, for example, to yield 100% of time and charges on each tax return, but instead to achieve 100% yield on the entire engagement. In audit engagement management terms, the focus is not on yield on the cash program or the inventory observation (even though each such element is separately estimated), but instead to yield time and charges overall. The detail by element is used instead to gauge the overall progress of the engagement.

In fact, there will be overruns on early returns due to investment in the learning curve. The learning curve is a new investment every year, since 1040 preparation occurs for about 10 weeks out of 52 weeks of each year. People retained from prior years have a shorter learning curve, as do those who enter later in the season rather than at the beginning (due to the knowledge and momentum built by the early arrivals). The efficiency gained by 1040 Central is that fewer learning curves are necessary and maximum exploitation of the investment is enjoyed once it has been incurred.

Two key persons in the success of 1040 Central are the office tax coordinator and the COO. Often, the tax coordinator acts as a buffer between personnel on the engagement and others (especially firm members). 1040 Central is a new concept and many of its "customers" will be uncomfortable not being able to talk to and directly control those performing the work. They will still want to provide leadership and guidance as before. Unfortunately, such leadership and guidance are not only unnecessary, but actually a hindrance. Further, each tax return signer in the past has developed varying "style" differences that even he may not perceive as "differences," since practitioners tend to operate independently in this area. 1040 Central by necessity must iron out these varying styles, not because any one way is wrong, but in order to promote consistency within the engagement team. The tax coordinator (usually a firm member) must frequently run defense on these kinds of issues.

The COO must fully support the 1040 Central engagement. Scheduling conflicts will inevitably occur that will require resolution. There is a tendency frequently to view 1040 work as less important than other work. While it would be hard to argue against this thought with regard to a single 1040 when comparing it to an audit report whose promised delivery date is approaching, the 1040 Central engagement must adhere to a very precise schedule if it too is to be completed on time. Because this work is handled by relatively few people, there may come a point when it would be physically impossible to finish--and the issue is not merely one extension to be filed as a consequence, but hundreds (many of which may involve key clients). It may seem that giving up a senior for one day in mid-March has little effect, but it does not take very many incidents such as this to create a significant problem. And when points of view by those within and without 1040 Central conflict, often only the COO will be the one who has to make the call.

Coordination of return signer review

Return signers will receive return files containing client data, router and the prior-year jacket. They should review the returns and enter review notes on-screen, and return the file to the pick-up point.

The signers should be free to apply whatever level of thoroughness of review they deem necessary to ensure the returns' accuracy. They should not place any more reliance on 1040 Central than they would on any particular member of the staff. Presumably, as their confidence in 1040 Central grows, they will reduce the thoroughness of their review; however, ultimately they are responsible for the accuracy of the returns they sign. Reducing the thoroughness of the signer's review is not principally how the signer's time on the engagement is reduced under the 1040 Central approach. Time is reduced regardless, since the return is more complete and accurate on average than it would have been under the conventional approach. Obviously, this is not always the case. However, it must be remembered that the objective is to achieve overall improvement. Once in place, 1040 Central continues relatively effortlessly in the eyes of its customers year after year.

Coordination of printing, duplicating and assembly

The control clerk, in most offices, should be able to print all returns along with his other duties. Returns should virtually never be printed more than once.

Duplicating and assembly could be performed by the client support group (by delivery in batches by the control clerk) or, alternatively, added as part of the effort in 1040 Central. However, noisy high-production copiers should not be in the same room as 1040 Central engagement personnel. Also, talking should be kept to a minimum.

Prescheduling of client interviews

Prescheduling of client interviews affords the opportunity to change client behavior slightly and in a very advantageous way from the standpoint of work compression late in the season. A cover letter sent with the client's organizer (or under separate cover) should promise efficient service and state a tentative date and time to meet with the client regarding his return. This appointment should be set based on a review of last year's calendar (personal daytimer, etc.) and deliberately adjusted forward by three to seven days. (In subsequent years, further adjustments may be made.) While some will respond by postponing or indicating uncertainty about being ready, a large percentage will accept and keep the appointment. This activity can be handled by the inventory control clerk on behalf of each signer (or other person who will be meeting with the client).

Delegation of client interviews

A factor that contributes significantly to the intensity of member time on 1040 engagements is interview time when the return information is brought in. In-person interviewing (rather than mailing in or dropping off) should be encouraged because this is an excellent time to identify and promote the firm, as well as promote additional service opportunities (e.g., estate planning).

However, interviews do not always need to be handled by members. Return signers should consider delegating responsibility for meeting with 1040 clients not associated with key business clients or whose returns are uncomplicated and there is a staff member whom the client has come to trust. Tax department seniors and managers, as well as more experienced seasonal personnel, make excellent conferees in these cases. If complex issues arise, the conferee can call in the member or other expert as judged necessary.

Billing

Consideration should be given to centralizing billing of 1040s, allowing for better management of 1040 Central's budget. Tentative bills might be developed subject to approval by the return signer. This would assure that early period learning curve write-offs are offset by late period efficient return pick-ups.

Data development

At the end of each 1040 Central engagement, data accumulated during the engagement should be thoroughly evaluated to find opportunities for improvement. A data summary should be prepared that includes the following information by return:

* Date return was received.

* Date return was finished.

* Hours and charges incurred by engagement personnel.

* Hours and charges incurred by nonengagement personnel.

* Processing or other nonlabor expense.

* Amount billed.

From this information, the following matters may be reviewed:

* Average days elapsed time in process.

* Average hours by level of difficulty.

* Member leverage ratio.

* Progress regarding delegation by members (reduction in time spent on 1040s).

* Yield on the engagement, by time frame within season, by member, by preparer and by reviewer.

"You can't manage what you can't measure." This data will be invaluable in continuously improving the process.

Abbreviations Commonly Used in The Tax Adviser

TTA          The Tax Adviser
aff'g        affirming
AFTR2d       American Federal Tax Reports, second
             series (Research Institute of America)
Ann.         IRS Announcement
CB           Cumulative Bulletin
Cir.         Court of Appeals
Cl. Ct.      Claims Court
COBRA        Consolidated Omnibus Budget
             Reconciliation Act of 1985
Cong. Rec.   Congressional Record
DC           District Court
DRA          Deficit Reduction Act of 1984
ERISA        Employee Retirement Income
             Security Act of 1974
ERTA         Economic Recovery Tax Act of 1981
Fed. Reg.    Federal Register
F2d          Federal Reports, second series
F3d          Federal Reports, third series
F Supp       Federal Supplement
GCM          General Counsel Memorandum
H. Rep.      House Ways and Means Committee
             Report
IR           Internal Revenue News Release
IRB          Internal Revenue Bulletin
PL           Public Law
Regs. Sec.   Treasury Regulation
Rev. Proc.   Revenue Procedure
Rev. Rul.    Revenue Ruling
rev'g        reversing
RRA          Revenue Reconciliation Act of 1993
Sec.         Section (refers to the Internal
             Revenue Code of 1986 unless
             otherwise indicated)
S. Rep.      Senate Finance Committee Report
SSRA         Subchapter S Revision Act of 1982
Sup. Ct.     Supreme Court
TAM          Technical Advice Memorandum
TAMRA        Technical and Miscellaneous
             Revenue Act of 1988
TC           Tax Court (regular decision)
TC Memo      Tax Court (memorandum decision)
TD           Treasury Decision
TEFRA        Tax Equity and Fiscal
             Responsibility Act of 1982
TRA          Tax Reform Act of 1986
USTC         United States Tax Cases
             (Commerce Clearing House)