Tailor-Made Tax Practice Quality Controls presented at the West Michigan Tax Symposium

Tax Section 1#AICPAtax

Tailor-Made Tax Practice

Quality Controls

Presented by:

Jina Etienne, CPA, CGMA

Director – Taxation, AICPA

Tax Ethics & Standards | AICPA Tax Section

West Michigan Tax Symposium November 12, 2014

Tax Section 2Tax Section #AICPAtax 2

Today’s Agenda

Quality Control Standards

Elements of a Quality Control

System

Considerations in Designing a

QC System

Unique Challenges for Solo

Practitioners & Small Firms

Questions

See Resource Appendix for additional information not included in the live

presentation, such as products, resources, hyperlinks and other information.

Tax Section 3Tax Section 3#AICPAtax

Quality Control

Standards


Quality Control Standards

AICPA Code of Professional Conduct

AICPA’s Statement on Quality Control Standards

(SQCS) No. 8, A Firm’s System of Quality Control

Yellow Book, Generally Accepted Government

Auditing Standards

PCAOB

Circular 230, §10.36

State Board of Accountancy rules and regulations

http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/QC-00010.pdf


Firmwide Quality Control

AICPA has longstanding and

well-established principles of

quality control regarding a firm’s

accounting and auditing practice

SQCS objectives

• Compliance

• Appropriate work product


Professional Liability Implications

Lack of experience in industry or client operations

Lack of knowledge or qualifications

Lack of independence

Conflict of interest

Poor supervision and review


Relevance for the Tax Practitioner

Assists compliance with

• Statutory and regulatory requirements

• Professional standards

Minimizes the risk of professional

liability

Required by Circular 230

A best practice for all sizes and

types of tax practices


Tax Practice Quality Control System - Defined

Purpose is to provide

reasonable assurance of

compliance with applicable

statutory, regulatory, and

professional requirements

Consists of organizational

structure, policies, and

procedures

Evidenced by Tax Practice Quality Control document


Elements of a Quality Control System

Leadership responsibilities

Ethical requirements

Acceptance of client relationships

Human resources function

Engagement performance

Monitoring of QC system


Factors that Influence QC System

Practice

size?

Number of offices?

Degree of

authority

granted?

Knowledge and

experience?

Nature of

practice?

Specialties?

Other factors?

Cost-benefit

considerations?

Practice

areas?


Elements of a

Quality Control System


Leadership Responsibilities

Assume ultimate responsibility

Quality of work overrides profits

Appropriate experience and authority

Clear and continuous communication

Dedicate sufficient resources

Demonstrate commitment to the QC system


Ethical Requirements

Adherence to all applicable laws, regulations, and

professional standards

Communication of firm policies and procedures

Documentation of compliance


Acceptance of Client Relationships

Evaluate prospective clients

Determine if the firm has the necessary capabilities

and resources

Document the understanding with the client

Periodically re-evaluate the client relationship


Human Resource Function

Hiring program

Assignment of personnel to engagements

Continuing education program

Qualifications for advancement

Evaluations


Engagement Performance

Engagement plan

Supervision and review

Compliance with QC system standards

Communication of results to client

Documentation of results and of their

communication to client

Use of consultants

Procedures to resolve differences of opinion

Tax practice documents


Monitoring of QC System

Document compliance with QC system

Establish an inspection program

Evaluate compliance

Assign monitoring responsibility

Provide a process for client complaints


Quality Control Materials

Quality Control Policy (written)

• Summarizes and communicate QC policies and procedures

• Ensures delivery of quality services to clients

Tax Procedures Manual

• Details procedures and related forms, checklists and worksheets

• Streamlines the administrative aspects of practice

Voluntary Tax Practice Review (optional)

• To assess the quality of the QC system

• Internal self-assessment vs. firm-on-firm review


Tax Procedures Manual

Sets expectation to follow established procedures

• Provides a benchmark assessing internal compliance with firm’s

QC requirements

Should be written

• Included as an appendix in the firm’s tax practice quality control

document

Make it accessible to all firm personnel

Review and update periodically

Include in firm training

• New hire training

• Annual busy season preparation


Sample Quality Control Documents

AICPA’s Tax Practice Quality

Control Guide*

Different samples for three different

practice models

• Sole Practitioner CPA Firm with Limited

Staff

• CPA Firm Without a Structured Tax

Department

• CPA Firm with a Structured Tax

Department

Each is based on the six elements

*See Resource Appendix for links


Sole Practitioner

The sole practitioner sample document contains

general parameters for operating a tax practice and

establishes the basic foundation of preferred

practices for a sole practitioner’s tax practice.

Assumes one owner, with or without employees.


Sole Practitioner, continued

The owner has overall

responsibility the QC system

Employees may assume varying

degrees of responsibility for

aspects of the QC system

Challenges for the solo owner

• What is “leadership” in a solo practice?

• When to seek outside counsel or

consultants?

• Process to investigate client complaints


Firm Without a Structured Tax Department

The sample document for a local CPA firm

Concentration is on establishing

responsibilities for tax matters within the

firm, and addresses some specialization

within the tax area

Presumed to be a mid-sized firm

Notice the a differentiation in “partner”

titles

• Tax “partner in charge” has overall responsibility

• Other partners or staff may assume varying degrees

of responsibility for different aspects of the system


Firm With A Structured Tax Department

This sample document contains detailed policies

and procedures that commonly exist in firms with a

separately structured tax department.

Added a new partner title: “administrative partner”

• Others to consider: “risk partner” or “QC partner”

Tax partner in charge has overall responsibility

Other partners or staff may assume varying degrees

of responsibility for different aspects of the system


Considerations in

Designing a QC System


Commitment to quality

Establish and maintain

policies and procedures

Communicate

expectations

Talk about it with clients

Adapt procedures

based on resources

Articulate your value to

clients and prospects

Leadership Responsibilities


Awareness of relevant

standards

Anticipate “sticky

spots”

Avoid surprises

License, Circular 230,

and memberships or

associations

Specialized guidance

available

Set expectations

Ethical Requirements


Examples of Ethical Requirements

Tax return reporting standard

Confidentiality of client information

Conflicts of interest

Due diligence

Knowledge of client’s error

Contingent fees

Written tax advice


Know what to ask

Define your process for

each situation

Know when to say no

Know when to walk

away

Balancing Independence & Advocacy


Client Acceptance Procedures

Identify risks

Develop firm portfolio of services

Develop desired client profile

Require approvals

Suggested Tools and Procedures:

Prospective client questionnaire

New Client Acceptance Forms(different for each type of client)

Minimum fees & fee worksheets(for complex engagements)


Evaluating Integrity

Open and honest communication with management

Talk to predecessor accountant

• Rationale for changing firms

• Changes in ownership/ownership disputes

For larger clients & business entities

• Background checks on management

• Verification of applicable licensing/registration requirements

• Management experience


Other Acceptance Considerations

Compliance history?

Ability to pay?

Relationships with others?

• Clients

• Colleagues

• Family

• Friends

Conflicts of interest?


Conflicts of Interest

Look closely – many potential landmines

Joint returns

• Divorce or separation

• Communication limited to one spouse

• Only one spouse signs engagement letter

Business returns

• Prepare returns for pass-through entity but only one owner

• Entity-level tax recommendations that impact your client’s

personal return but you do not prepare returns for all owners

IRS examinations

• You recommended a position that is now under review by IRS

• Client questions a position raised in an exam


Procedures to Address Conflicts

Provides clarity for staff on how to proceed

• Does an actual or potential conflict of interest exist?

• Can I remain objective?

• Can the potential or actual conflict be waived?

Resources for guidance

• AICPA, IRS and state CPA society

• Attorney

• Applicable standards, laws, rules, and regulations


What about long-time clients?

Perform a periodic evaluation (annual?)

No “one size fits all” approach

Two common triggers for evaluation

• Change in client or firm circumstances

• Problematic clients

Continually assess & reassess risks

• Changing circumstances (internal vs client)

• Avoid risk (client termination)


Terminating clients

Workpaper documentation

Approaching deadline

Use termination letters

• Factual and concise

• Avoid documenting the reason

• Traceable delivery method

• Termination letter elements

Cease providing services


Human Resources Function

New! Circular 230 §10.35, Competency

• A practitioner must possess the necessary competence to

engage in practice before the IRS.

• Competent practice requires the appropriate level of knowledge,

skill, thoroughness, and preparation necessary for the matter for

which the practitioner is engaged.

Be slow to hire and quick to fire

Consider engagement assignments

• Evaluate returns to determine proper staff or support role

Require annual CPE + ongoing learning

Annual review + ongoing informal feedback


Do You Have a Hiring Program?

Four phases of the employment process

• Recruitment

o Job characteristics

o Minimum education, skills & training

o Personality (firm culture)




• Recruitment

• Selection

o Identify key questions to ask about experience or education

o Watch for “Red flags”

− Employment gaps

− Jobs left off resume

− Only years listed, not months or specific dates




• Recruitment

• Selection

• Placement

o Define your onboarding program

o Establish expectation of quality from the start

o Include quality control manual as part of initial training




• Recruitment

• Selection

• Placement

• Retention

o Ongoing training should reinforce commitment to quality and

reinforce QC procedures

o Provide ongoing feedback – both formal and informal


Engagement performance

Define your workflow

Know when to ask for help

Use tracking forms, logs, or control sheets

Document all client communications

Develop a network


Use Engagement Letters

Circular 230§10.33, Best Practices for Tax Advisors

• Clearly communicate the terms of the engagement

• Documentation is recommended

Why use engagement letters?

• Clear understanding of expectations

• Minimize risk of disputes regarding scope and fees

• Key exhibit when defending a professional liability claim

Clearly define client vs. CPA responsibilities


Key provisions

• Scope of services

• Limitations of services

• Client and CPA

responsibilities

• Deliverables/work product

• Timing

• Fees

Other considerations

• Avoid “evergreen”

engagement letters

• Unilateral letters

• Review engagement

letters with clients

• Attorney review

Engagement Letter Do’s and Don’ts


Establish procedures to document client

representations

• Require clients to complete and sign questionnaires on key

issues (e.g., Foreign Account Reporting Information Form

and/or Questionnaire)

• Use customized forms to document client understanding and

compliance (e.g., Travel & Entertainment Disclosure Statement)

Must consider all forms of written advice

• Internal memos

• Email – internal messages and email to/from clients

• Mobile communications – texting and instant messaging

• Social media – do you have a written policy?

Managing Client Communications


3rd Party Requests for Tax Information

Traditional requests pertain to loans to clients

Nontraditional requests

• Employment or citizenship status

• Number of employees, “full-time” status or other information

relevant to worker classification

o May emerge in 2014 re: “play or pay” provisions under

Affordable Care Act

• Information pertinent to:

o Sales and use tax

o Qualification for government programs or matching funds

o Tax exempt status


Application of §7216

Must obtain taxpayer consent for each separate

disclosure or use

May be attached to an engagement letter

See§301.7216-3(c)(1) for special rules

• Obtaining multiple disclosures to either:

o Consent to multiple uses within the same document

o Consent to multiple disclosures within the same document

o Cannot authorize multiple types in the same document

• Consent to disclosure of all information in an entire return


Monitoring of QC system

Reassess annually to adapt for growth and shifts in

technology

• Assess operating effectiveness of policies and procedures

• Assign monitoring to qualified individuals

• Address deficiencies

Suggested Procedures:

Document complaints and steps taken to

address them

Post-tax season wrap-up meeting

Quality control inspections


Unique Challenges for Solo

Practitioner & Small Firms


Sole Practitioner Challenges

Balancing roles

• Running the business

• Doing the work

• Quality control

Planning for growth

Maintaining focus

Adapting QC elements that contemplate multiple roles:

Redefining “leadership” in a solo practice

Know when to ask for help

Limit scope of services to minimize risk


Service Standards & Guidelines

Develop a targeted turn-around time for returns

Deadline for submitting information to file by 4/15

Define processes for:

• Managing extensions

• Tracking missing information

Create guidelines for balancing competing priorities,

for example:• All work is FIFO, with defined exceptions (e.g.,

top 5% always take priority?)

• Temporarily eliminate all non-tax services for a

define period during busy season (e.g.,

between 4/1 and 4/15?)


Manage Your Schedule

Define busy season office hours

• Allow time for breaks and family

• Create a work-free day

• Make Fridays a “normal” work day (e.g., don’t work late)

Manage client appointments

• Defined days for evening appointments (e.g., Tuesdays only)

• Limit times for Saturday appointments (e.g., 8am to noon)

• Set an appointment-free day (e.g., no appointments on

Wednesdays)

Plan for administrative tasks

• Set aside an “admin” day

• Reserve a particular time of day for admin (e.g., after lunch)


My “Box” System…

Received Prepared

Missing

Information

- Assembly- Delivery- File

When I first started my practice…

All firms have a system that includes

these processes…

FIFO3 Day Hold


True “solo” practice

• Build in additional time for

self review

• Use worksheets to create

check-totals

• Use logs and tracking

reports

Small firm environment

• No self review

• Consider an intern for basic

data entry

• No data entry by staff that

perform reviews

Adapt Workflow Based on Resources


Create Support Network

Create a go-to resource list

• Online discussion groups or listserv

• Online sources for technical

information

Find a trusted advisor, mentor,

or colleague

Develop a network for technical support

Establish relationships with related professionals

(e.g., attorney, banker, and financial advisor)


Consultants & Part-Time Staff

Outsource complex, specialized, or

time-consuming work or projects

Consider hiring part-time positions

during filing season

• Remote staff (requires proper technology)

• Adapt procedures to account for training and

supervision

Push down/automate routine tasks

• Leverage portals instead of sending documents to clients

• Open your calendar so staff can schedule appointments


Documenting Your Procedures

Whiteboard your process

Draw a flow chart for each

procedure

• Technical (e.g., preparation, review)

• Administrative (e.g., billing, assembly)

Get input from staff, all levels

Start with a template

• See resource appendix

• Consult insurance carrier

• Firm networking groups


Questions


Jina Etienne, CPA, CGMADirector – Taxation, AICPA Tax Section | Tax Ethics & Standards

1455 Pennsylvania Ave, NW, Washington, DC 20004

Direct: 202-286-0448

@MissTaxCat

https://www.linkedin.com/in/etiennejina

https://twitter.com/MissTaxCat

https://www.linkedin.com/in/etiennejina


Resource AppendixThese slides have been included as supplemental information only. They may be referenced during the presentation but will not be included in the live presentation.


Book Recommendations

The E-Myth RevisitedWhy Most Small Businesses Don't

Work and What to Do About It

The Checklist Manifesto: How to Get Things Right

http://smile.amazon.com/The-E-Myth-Revisited-Small-Businesses/dp/0887307280/ref=smi_ge_rl_btns3_setch?_encoding=UTF8&*Version*=1&*entries*=0&ie=UTF8&pldnNew=1

http://smile.amazon.com/The-E-Myth-Revisited-Small-Businesses/dp/0887307280/ref=smi_ge_rl_btns3_setch?_encoding=UTF8&*Version*=1&*entries*=0&ie=UTF8&pldnNew=1

http://www.amazon.com/Checklist-Manifesto-How-Things-Right/dp/0805091742

http://www.amazon.com/Checklist-Manifesto-How-Things-Right/dp/0805091742


AICPA Product Recommendations

Managing Your

Tax Season

File In Time Due date tracking and task

management software

10 Steps to a Digital

Practice in the Cloud: New Levels of CPA Firm

Workflow Efficiency

http://www.cpa2biz.com/AST/PricingStructureAssortments/Student/Pricing_Student/PRD~PC-090488/PC-090488.jsp?selectedFormat=Paperback

http://www.cpa2biz.com/AST/PricingStructureAssortments/Student/Pricing_Student/PRD~PC-090488/PC-090488.jsp?selectedFormat=Paperback

http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/Tax/Compliance/PRDOVR~PC-016158hs/PC-016158hs.jsp?selectedFormat=Software

http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/Tax/Compliance/PRDOVR~PC-016158hs/PC-016158hs.jsp?selectedFormat=Software

http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/InformationManagementTechnologyAssurance/PRDOVR~PC-PTX1204/PC-PTX1204.jsp

http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/InformationManagementTechnologyAssurance/PRDOVR~PC-PTX1204/PC-PTX1204.jsp


AICPA Member Resources

Tax Ethics & Professional Standards resource page

• General guidance

• Tools & resources

• Learning & articles

Circular 230 resource page

• General guidance

• Tools & resources

Statements on Standards for Tax Services

• Interpretations

• Frequently Asked Questions

http://www.aicpa.org/INTERESTAREAS/TAX/RESOURCES/STANDARDSETHICS/Pages/default.aspx

http://www.aicpa.org/INTERESTAREAS/TAX/RESOURCES/STANDARDSETHICS/TREASURYDEPARTMENTCIRCULARNO.230/Pages/default.aspx

http://www.aicpa.org/INTERESTAREAS/TAX/RESOURCES/STANDARDSETHICS/STATEMENTSONSTANDARDSFORTAXSERVICES/Pages/default.aspx


Tax Section Member Resources

Tax Practice Quality Control GuidePractice guide outlining on how the Statements on Standards for Tax Services affect the

tax practice quality control systems for certified public accountants in public practice.

“Navigating the Sticky Spots: Calibrating Your Ethical

Compass” PowerPoint slidesPresentation slides from the Nov. 2013 AICPA webcast

Annual Compliance KitOur comprehensive annual bundle of resources (e.g., checklists, engagement letters,

organizers, etc.) to assist with return preparation, review, and delivery.

Throughout the tax interest area of the AICPA website, this symbol identifies tools and resources

available exclusively for Tax Section members. When accessing premium member-only content within

the Tax Resource Library, members will be prompted to enter their user ID and password to validate

their Tax Section membership. Not a member? Learn more about these premium resources along with

the many other benefits of membership in the AICPA Tax Section.

http://www.aicpa.org/InterestAreas/Tax/Resources/practicemanagement/DownloadableDocuments/TPQC_Guide_Published02152013.pdf

http://www.aicpa.org/InterestAreas/Tax/CPEAndEvents/DownloadableDocuments/2014-06-12 Navigate Your Way Through 10 Top Tax Techniques Presentation Slides.pdf

http://www.aicpa.org/InterestAreas/Tax/Resources/TaxPracticeImprovement/Pages/default.aspx

http://www.aicpa.org/InterestAreas/Tax/Pages/TaxHomepage.aspx

http://www.aicpa.org/INTERESTAREAS/TAX/MEMBERSHIP/Pages/TaxMembership.aspx


Tax Practice Quality Control Guide

Contains samples for three different

practice models

• Sole Practitioner CPA Firm with Limited Staff

• CPA Firm Without a Structured Tax

Department

• CPA Firm with a Structured Tax Department

Throughout the tax interest area of the AICPA website, this symbol identifies tools and resources

available exclusively for Tax Section members. When accessing premium member-only content within

the Tax Resource Library, members will be prompted to enter their user ID and password to validate

their Tax Section membership. Not a member? Learn more about these premium resources along with

the many other benefits of membership in the AICPA Tax Section.

http://www.aicpa.org/InterestAreas/Tax/Pages/TaxHomepage.aspx

http://www.aicpa.org/INTERESTAREAS/TAX/MEMBERSHIP/Pages/TaxMembership.aspx


§7216 Resources

AICPA Tax Section’s Section 7216 Consent Forms

Practice Guide

IRS Section 7216 Information Center web page

http://www.aicpa.org/InterestAreas/Tax/Resources/IRSPracticeProcedure/default/DownloadableDocuments/7216-Guide-7.16.13.pdf

http://www.irs.gov/Tax-Professionals/Section-7216-Information-Center


§7216 Consent – Form & Content

See Rev. Proc. 2013-14

Paper format must be on 8 ½ x 11 paper, and:

• All text must pertain solely to the disclosures or use

• All text on the sheet must be at least 12-point type

Electronic formats must:

• Be provided on one or more computer screens;

• Provide text on the screen related to the specific disclosure or

use to be authorized by the consent;

• Be of normal or standard body text for that website with

sufficient contrast between the text and background colors;

• Be able to be signed and dated by the taxpayer; and,

• Be formatted in a readable and printer-friendly manner.

http://www.irs.gov/pub/irs-drop/rp-13-14.pdf


Disclosures Not Requiring §7216 Consent

Provided in Regulation §301.7216-2

Disclosures not required

• Made pursuant to any other IRC provision or to an IRS

employee

• Different offices of the same firm

• Related family members* (with taxpayer’s consent provided

there is no conflict)

• Attorneys for purposes of securing legal advice

• Officer of a court for proceedings involving the tax return

preparer or client

*Per definition of related taxpayer under §301.7216-2(e)(2)


§7216 Rules Regarding Newsletters

Regulations allow tax return preparers to compile

lists for newsletters

Lists may contain:

• Name, addresses, email address and phone number

• Entity type and tax form number

May be used to provide tax information, general

business information or analysis, or solicit

additional tax preparation services

May NOT:

• Solicit products or services other than tax return preparation

• Sell or transfer the list, except as part of the sale of the business

Tailor-Made Tax Practice Quality Controls presented at the West Michigan Tax Symposium

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