The world of taxation is complex, more so for the small tax firms who handle several clients, pertaining to different tax forms. Tax professionals find themselves at a crossroad as the tax season approaches. The tax forms are a maze, each with its own set of complexity, regulations, and challenges.
Taxation is challenging for the clients as well. With new regulations, procedures, and approaching deadlines, tax firms must maintain absolute clarity with the clients in terms of the dues to be paid to the IRS in the form of dues or penalties. Keeping a constant track of the income and expenses also helps highlight any discrepancies and legal issues.
In this article, Finsmart Accounting – trusted globally for outsourced bookkeeping services – will delve deeper into the nuances of the different tax forms, the complexity that they bring along for small tax firms and their clients, and how these firms can master this tapestry.
Before we get into further details, let us understand the most common tax forms that tax firms deal with:
1. Form 1040: This tax form accounts for individual tax filing in the US. It is the standard document that taxpayers use to report their income, expenditures, investments, and credits. This is the basic determinant of the tax liability.
The key components of Form 1040 includes:
– Income section: This covers wages, business incomes, dividends, and other sources of income.
– Deductions: This is inclusive of both standard and itemized deductions
– Credits & taxes: This helps determine the actual tax liability and applicable credits
– Payments: In this section, the details of tax payments made throughout the year can be found
– Refunds: In this section, the final refund amount is calculated to ensure no extra amount is charged
2. Form 1099: This tax form is a collection of various types of incomes received by individuals other than the regular sources.
The key forms in the 1099 series include:
– Form 1099-MISC: This form helps report miscellaneous income, including freelancing or contractual jobs
– Form 1099- INT: This is the type of form used to report income earned from bank accounts (interests, for example)
– Form 1099-DIV: The distributions and dividends from investments are reported through this form
– Form 1099-R: This form is used to report information or distributions from annuities, retirement plans and pensions
The 1099 series is critical for taxpayers to provide detailed information about their income sources. These forms help in accurate reporting on Form 1040.
3. Form 1120: This is the form used by corporations to report their income, loss, gains, deductions and credits. This category of tax form has several components, which makes it more complex than the individual category.
The key components include:
– Income: This section helps report different types of business income
– Deductions: Salary of employees, rent of the building, depreciation of the vehicle used for business purposes are some of the examples of the deductions under this section
– Tax and credits: This includes the tax liability of the corporation and helps make a note of any applicable credits
Corporations face several challenges when it comes to tax declaration and hence, it is essential to seek support from experts in the field.
4. Form 1065: Also known as the “US Return of Partnership Income”, form 1065 is a fundamental document for partnerships. It is used to report income, deductions, and credits to the tax bureau. Partnerships are pass-through entities, flowing through individual partners, who then report their personal tax returns through this form.
Key components:
– Income and deductions: The form captures sources of income, revenue, gains, losses, and deductions, providing a financial snapshot of the partnership.
– Schedule K-1 distribution: The K-1 distribution is used to outline individual shares of income of the partners. Partners use this information to fulfill their tax obligations.
– Tax credits and details: It is used for the reporting of tax credits and essentials of financial details. It also gives a financial overview of the partnership’s fiscal standing.
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Tips to Handle Clients Based on Different Tax Forms:
While the end goals of all customers are the same – save taxes, the way that needs to be done can vary widely. That is why small tax firms need to understand their clients well. The success of the clients depends solely on the approach that is being taken.
1. The approach: The client onboarding process has to be based on the tax form they abide by. It is key to gather the necessary information efficiently and streamline the tax preparation process accordingly. The tax preparers must also identify the gaps that could be detrimental.
2. Invest in tax software: Your systems should be ready; handling different tax forms and identifying discrepancies should be their key role. The tool should offer automation, consist of e-filing options, and provide real-time updates to reduce errors and enhance efficiency. It is essential to realize how overburdened teams can get during the peak tax season. Efficient software makes lives easier for professionals during such tough days.
3. Specialized staff training: Small tax firms often lack the bandwidth and resources to train their employees. Hiring staff, equipped to deal with a specific kind of tax form, can be easier. Their knowledge and expertise help in completing tasks faster and in an error-free manner. Their hands-on experience with changing regulations also goes a long way in helping clients achieve the goals they deserve.
4. Client segmentation: Clients can be segregated in several ways. Tax complexities within a tax form, approaching deadlines, and the unique needs of the clients are some of the ways clients can be segregated. This segregation helps the tax preparers analyze the complexity of the jobs, prioritization of the tasks, and management of the workload, without panicking.
5. Proactive communication: Clear communication with clients is key to attaining efficiency in tax preparation. Use a channel that works best for you and your clients. Daily updates, work progress, any hiccups on the way, and deadlines are some of the aspects that you can speak about daily. Make sure to give any good or bad news in advance; try to avoid surprises for clients. Make sure you also keep a channel open for the clients to share their feedback, make amends wherever possible, and make sure that they are satisfied. Constant communication also helps avoid last-minute rush and error.
6. Quality control: It is not enough to just seek feedback from your clients, it is equally important to act on them. As a small tax firm, constant improvement is the only way to constant success. Make sure to implement quality control measures as and when needed. Include checklists, conduct regular reviews, and provide information that helps your clients understand you better. Maintaining a certain standard of quality also helps ensure accuracy, compliance, and combat potential issues before they arise.
Challenges of Small Tax Firms in Handling Diverse Tax Forms:
1. Diverse client needs: Small tax firms lack the resources and means to handle diversity in business. Training, hiring, and rehiring are constant challenges that they deal with. Managing client expectations and their diverse demands is a challenge in themselves.
2. Regulatory challenges: The tax system in the US is extremely volatile. It needs the team to remain abreast and constantly deal with the changing regulations that affect the clients. Continuous education and participation in industry events are some of the necessary tasks to keep up with the evolving laws. However, the small tax firms often do not have the means to keep up.
3. Software costs: While small tax firms might be aware of the need for software that helps in automation, there is always a capital constraint. This leads them to work manually, spend more time on repetitive tasks, and end up making errors. Often small tax firms also end up choosing software that does not meet the requirements to save money.
4. Staff training: One of the major challenges that small tax firms face is that of staff training. The talent shortage is a known issue and the problem of staff training is closely associated with that. For small tax firms, spending time, resources, and money on constant training can be incredibly difficult, which pushes them a few steps behind.
The Solution:
Most of these challenges are recurring and persistent for small tax firms. No matter how much they try to pull themselves up, it is often extremely difficult to keep up with all things new. As a result of these shortcomings, tax firm leaders find themselves at a crossroads where they struggle to meet deadlines, stick to the regulations, and help their teammates maintain a balance. Although this might seem to be a serious problem and it is, there is a solution – outsourcing. By outsourcing tax tasks to experienced partners like Finsmart Accounting, small tax firms can get access to the best-in-class professionals who are adept in different tax forms, a team that doesn’t need constant training, and those who have already been using software for automation. The best part is that they understand the tax landscape in a way that does not let your clients face the torment brought on by sudden changes in regulations. It also doesn’t overburden your internal team during tax season, enabling them to focus on more important jobs.
It’s time to let your tax woes go! Partner with Finsmart Accounting and get the most out of the partnership.
Write to us at connect@finsmartaccounting.com for more questions.
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Director Growth Strategy & Alliance
Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.
