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Tax & AccountingApril 23, 2020

2020 Tax Season in Data: 04/20/2020

The simple definition of momentum is “mass in motion.” All objects have mass, so if an object is moving, then it has momentum - it has its mass in motion. The amount of momentum that an object (“it”) has is dependent upon two variables: how much and how fast “it” is moving.

Now that we have passed the original April 15th filing deadline, and face extended deadlines falling between now and July 15th, how well are firms maintaining and gaining momentum?

In reviewing the data (for the period ending 04/20/2020), we can see that overall momentum is continuing to lag. Firms of all segment sizes and filing levels continue to fall behind their 2019 tax season metrics, with varying degrees of severity. Certain filing types and firm segments are experiencing more pronounced fluctuations than the national average – two of those are called out below.

As always, I hope that this information helps you make data-driven decisions.

Our Data Source

Before we start, I want to share what data drives the Tax Season in Data. These reports are the results of millions of unique tasks processed through the XCMworkflow system annually. We leverage the resulting data points to obtain insight into the pace of filing seasons. Our customers, who receive these types of analytics during the tax filing season, have told us that one of the more significant benefits they receive from the data is when they compare their firm against the pace of the national average or similar-sized firms.

Utilizing XCManalytics, I have compiled this years’ data for 1040, 1065, and 1120-C returns, benchmarked against 2019 returns to provide the tax community with insights into the pace of the 2020 tax season.

Individual Tax Returns (1040)

We can see from the chart that firms are continuing to fall behind prior seasons, with over a 21-point difference between returns not started in 2019 and 2020. This increasing gap between year-over-year national averages is, once again, not surprising. Firms and their clients are taking advantage of extended tax deadlines. However, some progress is being made as completed returns have jumped over 10% since our last report (period ending 04/01/2020).

I expect the national average pace to pick up over the next few months, but caution firms to maintain focus on these returns between April and July, as well as on maintaining consistent client communication to ensure that the necessary documents are received.

One highlight from our most recent set of data comes from CPA firms with 10-20 employees (chart below).

These firms have been managing their customers well and are performing better than the 2020 national average across the board. Their completion rate and in-process rates are 7.1% and 3.3% higher (respectively) than the national average, and the average not started rate is 3.6% lower.

By communicating with clients, these firms have been able to identify and target clients who needed to file an extension or take advantage of the July 15th filing deadlines, and utilize that data to focus on completing their in-process return inventory at a consistent pace.

July will bring a new mix of challenges. There is a potential triple threat of remaining tax payments, and payments of both first and second quarter estimated taxes. Firms MUST communicate with their clients about these potential challenges in advance to avoid a potential shock come July.

Moving onto partnership (1065) returns, the trend in 1040 filings is echoing here, though not as severely as 1040 filings. I am encouraged to see that only completed returns show a more than 5% difference between the 2019 and 2020 filing seasons.

Though the backlog of returns not started has decreased, dropping 3.5% since our last report, the difference between the 2019 and 2020 filing seasons has increased slightly, going from 3.8% to 4.3% between the two periods. Similarly, while the percentage of completed returns for the 2019 filing season has increased, the gap between the 2019 and 2020 filing seasons has grown 4.5%, from 1.6% for the period ending 04/01 to 6.1% for the period ending 04/20.

This increasing drop in productivity leads me to believe that firms are finding it difficult to coordinate the data collection and documentation gathering necessary to complete these returns efficiently. Distancing challenges may be bringing new obstacles in information organization. As firms run out of pre-preparation work that can be completed in advance, we may see this gap widen further. I cannot emphasize enough the importance of clear lines of communication between the firm and clients.

I will also reiterate my recommendations from the 04/01 analysis that, absent the opportunity for advance preparation, firms perform a forecasting exercise to plan the most effective resource allocation. Prior years’ activity, accurately extrapolated against this extended season, can help you line up resources and ensure you have capacity when work comes in the door.

Corporation Returns (1120 C)

Rounding out our data, we take a look at the XCM national filing pace for 1120 C Corporations. 

For this period, the 1120-C returns are a bit of a mixed bag. On the one hand, all four measurement points are showing positive period-over-period growth. The national average for in-process returns are on par with the 2019 filing season, and NC returns are lower for the 2019 filing season than they were for the 2019 filing season.

However, we also see an increasing gap between filing seasons for returns not started (10%, up from 7.8% last period) and completed returns (8.8%, up from 4.2% last period). And while in-process returns for 2020 is on par with the 2019 data, that is largely because the 2019 data dropped 3% period-over-period. There was only a 0.3% growth in 2020 in process returns since 04/01/2020. Part of that can be attributed to returns being completed. However, I believe that a lack of client data is causing return backlogs.

One segment that is showing this very distinctly is the 20-50 person segment. They are falling behind the national average pace and own their year-over-year pace faster than the national average (as can be seen in the chart below).

This segment traditionally is on a faster track than the national average. For the 2020 filing season, returns being completed is showing an 11.2% year-over-drop, which is a very sharp decline. This firm segment may be experiencing work from home challenges.

Firms in this segment may benefit from reviewing processes to identify where they can be streamlined and optimized to increase productivity on the employee or client service level. In conjunction with clear communication, streamlined processes could help regain some of the momentum lost.

Our remote team managers recently provided some of their communication tips for successfully managing a remote team to increase productivity and employee buy-in.

Concluding Thoughts

I said in the 04/01/2020 update that as firms continue to work remotely, we will gain additional insights into how the national leaders are optimizing business processes and harnessing the collective power of automation to serve their customers. It’s safe to say that we are seeing the impact in these most recent numbers.

Those firms who implemented workflow and automation technology tools prior to COVID-19 seem to have felt the impact of shelter in place and work from home orders the least. Similarly, firms that streamlined and modified processes early on have since begun to pick up speed. As more firms continue to optimize their work from home processes, I expect to see the filing pace continue to increase.

One question that remains is how firms under severe movement and business restrictions will obtain client documentation. Every firm has those clients who prefer to drop off stacks of paperwork, and under current restrictions, that may not be possible. The office isn’t open to accept documents via mail or in-person drop-off, and fax machines and flatbed scanners are no longer standard home office supplies. This inability to obtain the necessary documents may restrict firms’ ability to complete returns. I look forward to seeing how firms adapt and overcome this challenge.

Click through to read the 05/04 update, and stay safe, stay healthy, and stay productive.

Mark McAndrew
Mark McAndrew, Author at Tax & Accounting

As the Director of Project Management for Firm Management (FM) at Wolters Kluwer, Mark focuses on the vision and strategy of all FM products and delivering customer and shareholder outcomes within the FM solutions set. Mark has extensive experience within both the Fortune 1000 and large public accounting firm spaces. He is a frequent speaker on business process management and workflow advisory consulting, tax and accounting outsourcing, and productivity enablement software deployments.

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