As discussed in my last update (for the period ending 04/20/2020), we see positive movement on the national filing pace. Completed returns have increased by 5.1% since 04/20, and firms are slowly (very slowly) closing the gap on returns not started. A lack of customer information, or perhaps more accurately, general customer engagement, is no doubt continuing to hinder progress, and causing the large gap between the 2019 and 2020 returns not started filing pace. As states begin to explore safe ways to begin operations, and firms continue to adopt technology to obtain the necessary information, this gap should continue to decrease.
2020 Tax Season in Data: 05/04/2020
Yogi Berra once said, “If you don’t know where you are going, you’ll end up someplace else.” It’s a funny quip, one of those sayings that, on the one hand, doesn’t make much sense but, on the other, makes all the sense in the world. If you don’t know in advance where you want to be, how will you get to where you want to go? It seems like a reasonable concept, but when the course you plot changes, how will you react?
As we reviewed the data for the third installment of the tax season in data (for the period ending 05/04/2020), we are seeing Yogi Berra’s quote in action. The data tells us how firms are reacting to the changes brought on by COVID-19, and in general, that data is… neutral. There are a couple of highlights in filing segments, which are discussed below. There are also a couple of firm segments performing below not only their 2019 filing pace but also below the 2020 national average, also discussed below.
New for this installment is a segment spotlight, where I discuss one segment in a little more detail. Today's focus: 1040 filings for firms with 500-999 employees.
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)
Partnership returns are continuing to make progress in catching up with the 2019 national filing pace, with improvements all around. Especially heartening is that 2020 completed returns are only 4.6% behind the 2018 season (down from 6.1% behind in our last update). With the completed returns gap between the 2019 and 2020 seasons growing from 04/01 to 04/20 (from 1.6% to 6.1%), there was a concern that productivity was dropping. It is too soon to say if this decrease means that firms are finding effective ways to coordinate data collection and documentation.
Firms that followed my advice in the 04/01 and 04/20 updates to utilize forecasting exercises and plan efficient resource allocation should be utilizing that model to plan through the summer.
One segment that caught my eye is firms with 250-499 employees. Partnership returns being filled by this segment don’t seem to be impacted by any season trend (see graph below).
As can be seen above, work is being prepared, reviewed, and filed at a continuous pace as compared to prior seasons. This may be attributed to the timing of the national reaction to COVID-19 occurring in close proximity to the March deadline. Much of the work that was going to be completed before the deadline was already completed, and extensions filed. Firms of this size most likely already had technology solutions implemented, providing them with a more seamless transition to work from home than those firms that did not.
Corporation Returns (1120 C)
Corporate (1120-C) returns are showing the least amount of progress in closing the filing pace gap. In general, the 2019 and 2020 gap remains within a percentage point of the gap measured on my last analysis. The only measurement point that showed movement of more than a point was returns not started; the gap shrunk from 10% to 8.8%, a 1.2% drop.
One positive light in corporate returns is the 100-249 segment (graph below). We first looked at this segment in the 04/01 update and noted that they were outpacing the national average.
While the filing pace for this segment is still behind the 2019 filing pace, firms in this segment continue to outpace the 2020 national average, except for returns in progress, where they are 0.6% behind the 2020 national filing pace. And while they are no longer ahead of their 2019 filing pace for completed returns, they are 15.9% ahead of the national filing pace for 2020.
I am curious how this segment is outperforming the national average year over year; possibly because they are large enough to experience some version of economies of scale while being small enough to remain agile and adapt to change quickly.
In our new segment spotlight, we’re looking at the 1040 filing pace for firms with 500-999 employees. These large firms are showing a distinct downwards trend in their filing pace. In addition to falling significantly the 2019 filing pace for their segment, they are also behind the 2020 national average filing pace. For returns not started, they are 17% behind their 2019 filing pace, and 8.2% behind the national average filing page.
This significant backlog of returns not started can be attributed to several things. In addition to being affected by the industry-wide lack of incoming client data, decreased client engagement, and reduced staffing, these larger firms may not have been able to react to work from home and shelter-in-place orders with the same agility as some of the smaller firms, purely due to size.
The 17% difference between the 2019 and 2020 filing paces may also be due to extensions not being filed. During a typical tax season, these extensions would have been filed prior to April 15th; the extended filing deadline means that the pressure to complete these extensions is not yet felt. By moving those extensions through the pipeline now, firms can reduce some of their late-season compression and workload challenges.
We also know that many firms in this segment utilize outsourcing as a complement to their staff during busy season. Outsourcing partners have also been affected by COVID-19, with shutdowns in India and other overseas outsourcing hubs affecting capacity. Some outsourcing partners were able to implement business continuity plans and continue to support firms, at full or partial capacity. Others were not able to process returns while maintaining the necessary security to protect confidential client data, requiring firms to pause or cancel their contracts. Firms who previously had access to resources other than their employees are now suffering from a lack of capacity to process the returns previously outsourced. As restrictions overseas begin to ease, firms should have a conversation with their outsourcing partner around capacity and return to work dates.
The overall theme of the data from this update seems to be, “hurry up and wait.” Wait and see if the 04/20 data was a fluke, and our next update will show greater positive changes. Wait and see if the limited relaxation of social distancing guidelines by some states has an impact on the flow of client data. Wait and see if firms will take advantage of extended deadlines to spread out the workload, or if the same compression issues that we usually see in March / April will be pushed to June / July.
With the highest percentage of completed returns sitting at 41.7% across all filing types, most firms have more than 60% of their workload yet to complete over the next 3.5 months. During the month of May, firms still have an opportunity to gauge capacity and allocate their workload to avoid late-season compression issues. As states begin to discuss allowing businesses to reopen with limitations, we may see the filing pace pick up, as the necessary client information begins to trickle in. Firms should not depend on this, though, and continue to implement technology to enable productivity as well as consider resuming business practices such as outsourcing to maintain and increase momentum.
Click through to read the 05/20 update, and stay safe, healthy, and productive.