Tax Optimization: How to Make Your Firm Digital by Default

One of the few silver linings during this pandemic has been the accelerated adoption of technologies and processes that allowed employees to work effectively regardless of location. Successful firms used…

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Last Updated September 1, 2023


One of the few silver linings during this pandemic has been the accelerated adoption of technologies and processes that allowed employees to work effectively regardless of location. The firms that were successful working remotely utilized digital solutions to not only move and access information electronically but also to collaborate virtually.

By default, those firms utilized digitized applications either to natively capture data electronically or transform physical documents into a digital format at the earliest “root” source opportunity so that it could be accessed by anyone on their computer regardless of where they were working.

To work optimally with personnel in remote locations, all files must be digital by default.

One of the key benefits of “digital by default” is that documents received digitally have a custody trail when delivered via a portal or secure email that allows those documents to be re-accessed in their original form, which can be difficult with physical documents (and must be physically returned back to the client at completion of the engagement).

We’ve heard more than once that a client believed a missing document “was in the stack I sent you.” We’ve also seen firms continue to move those physical client source documents through the tax process to the preparer and reviewer, because they were “not sure that all the documents were properly scanned.” (Something that, by the way, would be almost entirely eliminated with digital ingress and proper quality control at the scanning level).

Additional benefits of “digital by default” are that the files can be backed up and secured by the firm’s applications, which again is difficult to do with physical files exposed throughout the office or in transport to someone’s home during the tax production cycle.

So where should firms look to be “digital by default?”  Below we outline seven processes that should be on every firm’s radar.

Engagement Letter: One of the first processes to digitize is the delivery of the engagement letter.  For firms sending out organizers, the engagement letter can actually be incorporated into the cover letter of the organizer and written with a negative confirmation (i.e.: by virtue of you providing your source documents, you agree to the terms of this letter). For standalone engagement letters beyond 1040s, they can be either emailed to the client with an integrated signature tool (i.e. RightSignature, Adobe Sign, DocuSign, TR or CCH eSignature, etc.) or placed in a portal with client notification and returned through the portal.

Modern Portal: Formally training clients to utilize the firm’s portal to transfer files to/from the firm should be a priority this busy season and creates a safer environment for both the client and firm personnel (specifically taking COVID into account). Modern portals are not only “secured file drawers on the Internet,” but also have the capacity to integrate PBC (provided by client) lists, status dashboards, and client reminders as part of an automated digital workflow within that application. These features are being replicated by the major accounting software vendors into their portals and firms should evaluate how integration with tax, document and workflows tools can be optimized to minimize human interaction and potential errors.

Standardized Source Documents: While many “paperless” firms scan source documents at the completion of the tax process to store digital copies, the real benefit to firms is doing so at the front end in a firm standard format. Pushing the scanning to the front end allows source documents to be immediately accessed from any location for both preparation and review. Today’s scanning tools also create a standard “bookmarked” format for all source documents which everyone can learn consistently. According to the 2021 CPAFMA Digitally Driven Firm (DDF) Survey, 79 percent of firms were utilizing automated bookmarking and 69 percent were utilizing auto-input of information from key source documents via OCR (optical character recognition) into the return. An added benefit is the cost-savings when all scanning and quality control of the source documents is centralized in the administrative department which does so at a lower cost and also promotes more consistency in the files.

Importing Trial Balances: An oft overlooked opportunity to streamline input into business tax returns is the importing of the tax trial balance from the binder package into the return, which 66 percent of the CPAFMA DDF survey respondents were utilizing. Once tax codes and groupings are designated, the information can be directly imported into the return with time savings rolled over from year to year.

Digital Delivery: One of the most significant cost savings within the tax process is the transition from physically delivering a return to digitally delivering it. At the time firms train their clients to utilize the portal for document ingress, it can be explained that their return will be securely delivered in the same fashion with notification when completed. There are not only savings in regard to paper, envelopes and postage, but also much of the administrative handling required to get those returns into the mailbox.

Digital Invoicing and Payment: There is a significant amount of manual handling in most firms billing and collections processes. Today’s time and billing systems can easily generate a digital invoice that can either be emailed directly to the client (and their controller/accounts payable person) or placed in the portal as an attachment with the return. Firms can include digital payment instructions such as ACH and online credit card payments which can integrate payment links embedded in these invoices. Some online payment services (CPACharge, QuickFee, Thomson Reuters Kotapay) can also be integrated with the firm’s practice management application for direct import to the appropriate client account, rather than manually re-keying.

Digital Workflow: Many early adopters of “paperless” technologies automated individual components of their tax processes such as due dates, return assignments, engagement management, delivery instructions, etc. utilizing spreadsheets or components of individual applications. Unfortunately, this often led to information between these applications being out of sync, which created significant manual reconciliation. One of the key solutions to “digital by default” is the utilization of a true workflow tool that takes all of these components and puts them into a single application that can be made available to all firm personnel to immediately see the status of any project. Project workflow capabilities can be embedded in the tax program or practice management application, but the most comprehensive solutions were designed specifically for accounting firm workflow (CCH XCM and Workstream, Thomson Reuters FirmFlow, Doc-It Workflow, OfficeTools, etc.).

Firms that continue to adopt and promote entirely digital files and processes will be at a competitive advantage for the many reasons mentioned above and it is up to each firm to educate their personnel and their clients to become “digital by default.”

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