Art of Accounting: Extensions and the myth of slow summers

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I know a lot of accounting firms that file as many extensions as they can to relieve tax season pressure and spread the work out during the slow summer season. I believe a "slow summer" is a myth and don't think this is a good business practice. Here are some of my reasons.

1. For starters you are usually down 22% in staffing on any given week during the summer, assuming each staff person, owner or partner takes a two-week vacation. There are nine weeks in July and August so each person would only be working seven weeks. Do the math. That is 22% less time. This assumes each person only takes a two-week vacation. Some might take more, and some might just take a week and then take off on Fridays (this is more than two weeks). Many firms have a leave early policy for Fridays in the summer. In any event, you should get the idea that you are not carrying a full staff during the summer.
2. Spreading out the work does not work since you use May and June to catch up on regular work that was pushed forward because of tax season, and then you are short-handed in the summer. So what happens? You end up with another tax season in September and October. This creates a very busy and hectic period when it is nearly impossible to get people to work overtime. Plus, you are not geared up for "tax season" as you are through April 15. Your systems, scheduling and coordination of preparers and review staff are not in sync. Add to this muddle the business returns you extended, and you have a very busy period after the summer, when none of this work could be done because you were shorthanded. My conclusion: Extensions to spread out the work do not work. Obviously, there are some returns that must be extended, and I am not including these. I am suggesting that you should not extend any return that can be completed during tax season regardless of the inconvenience during that period. 
3. Preparing extensions, even for the simplest of returns, takes added work, which drags staff away from return preparation. Further, many firms cannot charge for their work preparing extensions. On larger returns, it could take a couple of hours to prepare the extension, and perhaps some of this time could reduce the actual preparation time, but not that much. Along with the extensions you will need to prepare the current year's estimates, and this is an added step since estimates are usually a byproduct of your tax prep software when the return is actually completed. Additionally, the earlier estimates might need to be adjusted when the return is completed, adding more work. Note that every extra time the file is "touched," you spend time and productivity declines.
4. When extensions and estimates are prepared, the tax payment calculations might be much lower than the final amounts, resulting in interest and penalties. Some states might not approve the extension if the tax payments were too low. If the payments were too high, the client would be providing cash to the IRS and state governments they could have been using themselves during that period.
5. Your cash flow is delayed up to six months since many firms bill for the return when it is completed. I don't know about you, but I always like getting paid sooner rather than later.
6. When an extension is filed, I find that the client and accountant live in the past and forgo current-year planning until the prior year's return is completed. Opportunities for current planning are reduced further, lowering the potential for added revenues and greater client services and value.
7. Regardless of what clients say, they do not like extensions (unless absolutely necessary). And even if they don't mind, their spouse usually gets upset about it.
8. Everyone knows about tax season and you can get away with making your staff work crazy hours (you shouldn't do this, but many do). This does not work in the summer or September and October.
9. Tax season is a big admin undertaking, and your staff is usually organized and set up to turn around the work expeditiously. Somehow this isn't replicated afterward, making the whole process take longer with added touches. Added touches = reduced profits.
10. Comment: Many practices are overloaded with tax season work and truly have slow summers, so in those cases added extensions might work well for them to spread out the work. For them, I suggest considering some of what I wrote, but obviously not all of it.

This column is being posted after tax season and before the summer starts, so much of this advice cannot be taken for this year. However, what you can do is recognize the 22% reduced hours and make your plans and scheduling to fit into the actual hours you will have available. If you truly have free time, then concentrate on getting the extended returns completed. Make the client calls and organize your admin staff and procedures. 

If you really do not have the time (as I suggest), then set up a realistic schedule to get the returns done as soon as you can after the slow summer. An alternative is to hire some summer interns and train them to work on those tax returns. Training is a different discussion, but it works, and I know many firms that are extremely successful with interns preparing returns. Plus, they get a look-see and can offer full time positions to the better interns for when they graduate.

Whatever your situation, spend some time now to plan and manage your summer work.

Do not hesitate to contact me at emendlowitz@withum.com with your practice management questions or about engagements you might not be able to perform.