Tax preparation and tax advice are very different things. Many taxpayers assume that when they have their taxes prepared by a professional, they’ll also get tax planning advice or recommendations for ways to reduce future taxes. The bad news if that doesn’t always happen. Here are some of the reasons why your financial planning clients are not getting tax advice from their tax professional:
Timing
When do we usually see our tax pro? During tax season, naturally. Tax professionals are up against some very tight deadlines and heavy workload during tax season. Their focus during these times is to get the returns finished, paid for, and filed. There isn’t much time, if any, to do diagnostics on your tax situation or strategize ways to lower future taxes.
If clients want to see if their tax pro will do a deep dive on their tax situation and make recommendations, they should make an appointment outside of tax season.
Additional Service
Clients should check their tax pro’s engagement letter. Chances are good that the client only engaged the tax pro for annual tax prep, not tax planning. Detailed tax planning requires additional time, and clients need to ask for it. Also, the tax pro should reasonably expect to be paid for their extra time and expertise.
Most tax pros’ professional plate is already full of other aspects of their business, like bookkeeping and audits. As noted in his book, The Overtaxed Investor, Phil DeMuth says, “Tax preparation is a small and dwindling part” of the CPA’s business.
In-depth tax planning is an additional skill set and requires on-going, multiple touches with clients. Plus keeping up with the ever-changing tax code can be very demanding. Some CPAs may prefer the seasonal, low-contact aspects of tax prep.
“ In-depth tax planning is an additional skill set and requires on-going, multiple touches with clients ”
In some cases, the tax pro may be worried that making a recommendation for a strategy may be prompting a securities transaction, which would require a securities license.
Finally, some tax preparers are not allowed by their firms to give tax advice.
“If you want tax planning advice, you’d better be a business client of the tax CPA firm. Otherwise, you’re on your own.” – Phil DeMuth
Playing It Safe
CPAs and other tax professionals are precise, cautious, and conservative, which I understand. Their profession is based on veritable accuracy. As a result, it is safer for some tax pros to be a tax historian rather than to make recommendations for a tax strategy. Recording the past is safe. The numbers are the numbers. With the tax year over, there is nothing left to do but prepare the forms and file them. That business model is low-risk and there is very little left to chance.
On the other hand, developing a long-term tax strategy involves looking into the future, where there is always a degree of uncertainty. Planning involves forecasting and assumptions. By developing a forward-looking plan, there is a chance that the tax pro could be wrong, or the strategy might not work out perfectly. The thought of this could be very unsettling for a professional who is used to safely and precisely recording the past.
That being understood, while the tax professional is playing it safe, the client could be writing bigger checks than necessary to the IRS. It takes a rare tax professional who is willing to offer tax planning advice or a referral to another professional.
Your financial planning clients should ask their tax pro about their ability and willingness to provide in-depth tax planning that involves tax mitigation strategies. If they are able and willing, that’s great! If the tax pro is not, your client should look elsewhere for tax planning advice even if they keep their tax prep business where it is.
True tax planners aren’t hard to find. A good place to start is with the American Institute of Certified Tax Planners (https://certifiedtaxcoach.org/)
