Is Your CPA or Tax Attorney a Resource or an Expense?

 In Tax Planning

Many taxpayers believe that tax planning is only for the wealthy. In fact, a large number of moderate-income taxpayers view the cost of hiring a CPA or Tax Attorney as an expense that comes off their bottom line, thereby reducing their income. However, what I have seen over the course of my career is that the taxpayers (and more specifically small business owners) that tend to be most tax-efficient—and the businesses that tend to be the most successful—are the ones who look to their CPA or Tax Attorney as a resource to increase their net income, rather than an expense that reduces it.

You Probably View Your CPA or Tax Attorney as an Expense If…

It is generally easy to tell whether a taxpayer views their CPA or Tax Attorney as an expense. Here are some indicators:

  1. Self-Preparing Tax Returns – Every taxpayer has a right to prepare his or her own tax return, and for very simple returns where the taxpayer is in a low tax bracket, it may even make the most sense for the taxpayer to prepare the return herself. However, the overwhelming majority of tax representation matters that I have handled (ranging from notice responses to audits) have resulted from taxpayers who self-prepared their individual or business returns and omitted income, claimed deductions that didn’t make sense in the context of their return, or reported their income incorrectly. While it may be cheaper in the short run to prepare your own taxes, the fee for a preparer to file a return pales in comparison to the fee for a taxpayer representative to defend an audit by the IRS or State Department of Revenue (and is generally a much less stressful route for the taxpayer). Most tax returns cost less than a thousand dollars to prepare, but defending an audit is generally going to cost a minimum of $3,000. It also cannot be ignored that there is the potential of overpaying taxes by a higher amount than what it would have cost to hire a professional to file it for you.
  2. You Talk to Your CPA or Tax Attorney Once Per Year – Oftentimes taxpayers communicate with their CPA or Tax Attorney just once a year at tax time. They do not inform their tax professional of key changes in their employment, their business, marital status, or other important life changes that impact their tax situation. What oftentimes results from this scenario is that the taxpayer ends up with a large balance due at the end of the year or has substantially overpaid estimated taxes and missed out on some potentially beneficial investment returns had that money been put to work for the taxpayer throughout the year, rather than sitting in Treasury’s coffers. 2020 is a great example. Some of my clients that I work with throughout the year evaluated their estimated taxes on a quarterly basis, and we were able to get pretty close to what their tax liability would be while allowing the client to have as much use of his or her money throughout the year as possible. Many of these clients had very good market returns from investing their funds throughout the year rather than overpaying estimated taxes.
  3. Your CPA or Tax Attorney Does Not Know Your Future Goals – Within the context of tax planning, oftentimes taxpayers are focused on short-term considerations (i.e. how much tax is owed, what can be deducted, or what credit is available this year). However, to achieve the best possible outcome and truly be tax-efficient, this will involve a comprehensive look at the whole of a taxpayer’s situation. This involves looking at the taxpayer’s family and household expenses, employment situation, or future income projections for her business, when the taxpayer plans to retire or slow down her involvement in day-to-day operations of a business she owns, whether there are children who need funding for their future college expenses, the taxpayer’s likely tax bracket in retirement, and many other considerations that impact what should be done in the present. If you have not talked to your CPA or Tax Attorney about the future goals for yourself as a taxpayer as well as the future goals for your business, you may be focused on what it will cost you to do that as opposed to what benefit you may receive in the form of tax savings and the confidence that planning for your future can bring.

Are You Looking to Begin Using Your CPA or Tax Attorney as More of a Resource?

Perhaps in reading the article so far, it has occurred to you that you should work a little more closely with your tax professional throughout the year. Or maybe you were already thinking about it prior to this. In either case, here are some tips that you can use if you decide to start using your tax professional as more of a resource, rather than an expense.

  1. Commitment and Availability – Beginning an engagement with your CPA or Tax Attorney to start planning for the next tax year or to develop a long-term tax plan will require some effort on your part with regard to communication and providing information. If you are not sure whether you will be able to follow through on document requests and respond to communications and questions that your tax professional may have, the engagement is not likely to end successfully.
  2. Have Your Finances in Order (or Work with Your CPA to Accomplish That) – It is surprising to me how well some clients can handle maintaining their own books for their small business. But in most of these cases, these clients have had some level of coaching (or periodic oversight throughout the year) by their current or previous CPA regarding how to properly classify transactions and reconcile accounts. Most common is the scenario where the small business client has a good bookkeeper. Clients with a clean set of books for their business are able to efficiently have their taxes completed at the end of the year and make future plans based on accurate data. In addition to having clean books for his business, the taxpayer also needs to have his personal finances in order. Even if the taxpayer does not have a strict budget for his expenses, it is important that he knows what income and expenses are incurred each month. This is especially true for S Corporation shareholders, as planning for salaries and distributions should involve the total cash outflows that the taxpayer will need for his personal financial situation.
  3. Keep Your Tax Professional Updated About Important Changes – Once you and your tax professional have developed a tax plan for the upcoming year or a long-term tax plan, it is important to discuss changes in your personal or business circumstances that may impact the plan that has been developed with your tax professional. It is a good practice to touch base with your CPA or Tax Attorney at least mid-way through the year, or preferably quarterly, and update your tax professional regarding life or business changes such as the birth of a child, changes in employment, retirement plan withdrawals, changes in state residency or domicile, changes in direction of your business, a divorce or separation from your spouse, the sale of a home, or other relevant changes that will impact your tax plan.

If you would like to develop a tax plan for the upcoming tax year or look longer-term to the future, my firm would be happy to assist you! Feel free to contact me using the form below.


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