Counting on Accountants
The difference between tax advice and tax planning.
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Without question, the most common reference request I receive is for a “good” accountant. The checklist usually looks like this: 1. charges marginally more than Turbo Tax, 2. can meet with me on demand to discuss my taxes in detail, and 3. provides ongoing advice on how to reduce lifetime tax footprint.
All three cannot be true. Usually, tax filers prioritize in the exact order listed above so tax planning gets completely cut out of the picture. This often results in mismatched expectations and disappointed customers.
Then the unicorn shopping commences, and many are surprised to find out what they seek doesn’t exist.
The direct-to-consumer professional tax service industry has experienced the mother of all disinflationary forces over the past three decades. Low-cost tax filing software such as Intuit’s Turbo Tax have effectively capped consumer expectations on price.
For Clarity:
“Starting At”, in marketing speak, means “please inquire so we can force your time investment to a point that it’s difficult to walk away from our absurdly high actual price.”
Come to think of it, I don’t believe the DIY version of the software has increased much, if at all, over the past twenty years. But I digress. The point is that the salient price points above set consumer expectations and full-service accounting firms are forced to react.
Price is simple to compute while value is not. Therefore, most consumers prioritize price over value. It’s much more efficient to do this given the quantity of buying decisions we have to make. Price is a major component of the value equation, so paying attention to that and ignoring the rest is usually directionally correct.
Sometimes, this quick-hack calculation misfires and we end up with a cheap solution delivering suboptimal results. Such is often the case with tax planning.
Let’s do some math. Say you pay your accountant $500 per year to file your taxes. They would need to process around 300 such returns per year after taxes and business expenses to clear about $100k in income.
On top of that, they probably haven’t increased their fees in years, meaning they need to add clients to keep pace with inflation.
Oh yeah, and most of the work is done in 5 months out of the year.
So that’s 300 returns and 260 working days, excluding Holidays. Sorry to inform you, this is not enough time for comprehensive tax planning. It would be economically unfeasible.
Many CPA firms have migrated their practices to focus on small businesses, which have more complex needs that software solutions cannot by themselves address. Fewer clients but higher tax preparation fees.
Others have adopted the low-cost, high-volume models necessary to just make a living and this is where I find most of the pain points. Not responsive or proactive, low communication, limited access, etc.
The solution isn’t to just pay your accountant more. First, it’s important to calculate the full value equation. This means considering cost and the full scope of services desired. Do you need year around advice? Do you want tax projections and coordinated investment planning?
A low-cost solution may be perfect for you. For those with more complex needs, a sensible approach may be to just put your financial advisor and accountant on the same page. They should be coordinating on your behalf.
Typically, the advisor does the planning while the accountant keeps you compliant. Additional costs could be minimal if you’re already using a financial advisor. Tax planning should be a component of what you’re paying your advisor for.
Now is a good time to interview accountants if you’re looking for a change given it’s their off season. Have reasonable expectations going into the process and make sure that they have the ability, and desire, to coordinate with your advisor.
IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications:
https://irs.treasury.gov/rpo/rpo.jsf
Alternatively, you can become an expert on the over 80,000 pages of the Internal Revenue Code yourself.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial LLC. Member FINRA/SIPC. Advisory Services offered by National Wealth Management Group LLC, an SEC Registered Investment Advisory and separate entity from LPL Financial LLC.