Why It is Important to Listen to Your Clients

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My bread and butter are clients who are coming from another tax professional, thinking that they are paying too much in taxes. Before I meet with the client, I ask for the last three years of tax returns to get an idea of the client’s tax situation. Outside of that, I get to do some networking with other accountants, and I often hear that they give “blanket” advice. That is my term for giving the same advice to everyone who walks through the door. There is a big danger in that.

First of all, it is important to analyze the prior years tax returns to see the reason for the high tax bill. I am going to make a statement with the possibility of sounding crass. Most returns that I examine have high tax bills, because the former preparer was just concerned with cashing the paycheck for the tax preparation. Some returns are single-member LLCs treated as disregarded entities for tax purposes. That means they file a Schedule C, with the net income being subject to self-employment tax. If the Schedule C has less than $15,000 in net income, I leave it alone. The self-employment tax on $15,000 is $2,295. It would cost more for me to do a corporate and personal return than they would be saving in taxes. However, anything over $15,000, I consider other options.

After the new tax law was passed, and even before then, I knew the past tax situation. However, I want to hear the client’s one- to five-year plans for their business. Unlike my colleagues, I have no interest in just cashing a paycheck, I want to know what the future will bring — what the client does with the money they make, how much money they need to survive, etc. The reason for all of those questions is for me to get an idea of how this person should pay tax.

I met with one particular client about a year ago. He just paid an attorney to do asset protection. He stated that his CPA gave his blessing on the new structure. The problem was this: All of the companies he set up were S Corporations. He was in the 39.6 percent tax bracket. He had a full-time job, so the income flowing to him was passive. His main company was in IT, which he was looking to grow and sell in five years. I introduced the idea of IRC §1202 stock for the IT company, which would require him to revoke his S Election. The 1202 stock — provided that the issuance of the stock commenced with the original shareholder — can be sold in five years. The first $10 million made from the sale is tax-free.

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About Craig W. Smalley, EA

Craig Smalley

Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.


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Apr 21st 2018 16:55

Nice article, Craig.

The "buy equipment whether you need it or not" advice that some accountants give is really bad. I advise people that, if you have a genuine need for equipment, now is a good time to buy, even if you finance with no money down on the last day of the year. But to buy stuff you don't need just to "save on taxes" is foolish.

I'm curious about your compensation arrangement. I agree with creating value, but in the eyes of the IRS, could that be interpreted as a contingent fee? I know you can't prepare a return and charge a percentage of the refund, but is basing your fee on taxes saved permissible? The only time I really do that is during tax audits or penalty abatements and such.

How about times when you review a return and, realizing it is clearly erroneous, that the client actually owes much more money than originally indicated? In such a case, you are not creating "value" in a monetary sense, but assisting a client with coming into compliance.

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