5 scenarios with fee quotation breakdowns.
by jassen bowman
tax resolution systems
one of the most common questions i get from practitioners adding tax resolution services to their service offerings has to do with fees. many practitioners see the benefit of offering flat-fee service options, while others choose to stick with their existing hourly fee model.
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these are some example of how i quote fees when running a high-volume tax resolution practice. these scenarios do not represent any one particular client i’ve had. rather, they each represent dozens of similar situations i’ve worked on. these scenarios are the norm if you’re focusing on 941 representation. for completeness, i’ve also added a 1040 scenario as an example.
i want to point out that many flat-fee firms using unlicensed sales people (a violation of treasury regulations, by the way) will use a fee matrix to quote fees. this fee matrix is usually broken into $5,000 or $10,000 tax debt increments, and the fees are given for negotiating an installment agreement based on the tax debt amount. further fees are added (typically $2,000 to $4,000) on top of the fee on the matrix if the customer is being sold an oic.
i have written and spoken extensively elsewhere against this practice, so i’m not going to beat a comatose donkey. suffice it to say that i consider the practice of quoting fees based purely on the lien amount to be unethical, and i highly discourage the practice. the amount of work required to work a $15,000 tax debt versus a $45,000 tax debt, all other factors being equal, is identical.
in my flat-fee quotation process, i’ll charge the $15,000 tax debtor the exact same as i’d charge the $45,000 tax debtor, every time, as long as their circumstances are otherwise the same.
also note that if you use a fee quote generator built into a tax resolution software package, it is most likely using an approach very similar to this unethical practice to generate the fee quote. thus, i would encourage you not to accept the default fee quote generated by such software packages.
fees shown here are slightly higher than national averages, but substantially lower than what a few national tax resolution firms charge. if you take off the trust fund recovery penalty (tfrp) representation fee for each scenario, which many tax resolution firms tack on later as a “rewrite” (request for additional fees later on), then you’re going to be competitive with national firms quoting the same prospect.
you’ll notice that i quote fees for the entire representation project – not just pieces of it. i do not do rewrites. if you’re not familiar with the practice, it’s the lowballing of a fee in order to make the sale, then “rewriting” the contract later in order to get more money out of the customer. this is how most big national tax resolution firms operate.
you can read more about this practice in this lengthy article i wrote several years ago for my own tax practice. this article is actually a sales letter for a service package that i no longer offer, but i’ve just never removed it. i think it’s worth reading, as it contains many marketing and service packaging lessons that you could learn from: http://taxhelphq.com/rewrites/
a proper consultation, conducted by a competent, licensed tax professional, will yield a complete picture of the taxpayer’s situation and what they need. if you are quoting on a flat-fee basis, i highly suggest making sure your client is aware of the complete fee, up front. this is simply a better, more ethical way of doing business.
final note: if you are charging hourly with a minimum retainer, these fee examples obviously don’t really apply to you. you may well discover, however, that your total bill for a client, when charging hourly, will actually come pretty close to these flat fee examples, when averaged out across many clients, particularly if you’re charging in the $150- to $250-per-hour ballpark.
ok, really the final note: if billing hourly, make sure that your hourly fee for representation is higher than your hourly fee for bookkeeping, tax prep, etc. this is simply higher value work, and you shouldn’t shortchange yourself on the fees you charge. when you set your minimum initial retainer, take this higher hourly fee into account, as well as being sure to take into account the fact that tax resolution work is inherently front-loaded during the first two weeks of the case in terms of your billable time.
scenario #1
business taxpayer owes $38,000 in payroll taxes, penalties and interest. all returns have been filed, all modules assessed. books are complete and up to date. no revenue officer is assigned, but the case is in acs. final notices of intent to levy have been issued on all modules, but they were more than 30 days ago, so cdp appeal rights have passed. taxpayer is compliant with current quarter ftd requirements, and the business has sufficient positive cash flow to support an in-business trust fund installment agreement (ibtf ia), but because of debt amount, does not qualify for express ia.
quotation considerations: this taxpayer is in about as ideal of a position as they can get. with no ro assigned, levy action is unlikely at this point, and the taxpayer is not pyramiding additional liability. ibtf ia not meeting express criteria requires full financial disclosure, requires a tfrp determination with 4180 interview, and the taxpayer must attempt to borrow against assets. however, it’s a fairly straightforward case, and if the taxpayer is cooperative, it will be an easy case.
fee quotation breakdown:
basic investigation of liability (il): $500
financial analysis (fa): $250
ibtf representation: $1,250
tfrp representation: $950
total fee quotation: $2,950
note: if you add the research phase, financial analysis and ibtf representation, you’ll see that it adds up to $2,000. in reality, this is simply my minimum fee for taking on any client, no matter what. i do not actually break it down like this to clients, this is just for illustrative purposes for you. in a high-volume firm, the il and fa are done by an assistant, and tracked at their much lower hourly billable rate (even at flat fee, you should internally track billable time for management purposes).
scenario #2
same scenario as above, except taxpayer has not filed 941 returns for six quarters. all assessed modules are based on sfr (6020(b)) returns prepared by a revenue officer. the revenue officer levied the taxpayer’s payroll bank account yesterday, thus prompting the taxpayer to seek assistance. all other parameters the same.
quotation considerations: this is going to be far more time-consuming. thankfully, the books are all in order, so preparing the returns is straightforward. working with the ro to obtain levy release will require the returns to be filed, and there will be a tfrp discussion nearly immediately.
fee quotation breakdown:
liability investigation: $500
financial analysis: $450 (higher because it’s a “rush” job because of the levy)
levy release negotiation: $750
ia representation: $1,500 (a small “inconvenience” fee is added)
tfrp representation: $950
preparation of six 941 returns: $300 (plug-and-chug from quickbooks, so a break)
total fee: $4,450 (see how quickly that escalated?)
scenario #3
similar to #2, but now let’s assume that the taxpayer’s in-house bookkeeper quit unexpectedly two full fiscal years ago, and nothing has been updated since then. taxpayer has already been levied by ro twice before, and tfrp assessment has already been personally made. taxpayer is not current with ftd requirements, so is pyramiding the liability. taxpayer also isn’t very friendly, and you get the feeling that it’s going to be difficult to get him to cooperate through the process.
fee quotation breakdown:
liability investigation: $500
bookkeeping for two years: $1,250
two 1120s returns: $1,000
negotiate stay of enforcement with ro to get the above done: $500
financial analysis: $250
business ia representation: $1,950 (because of the pyramiding, takes more work)
personal tfrp representation to stay collections (cnc): $1,250
preparation of six 941 returns: $300 (plug-and-chug from quickbooks, so a break)
client attitude/foot dragging surcharge: $750
total fee: $7,750
scenario #4
similar to above, but the business cannot afford an installment agreement, has no equity in assets and is literally only making a few hundred dollars per month in profit. business owner is working nights stocking shelves at wal-mart in order to put food on the table, pay insurance on his pinto and pay rent to his parents to live in their basement.
fee quotation: same as #3, but this client is going to be with us for close to a year to negotiate what is now an offer in compromise, so we’re tacking on another $1,250 for that. all the other work still has to be done. total fee: $9,000.
yes, $9,000 from somebody who’s working part-time at wal-mart. this was actually very, very close to a real client i worked with in 2012. he was on a tiny weekly payment plan to me well into 2013, and eventually i just let him off the hook for the last couple grand of the fee. we offered out on both the corporate liability and the personal assessment, saving him over $100,000 in tax, penalties and interest. he had a full eight years to go on the csed, so waiting it out wasn’t a logical option.
last i heard from him, in case you’re curious, is that he had left wal-mart for a better job, and was getting his financial life back together. he intentionally has extra withholding taken from each paycheck now that he’s clear of the year-after oic refund grab.
scenario #5: a 1040 example
john doe, 32, finally graduated from college after 14 years in and out of school. in january 2014, he left the low-paying job he’d held at the corner gas station since he was in high school, and obtained employment as a lab tech with the county coroner, making four times as much money as he used to.
knowing nothing about taxes, and not understanding the impact on his taxes, john filled out the w-4 for his new employer the same way he always did, claiming the 42 exemptions he’d been claiming since he was 16 as a “hitchhiker’s guide to the galaxy” joke. john has never paid income tax in his life, as he never made enough money after the standard deduction and personal exemption to actually owe anything.
when 2015 rolls around, john drops his w-2 off at his sister’s husband’s uncle’s cousin’s house, just as he’s done his entire life. a week later, he’s called in to pick up his return. without even looking at it, he signs it and drops it in the mail.
since he’s rolling in dough, john moves out of his parents’ house during tax season. he begins pimping out his new bachelor pad apartment in the west hills. his parents never bother to give john his mail when he visits for dinner each week.
2015 is a great year for john. he gets two promotions, with substantial pay raises. he buys a brand new tesla roadster with his newfound wealth, and also finally starts dating the popular cheerleader from his high school days who never gave him the time of day back in school.
with 2016 rolling in, john files his taxes, just like last year.
but this time, john actually looks at his tax return, and is shocked to see that he owes $11,000 to the irs. he has a brief argument with his tax preparer, and then decides he should visit somebody else for a second opinion.
at h&r block, his new, friendlier preparer advises him that his tax return was actually prepared incorrectly, but not in his favor. he actually owes the irs $12,000. their “second look” service also examines his 2014 return, and discovers another error. john never even realized he owed $7,000 on 2014, let alone that it’s now going to be $8,500. and then he learns that the irs charges penalties, and doesn’t care that he never received his mail.
like a bull charging out of the gate, john is dumbstruck by the thought that he now owes the u.s. government nearly $24,000 – which he doesn’t have. fortunately, he decides to discuss this with his parents, and his truck driver father remembers seeing my ad in this month’s issue of “overdrive,” the leading publication for owner-operators.
quotation considerations: john’s story is fairly typical for 1040 liabilities. because he’s making decent money and has purchased some assets, we’ll need to do a full financial evaluation, even though the liability is less than $50,000 and thus meets streamline installment agreement criteria. we’ll also take a third look at the returns, because it’s not uncommon to still find further errors even after they’ve been “second looked.” this is a fairly typical and straightforward 1040 case. cases like this are the bread and butter of 1040 tax resolution practices.
fee quotation breakdown:
basic investigation of liability (il): $500
financial analysis (fa): $250
streamline ia representation: $1,500:
1040x prep for two years, plus pre-bill for next year return prep: $450
slight discount because he can pay in full up front, no direct marketing cost, he let me take the tesla for a spin and he seems like the kind of client who will stick with me for years to come: $250
total fee quotation: $2,450