four reasons to perform tax projections

make sure the client sees the value.

by ed mendlowitz
the 卡塔尔世界杯常规比赛时间 practice doctor

many accountants do tax projections. some clients get projections who should not, but there are many who do not, who should.

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here are some insights about preparing and charging for them.

reasons for projections – collective firm knowledge

partners, managers and other firm members continuously find out information about a client during the year that would affect their tax return. a method needs to be established to capture this information. some problems are created when nothing is done with the information and when the partner remembers it just before signing the return.

effective work flow software has places to record this information. alternatively, a brief memo can be prepared and placed in the client’s file in a place where the preparer working on the return can see and use it.

another way to capture the information is to enter it on the excel tax projection worksheet for the current year. irrespective of whether a projection is prepared, the worksheet can be a method of keeping track of a client’s affairs and changes during the year. if there are extensive changes, then a projection can be prepared or at least suggested to the client.

an example is when a client sold a valuable painting and he mentioned it to the partner, who entered it on the tax projection worksheet. when the client submitted his tax information he omitted this. the preparer noticed the entry when she was filling out the completed information on the worksheet and asked the partner, who then told her what it was and then she called the client to get the full details.

reasons for projections – to research complicated transactions

many clients call during the year when they undergo a complicated transaction to find out either the tax consequences or tax that will be due. occasionally there are contracts, agreements, letters of intent or inheritance information. this is a good time to research and lay out the items that will need to be reported on the tax return, or related returns. examples are:

• a divorce
• a section 754 step up for inherited real estate partnership interests
• a sale of a vacation home
• employer stock options or restricted stock that is granted, vested, sold or exercised
• sale of a business
• installment sale

why wait until the return is being prepared during the busiest time of the year to go through the agreements? also, preparing the projection as soon as you find out about the transaction will enable the client to find out what their tax liability will be with more time to prepare themselves for the tax payment, or to pay estimated taxes on a timely basis, if necessary.

reasons for projections – fluctuating income

a reason to do a projection is when a client has a substantial and fluctuating seven-figure income from many sources including rental real estate and restricted stock awards. preparing a projection is a way to make sure that the tax is calculated properly. the tax rates now cover many schedules such as regular tax, alternative minimum tax, investment interest expense and occasionally charity limitations. also states that impose high income taxes need separate calculations and determinations of when to make the fourth-quarter estimate tax payment – either by dec. 31 or jan. 15 when regularly due.

further, if clients have not made the proper estimated tax payments, there are methods to correct this and avoid penalty such as including the missed payments in an ira withdrawal or amount that will be rolled over. things can fall through the cracks. with clients with higher income the penalties can be quite substantial.

reasons for projections – to assist with extensions

also, many clients with higher income who typically need extensions will need a projection in order to calculate the extension payments and first-quarter estimated tax payments.

charging for projections

i see six alternatives:

1. don’t bill at all.
2. don’t bill but tell client that you usually charge for projections.
3. tell client in advance what the fee would be or what your billing method will be.
4. bill when the projection is prepared.
5. include an itemized extra charge for the projection when you bill for the tax return.
6. change the relationship by elevating the client to include routine projections each year.

discussion of the alternatives:

if you cannot get paid, why do it? if you believe the client needs the projection and they do not want to pay for it, why are you taking on a greater responsibility for it than the client? you shouldn’t. if you cannot explain why it is important for the client and they do not want to pay for it – it indicates that they do not see the value for the price you are charging, or that the value is simply not there. in either case, don’t do it or try to re-explain in terms such that the client sees the value.

many times an accountant either believes something is important, or as a matter of form, does something where there is no value to the client. an example is a tax projection. possibly the client needed it at one point, and then through some sort of habit it was continued yearly thereafter.

in the situation where you are doing it for the first time i would presume that the client needs it, and asked for it. this should be billed and you should tell the client in advance what the fee or fee basis would be. if they don’t want to pay it, don’t do it.

if you’ve done the projection without discussing the fee, then i recommend sending a bill immediately afterward. if the client questions it, give them my stock answer: “this is what i do to earn my living. you asked me to do it, and since it is an extra service i billed for it.”

some accountants do not bill when done, but wait until they prepare the bill for the tax return. i don’t like this. the time between doing the work and the billing is too long for the client to remember the use, value and benefit of the projection, or who actually suggested it be done the way it was done. perhaps the client wanted an off-the-cuff discussion or estimate and not a thorough analysis that might not have yielded a substantially different response than the “fancy” projection. discussing the fee up front homes in on what is really needed or wanted.

upgrading the relationship might be an unnecessary response to a one-time occurrence. on the other hand it might represent an important change in the relationship. we routinely do projections for clients

• with widely varying income from year to year or within a year;
• with a large number of investments in passthrough entities where last-minute “surprises” are likely and the projection forces inquiries into getting estimates from the managing members; or
• where it is a method of providing ongoing tax and/or financial planning.

whatever way you decide to handle it, you can never be wrong discussing the fee beforehand.

posted on april 26, 2023