When it comes to creating value for clients, taxes can be one of the biggest opportunities – and one of the most challenging – areas to tackle. After all, not only are there potentially large hard-dollar cash savings to be had (either in the form of taxes paid or penalties avoided), but straying too far into the territory of formal tax advice can create real liability exposure for advisors and their firms (especially if their firm’s unique rules around what constitutes ‘tax advice’ are violated).
For example, if a strategy involves an interpretation of the Internal Revenue Code that could be considered ‘tax avoidance’ (the kind of thing that is typically scrutinized by the IRS and restricted to designated professionals like attorneys, CPAs, and EAs) or even simply optimizing the timing or nature of income (by reducing the amount of taxable income, for instance), then advising on the strategy could violate the specific regulations set forth by the IRS in Treasury Department Circular 230.
So what can advisors do? For starters, by building up their own level of expertise in the field, they can start to recognize what kinds of strategies would likely require a CPA’s or attorney’s sign-off, and which might fall into the grey area of ‘tax planning’ that doesn’t necessarily constitute a recommendation. They can also work to build in a process for addressing these gray areas by offering written disclosures, limiting the scope of their activities to the facts presented in a given situation, and collaborating with a client’s own designated tax professional before moving forward with any kind of recommendations.
Another key piece of advice is to focus on providing ranges rather than precise numbers when describing the impact of different strategies. This is especially important if you’re going to be relying on software to create detailed projections of the outcomes of various strategies. Providing a range of scenarios will help to ensure that you’re not stepping too far into the territory of formally giving tax advice – and it will also make it much easier for your clients to understand the potential implications of their decisions.
Ultimately, many advisory firms haven’t developed the policies and procedures necessary to guide their advisors in terms of how they can engage with their clients on tax matters without violating their firm’s unique rules on what constitutes ‘tax advice.’ This leaves them vulnerable to potential legal liability if they don’t have the proper safeguards in place – not to mention the risk of a client getting hurt if a recommendation turns out to be less than ideal.
By gaining a deeper understanding of what does and doesn’t constitute tax advice and creating processes for how to communicate and project these ideas to clients, however, advisors can begin to feel more confident in their ability to add value in this area of their practice. And by working with their clients’ own tax professionals, they can reduce the risk of their firm being liable for their advisors’ errors in this crucially important and often complex area. Steuerberatung