Creating a Framework For Engaging With Clients on Taxes

Taxes are a central component of nearly every financial planning issue, yet many advisors struggle to find a clear framework for engaging with clients on tax-related topics. This is largely because of the perception that any mention of a tax strategy crosses the line into “Tax Advice,” which can lead to serious legal liability for an advisor and their firm, primarily in the form of IRS fines or even an exclusion from some E&O policies. Moreover, many advisors are barred by their compliance departments from offering any form of specific advice on a tax strategy.

For the most part, tax advice involves interpreting or analyzing existing tax rules to help clients determine how they might apply those rules to their own particular situation. Examples might include explaining tax brackets or how deductions and credits work (such as deciding whether to itemize or take the standard deduction). In general, these activities are considered to be a “practice” before the IRS, which is only available to attorneys, CPAs, EAs and enrolled agents, and must be performed in accordance with Treasury Department Circular 230.

However, some tax strategies involve more creative interpretations of existing laws. They might, for example, recommend that clients convert pre-tax assets into a Roth account, or that they move their investments from one location to another, or that they take advantage of an obscure rule in order to minimize their taxes. These types of strategies typically require the involvement of a tax professional to recommend, as they might be considered to be a practice before the IRS, or as a violation of their firm’s policy against giving Tax Advice.

As the tax landscape changes, however, it is becoming increasingly important for advisors to be able to engage with clients on more detailed analysis of how certain strategies might impact their taxes. Given the current regulatory environment, this will likely require a new framework that makes it easier for advisors to engage with their clients on this topic in a way that is both effective and compliant.

Creating such a framework is important for advisors because it will allow them to provide value to their clients without having to worry about crossing the line into formal Tax Advice. It will also help them to avoid being excluded from their E&O policies for violations of IRS regulations, which are not only costly but could also damage an advisor’s reputation and deter future business. This is particularly important as more firms allow their advisors to offer a broader range of advice, including tax-related recommendations. The best approach may be to provide a framework that divides the process into three phases: Consideration, Consultation and Recommendation. During the Consideration phase, the advisor sketches out the proposed strategy and analyzes its impact on the client’s situation. During the Consultation stage, the advisor and their client’s tax professionals discuss how to implement the strategy in practice. Finally, during the Recommendation phase, the advisor and the tax professional present the proposal to the client. Steuerberatung

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