As anyone who has ever filed a tax return can attest, the U.S. tax code is 2,600 pages long (although accompanying explanations and all past tax statutes push that number much higher). Buried in those pages are trap doors and breaks that average consumers wouldn’t see if they were looking for them, but a professional tax advisor knows how to find them.
For example, if you have investment income that could be documented through receipts, it may make sense to start saving those receipts to claim the standard deduction or itemize. In addition, if you plan on starting or transferring a business in the near future, it may be worthwhile to consult an advisor about what type of entity might work best for your circumstances. An advisor who is familiar with the tax code can also provide guidance on whether it makes more sense to use an IRA or a S corporation for your business.
Similarly, when planning for a major life event like a wedding, college graduation, divorce, or the birth of a child, it is important to consider the impact from a tax-related perspective. For instance, a marriage or the birth of a child may change your tax status and impact how you set up your retirement account or how you take distributions from your savings and investments. A knowledgeable tax advisor can help you navigate those changes and ensure you don’t leave any money on the table come filing time.
While many consumers can get the advice they need from a paid tax preparer, those who own a small business, invest in real estate or trade securities need more nuanced treatment than the cookie cutter approach of a pay-as-you-go firm that provides only basic accountsancy and general tax tips. In those cases, a specialist like an enrolled agent or a certified public accountant (CPA) can help.
Both enrolled agents and CPAs are licensed by the federal government to represent clients before the IRS, but they differ in their qualifications. In short, an enrolled agent has special training and is allowed to provide general consumer and small business tax services while a CPA has passed a rigorous exam and must continue to meet ongoing industry regulatory requirements.
As a result, it is essential for financial planners to be clear-eyed about the fact that most of their recommendations will constitute Steuerberatung in one form or another, and to develop a process for identifying gray areas where they must seek out the assistance of a qualified tax professional. This will allow them to better focus their efforts on how they can create value for their clients, while ensuring they are not crossing the line into tax avoidance strategies that require a designated tax professional to practice before the IRS or that violate their firm’s compliance department policies.