Transcript

SJ:

Hello everyone and welcome to the next episode of the Retirement Tax Services Podcast: Financial Professionals Edition. I’m your host Stephen Jarvis, CPA, and in this show I teach financial advisors how to deliver massive value to their client through retirement tax planning. Today of course is Friday, which means it is our tax Q&A Friday episode.

Now two weeks ago I was able to attend my first live conference of 2021 and it was fantastic. I was down in beautiful Scottsdale, Arizona. I want to give a really big shout out to The Perfect RIA who put that conference on, it was so great to collaborate with other advisors. Specially ones were so focused on growth and improvement. If you’re interested to learn more about all the great things that The Perfect RIA is doing, head over their website at theperfectria.com. So while I was at the conference in addition to enjoying the beautiful weather and learning a lot from the speakers there, I spent some quality time talking to all sorts of different advisors one particular I spent some time talking with Ben, a great advisor from North Dakota and Ben over the last couple of years has worked his way up to getting nearly 100% of his clients’ tax returns, which is incredible! So, great job Ben for doing that! Now Ben’s focus on tax planning as a key part of his approach with clients for years, so he has no trouble identifying tax planning opportunities for his clients. But he found himself happy to ask a question he just didn’t expect, which was:  What do I do with the simple returns they don’t have any obvious planning opportunities? and in part what Ben is asking here is: what do I tell my clients when they ask, ‘why did you have me bring in my return if you’re not going to do anything with it?’

So, before we dive further in to the specifics of what we can look at on those simple returns, we need to talk about the dishwasher rule. Now the dishwasher rule basically tells us that ‘if you wash the dishes and no one knows about it you don’t get any credit for doing it’. So either this is your spouse or your roommate or whoever you happen to live with, if you want credit for washing the dishes, you got to tell somebody – dishwasher rule. Now, this isn’t some sort of petty, needy, ‘I want validation for everything I do’, as an advisor this is you providing peace of mind and confidence to your clients – those are other words for ‘providing value’ to your clients – so they know that they’re being taken care of. So even if there is not some monumental shift that comes from your review of the tax return, you should be communicating to your clients that you are reviewing their returns and the types of things you’re looking for. So that they know they’re taken care of. And, if they’re newer to why an advisor might want a tax returns, feel free to share stories of other clients you have or other clients that you learn about from advisors, or from this podcast. So that you can reinforce why there is value in taking the time to do these things, because to Ben’s point that some tax returns can be more exciting, you know? Of looking down and seeing all these different opportunities for doing more complicated tax strategies, but even for your simple W-2 employee who really doesn’t having anything too exciting it’s worth the time to take some of these steps we’re going to talk about.

So, the first thing I would recommend on any tax return you look at is, that you are reviewing and verifying the accuracy of the taxpayer’s personal information. Look at name and address and Social Security number, those kinds of things, this is all information you should already have in your CRM. So you should be really well prepared to be able to go through and make sure those things are correct. Now, some people have this misconception that if something has been through our computer or it has been through a piece of software, that it must be correct, and that’s just not true. There are plenty of stories I have seen myself and I hear from advisors of data entry happening incorrectly, of information being provided incorrectly, so errors do happen. I recently was talking to an advisor whose client started getting rather intimidating letters from the IRS accusing them of doing all sorts of nefarious things and ultimately it turned out that their  social security number was off by one digit on the tax return and that’s what prompted all these letters was that the IRS thought that this person was someone else, and so it really is just a simple matter of double checking that information that’s already in your CRM. That’s one thing you can do on any return, and again dishwasher rule you might have less than 1% of your clients that actually have an issue there, but if your clients know these things can happen and that you’re making sure it doesn’t happen to them, that’s a value to them, that’s peace of mind, that’s confidence, that’s why they’re coming to you. You can also look at their filing status, whether single, married filing jointly, married filing separately or whatever the case might be. Which may not sound exciting and for most people doesn’t change that often but, as an advisor you typically know a lot about what’s going on in your clients’ lives, and you might be the first one to be able to say, ‘hey this is something we need to proactively look at, there’s been this change in your life, did that hey properly reflected on your tax return.

As you start doing this over time as Ben has been doing you can start comparing the current year return to the prior return and even there weren’t any of those really shiny opportunities in either year, this starts giving you a good framework for what is changing over time. You can look at not just the amount of income but the types of income, what lines on the face of the 1040 or income coming through on. You can look to make sure that they are getting similar deductions or credits from year to year to make sure there aren’t any changes that should’ve been reflected or if there weren’t any changes in their personal life or their situation, making sure that you’re seeing those consistent numbers come through.

Another one that I recommend to all advisors for all of their clients, is to look at – on the second page the 1040 – did your client receive a refund at the end of the year or did they have to make a payment? Now there is not one right answer for what you should be doing with your clients, it depends on what their goal is. Some people hate paying the IRS so much and physically writing the check, that they’ll do anything to avoid writing a cheque in April. So they want to make sure they get a refund, and they want to err on the side of getting a bigger refund so there is no way they are having to physically write a cheque to the IRS. You’ll find clients the opposite end of the spectrum where they say, you know what I am not giving the government an interest-free loan, so I would rather make sure I don’t pay any interest or penalties but I want to write a cheque every single year. With a little bit of work, you can get that refund or payment dialled in within several hundred dollars, that’s really not too hard to do but ultimately, it’s what is your client goal and what are they comfortable with? But take a look at what that refund or payment look like and ask them if they were happy with that, with that outcome. Interesting on this point is that, while your clients probably have no idea how much total tax they paid through withholdings or estimated payments, but most of them will be able to tell you if last year they had a refund or had to make a payment, it’s a very emotional thing for most of us.

Last thing thing, I recommended that you do with all clients is that you look at the 1040 with them. Again, whether it is simple or complex, review the 1040 with them, you can point out some of these things that you’re doing for them, and you can also start helping them understand where more complex strategies will be reflected on their tax return. Whether that’s things you are currently implementing and so you can see how they are being reported correctly or there are things that you are prepping them for, for future years to say, ‘hey, here’s what this is and this is where you will see this come through on your tax return when you do Roth conversions or when you work with them to do QCDs, so that you’re helping your client understand more of how the process works.

Alright there of course plenty of other things you can and should review a return for, I really just wanted to focus on what we do in those more simple situations. But if you’re newer to this and you aren’t sure where to start with reviewing tax returns, go ahead and send an email to advisors@rts.tax and I’ll be happy to send you a 1040 where you check-list that we use and I use with advisors, that you can have it as or as a reference to… really as a starting point and then depending on the niche you work with, there might be specific things you add to that. It’s certainly not an exhaustive list, the tax code is way too expansive to have a condensed list that would cover every possible scenario. But it does give you a good starting point of things that you should commonly look for and, like I said depending on what your niche is or who you typically work with, you might add items of your own.

Couple of other points is related to Ben’s question: you really should be doing long-term planning with your clients, so even if there was anything exciting on their return this year, really you’re implementing and building a process to make sure you are proactive to changes in their lives or their tax situation, or and this seems rather relevant in 2021 if there is changes in tax laws, and so you need to be proactive and not reactive. You are going to miss opportunities if you wait for complex things to happen, to even ask for those things. Get your clients in the habit and get yourself in the habit of going through this process.

Now, it’s possible you’ll have clients who push back on you when you asked for their tax returns and they say, ‘Hey, my CPA, my tax preparer looks at all of that I really don’t need to provide it to you.’ This is something you might hear but a couple thoughts on this: One, make sure that this is never an opportunity for you to to blame or despair as a CPA in any way. Mistakes do happen and that is true, mistakes happen in every profession so finger-pointing never gets us anywhere. You really want to present this as a team approach as having a second set of eyes, explaining to the client that quite often the advisor is in a better position to review some of that information that the CPA or tax preparer, typically is dealing with these returns in a condensed time period for a significantly larger number of clients than the advisor, pushing up against a deadline, so lots of times the advisor rises in a better position to review these. Another great thing about implementing, reviewing tax returns in your practice is that this is something you can easily systematise, and delegate to your team. Maybe not the whole process but quite a bit of it, this doesn’t just have to be additional time for the advisor. If you have a good checklist in place, if you have a good system for prompting, requesting those returns and organising them as they come in, this is something that can be easily delegated and just have the more complex situations brought to the lead advisor or only a summary of what should be discussed at the next client meeting. As we talked about in the beginning, don’t forget about the dishwasher rule, don’t forget about providing that peace of mind and confidence to the clients. This should come up with them whether you find something new, or not.

Okay so before we wrap up, let’s talk about action items. First action item – to no one’s surprise – is get a tax return for every client, every year. Even the simple one’s. You really shouldn’t have any criteria that lets clients opt out of bringing their tax return to you. One great way I’ve heard from advisors of how to approach this with the client is to say, ‘what’s in for for me to do my best work I need to be able to see your complete financial scenario, your complete financial picture, and for me to get that complete view I have to be able to see your tax returns. Now I am only willing to do my best work, so for us to work together you’re going to need to bring in your tax returns.’ That is just one way you can approach it, there are plenty out there that work, but I guess don’t-don’t give your clients the opportunity to opt out of this. This really should be non-negotiable. Next action item is to make sure you are using a checklist or some kind of system or process to make sure that reviewing your returns is both comprehensive and efficient. Like I said this shouldn’t just be additional advisor time, if you have a checklist already or you have a process in place already but you haven’t an updated it in a while, then, your action item should be to go and review that and make sure you update it. Tax rules change all the time, don’t just wait for this next tax law change, go ahead and review it now. For example, I am talking to a lot of advisors, who are not familiar with form 8915-e, which covers qualified disaster retirement plan distributions, and we won’t get into the details on this episode but you can certainly go out to retirementtaxservices.com to learn more about this, and it’s something that’s going to catch a lot of advisors by surprise if they’re not reviewing for it, because there is potential to mess up a lot of your planning in 2021 and 2022 for your clients if you aren’t aware of whether this is applicable to your clients.

Like I said before, if you’d like a checklist to help you get started just send me an email at advisors@rts.tax. Alright, next action item, find other advisors you can collaborate with, the advisor who prompted this question, Ben, he could have easily just stopped asking for his clients’ tax returns, if they weren’t complex enough but, instead he used his network because – it wasn’t just me, there were some other advisors there as we were having this conversation – he used his network to work make sure he was delivering value to his clients. He was looking for that input from other people who are doing this in practice. Because I am a huge advocate of learning from those who are doing, and I do say that fully acknowledging that I am a CPA, not a CFP, I’m not financial advisor, but that’s why I am always bringing on guests who are advisors who are currently practising so that we can match up great information with how it works in practice.

Now our network of advisors at Retirement Tax Services is definitely growing. So if you’re looking for advisors to collaborate with on tax planning in particular, head out to retirementtaxservices.com and get on our email list, for the next time our cart opens, so that you can become a part of our community. Last action item as usual is to go out to wherever you listen to your podcasts and leave us a five-star review and feel free to provide some comments so that we know that this is valuable and our community keeps growing. Thank you everyone for listening, good luck out there and remember to tip your server not the IRS!