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Are you trying to learn how to deliver massive tax value to your clients? Then look no further. Retirement Tax Services Podcast, Financial Professional’s Edition is a show hosted by Steven Jarvis, CPA. Steven aims to bridge the gap between tax professionals, financial advisors and their mutual clients in their quest for reducing tax expenses in retirement.
Welcome to the Retirement Tax Services Podcast! It is Tax Q-and-A Friday and Steven is answering a question submitted by an advisor named Daniel. Daniel’s in a situation involving a client’s CPA: Should he object to what might be bad advice? Also, how should he handle a disagreement with a COI?
Daniel’s client recently called. They informed him that their CPA has filed an amended tax return for 2019. This was done to reclassify their 2019 retirement distributions as Qualified Disaster Relief Distributions. Using Form 8915-D, they planned to spread the tax liability over 3 years.
The CPA claimed Covid-19 as the disaster. He’d given March 1, 2019 as the starting date. As a result, Daniel wondered how this could be justified: Most of Covid-19’s impact began in 2020. Had the CPA given bad advice?
Daniel admitted that he might’ve missed something. Nevertheless, the 300-pound gorilla was in the room. For the client’s sake, he couldn’t ignore it.
Eventually, you’ll see something similar with a client(s). Therefore, how do you approach a COI who may have dropped the ball? No one intelligent wants to burn bridges. However, the matter must be addressed.
Contacting a strange CPA/lawyer/et cetera can be intimidating. First of all, Steven suggests taking ownership.
In other words, take honest responsibility for what might be ignorance on your part. Even if your suspicions are right, keep humble. You’ll deliver more value that way.
Secondly, assume positive intent on the COI’s part. Whether they’re mistaken or not, they probably only intended to benefit the client. Additionally, an accountant who does taxes regularly might know something you don’t. Give them the same benefit of the doubt that you’d want.
Last but not least, focus on providing value to the client. You can’t go wrong with that as your goal. In fact, you may find that it’s common ground you share with a CPA. In best-case scenarios, this could lead to mutual respect—and in time, recommendations.
Do let the client in for your initial communications. This is a must-do (and base-level professional courtesy). Nevertheless, you always want the client’s permission to reach out. That’s all you need from them, though.
Conversing while the client listens in will only put the other party on the defensive. In a previous episode, an advisor named Michael saw the other end of this scenario: He was the recipient of an unexpected call from a CPA.
The stranger read him the riot act—with their client hearing every excruciating word. Thankfully, Michael kept his cool. Just the same, you can imagine what might have happened if he hadn’t.
It’s never a good idea to follow that CPA’s example. Instead, ask the client’s permission to contact the COI on your own. Express it calmly, as a desire to learn more about the strategy in question; not to start a hostile interrogation.
Next, contact the 3rd party in the same relaxed tone. Tell (yourself and then) them that you’re curious why they chose the strategy. Try asking to buy an hour of their time. This demonstrates professional respect, which normally makes people much more cooperative.
Steven has more tips for handling disagreement with a COI in this edition of the Retirement Tax Services Podcast. If you enjoy it, please feel free to subscribe to us on Apple Podcasts or wherever you’re listening from.
Do you have suggestions? Would you like to share a retirement tax planning experience on the podcast? Drop us a line at firstname.lastname@example.org.
Thank you for listening.
Hello everyone and welcome back to the Retirement Tax Podcast, I am your host Steven Jarvis and today’s episode is going to be our tax Q&A Friday edition. Our goal here at Retirement Tax Services is to help financial advisors deliver value to their clients. So rather than just theorize about what might work or what topics might be interesting, we go right to the source and ask advisors to tell us what is interesting and was working for them. On this week’s episode we’re going to answer 2 questions that come from an advisor named Daniel, so big thanks to Daniel for putting the questions out there for us.
Both of these questions relate to a situation that he’s in the middle of with a client CPA, which fits nicely into the conversations we’ve had already this week about centers of influence. If you missed a Monday or Wednesday episode on centers of influence, I highly encourage you to go back and give them a listen. There’s a lot of great information there, some really important action steps that come out of those as well. Alright so here’s the situation Daniel finds himself in, and I’m going to throw out a few forms and tax strategies that may be new but we’ll circle back and talk about them in more detail in a minute.
So one of Daniel’s clients recently called him to let him know that the client’s CPA has filed an amended tax return for 2019; for context, this episode is being recorded in April of 2021. The reason for the amended return was to re-classify retirement distributions that were taken in 2019 as qualifying disaster relief distributions using form 8915D to spread the tax liability over 3 years. The disaster the CPA is claiming on behalf of the client is of course, Covid19. Now Daniel’s gut reaction to this strategy was that this couldn’t possibly be justified since Covid19 didn’t actually start having an impact until 2020, and on the form the CPA had listed the disaster starting on March 1st 2019. So to Daniels credit in his question he acknowledged that maybe there’s something he was missing, but essentially asked “how do I address this with the CPA” or another is “how do I address the situation that feels so clearly wrong” and “how could you possibly claim a Covid related distribution in 2019”.
So let’s start with how to address the CPA or really any other professional working with one of your clients when you think that they have made a bad recommendation to your client and then we can get into the details a bit more on the qualified disaster distributions. So for those of you who listened to the Retirement Tax Podcast episode from Wednesday, you’ll know exactly that I’m going to start with my recommendation.
First, take ownership then assume positive intent and focus on value to the client. Before I could respond to Daniel, he got a recommendation from an advisor in his network that boils down to those 3 key points. Even if as an advisor you focus on tax planning and you feel like you’re an expert in that area, it’s pretty likely that a CPA who spends all of their time on taxes is going to be more of an expert in some of those areas than you are, that does not make that CPA infallible but should mean you start with a curiosity mindset to try to learn more. You can use the same approach we discussed earlier in the week and reach out and offer to pay for an hour of their time to better understand that strategy that they’re recommending and to learn more about how this benefits your shared client. The piece I really emphasized to Daniel is that especially in a situation where you as the advisor are really questioning the decision, do everything you can to have that conversation without the client present, so the CPA is not immediately on the defensive as that conversation starts. You should of course get permission from the client and let them know you are planning to have this conversation, but the client hired you to help them sort through complex financial issues in their lives, if you say “Hey Mrs. Client, I would love to call your CPA and ask a couple of questions about this strategy for my own personal understanding to make sure this fits in the overall financial plan we have discussed, is that alright with you?”
If possible when you’re setting the meeting up with the CPA, I would send over some of your questions ahead of time so they feel prepared for the discussion and you need to be really intentional that you approach this from that curiosity mindset, make sure your tone reflects that you are genuinely trying to learn from them. If you’re fired up about the issue, maybe have someone on your team read any communications before they get sent out – to make sure that tone really is consistent with what you’re trying to accomplish. Make sure you also come prepared yourself to that conversation saying it doesn’t feel right is not a valid argument, take a few minutes to either validate your concerns or just make sure you’re really going into the conversation with an open mind, ready to learn, no matter how crazy you think the idea might be on the service. If you can start the conversation making the CPA feel like you want to be educated instead of making them feel like they have to justify their actions to you, you’re going to have a much better outcome.
Again think of how you would want to be approaching the situation, even if it really is a terrible idea everyone makes mistakes even me even you, the best advisors I know are open about the mistakes they’ve made because they took ownership for them and learnt from them, think about how great of a relationship you are building and what a strong potential referral source you’ve created if you politely give the CPA a chance to correct their own mistakes, instead of aggressively pointing it out to them in client’s presence. Of course depending on the nature or the frequency of the mistakes CPA is making, maybe that isn’t someone you want referring people to you and that you wouldn’t want to refer people to, but again let’s start with positive intent, it’s really a completely different conversation if we get to a point where you want to recommend to a client that they leave another professional that they’re working with.
Okay so that addresses how to respond to the CPA, now let’s dive into what qualified disaster retirement distributions are; so qualified disaster retirement distributions were originally introduced by Congress in 2005 in response to multiple historically destructive hurricanes and since then has included events like hurricanes and wildfires and earthquakes. So the basic idea is that if your client is in a qualified disaster area or been impacted by one of these huge natural disasters, that they can take qualified disaster retirement distributions of up to $100000 per disaster, which allows them to not pay the normal 10 percent penalty on early withdrawals that they might otherwise have to pay and to spread the income over 3 years instead of capturing all of it in the year of the distribution. So to take these distributions they obviously have to have balances in retirement accounts that would allow them to take those amounts. There are a lot of important nuances and details but that’s the 40 thousand foot view. For taxpayers impacted by disasters, it certainly provides an opportunity to access funds as a result of an emergency, the program even allows a time period where the distributions can be paid back without losing the tax preferred status of the original contributions if it is done within that specified period of time.
While over the past few years this program has primarily targeted natural disasters – flooding, wildfires, earthquakes, hurricanes; for 2020, it was expanded to include Covid19. So for a client who wants to take advantage of this program, the first step is there have to have been distributions in the year that we’re talking about and from there you have to find the relevant form 8915, they are different for different years and then in the instructions to the form, it’s going to specifically list which disasters are applicable and the time frame that those disasters apply. As it relates to Covid19, which would be addressed through form 8915 E, as in elephant, the IRS stated that the disaster period began January 1st 2020 and only can be applied to distributions taken out during 2020. So from a high level data may have been right on the money, this strategy was not correctly implemented for his client by the CPA.
Even that being the case though, my recommendation to Daniel doesn’t change. We want to start by giving other professionals the same courtesy that we would want to receive, to be able to explain our approach and make a correction ourselves if necessary. So if you have clients that might benefit from this program or if you’re interested in learning more about it, IRS publication 575 and the instructions to form 8915 specifically 8915 E are great places to start, even if your clients that might benefit from this program have filed their 2020 tax return, a return can be amended to add this form to take advantage of this program. This is definitely a complex area but I would strongly recommend you consult with a tax professional, if you don’t have personal experience with it, to make sure it gets applied correctly for your client in their situation. This could be a great topic to add to your agenda for your next round of client meetings or as a newsletter or value add for your clients between meetings. If you’re getting your clients tax returns or tracking distributions in your CRM, we take hardly any time at all to review which clients had distributions in 2020 to consider whether this is applicable and should be looked into further. Even if it’s completely irrelevant for your clients, you can still take credit for assessing the clients situation on their behalf and making sure they feel taken care of; as long as you are letting the client know that you are doing these types of things for them – you’re adding value whether the strategy is implemented or not.
All right so action items on this topic: the first action item is of course request tax returns from all of your clients and prospects, this gives you a wealth of information about the client or prospect in general and how to identify potential tax planning strategies and evaluate their potential benefits, including whether qualified disaster retirement distributions might be something to look into. The next action item would be to dedicate a portion of your personal development time to learning about tax planning opportunities that are out there. As a financial advisor you are in a great position to identify potential opportunities if you know what to look for, even if you don’t feel comfortable giving the final recommendation on a tax strategy and you want to consult with the client CPA, you are still adding value by participating in the process, you can add value to your clients, you’re tax planning without providing tax advice. The last action steps specific to today’s episode would be to review your clients to see if this is an opportunity you should consider discussing with any of them. You’re looking for clients who had retirement distribution in the 2020, would potentially benefit from spreading the income from those distributions over 3 years instead of capturing all in one; now with this form there still is the option to take the income all in one year, if there for some reason was an advantage to that, you’re also looking for clients who might have had to pay an early withdrawal penalty on distribution they took during 2020.
All right everyone, thank you so much for listening today, if you’d like to learn more please look for that Retirement Tax Podcast wherever you find your podcasts or visit our website at retirementtaxservices.com. If you have a question about taxes you’d like to hear an answer to, on a future tax Q&A Friday episode or if you’d like to learn more specifically about the topics in today’s episode, please send me an email at advisors@tax, and until next time let’s all tip our servers not the IRS.
The information on this site is for education only and should not be considered tax advice. Retirement Tax Services is not affiliated with Shilanski & Associates, Jarvis Financial Services or any other financial services firms.