Love Letters from the IRS
Drive a car long enough, and you’re going to get pulled over. Not everyone gets a ticket, but the blue lights in the rearview at some point in a driving career are almost inevitable. The same is true with paying taxes. Just like with driving, there are some behaviors that increase your chances of catching the IRS’s ire, but it’s good to have a plan for when questions inevitably arise.
The good news about IRS attention compared to getting pulled over, it doesn’t happen all at once. You have time to put your best foot forward and not simply react in a high-stress environment. As a financial professional, you’ll likely be able to keep your cool and calmly navigate the IRS attention…but are your clients prepared?
“WAIT! Steven, you can’t possibly think IRS letters to my clients are my problem…right?”
That depends, what kind of advisor do you want to be?
The reality is that your financial planning (whether you think it’s tax-specific or not) has an impact on your clients tax return. That means you could directly or indirectly have an impact on a client getting an IRS letter or audit. And not just if you do something wrong either. Over the last 12 months, we have seen a huge uptick in IRS errors that get communicated in panic inducing ways (I personally received one, no panic, but I wasn’t thrilled).
Further complicating the issue is that many CPAs don’t see responding to IRS letters as an included service in what they offer their clients. Some will charge extra for it, leaving the client panicked and contemplating doing it on their own. Some just won’t deal with it at all and leave the client on their own – the letters are always addressed to the taxpayer, not the preparer.
So whether you see it as an opportunity to deliver massive value or part of your professional responsibility to see your planning all the way through to reporting (I think it’s a combination of both), you need a plan for what you’re going to do when a client calls to let you know they’ve received an IRS love letter.
To be clear, if the letter has nothing to do with your planning, your role will probably just be talking them off the ledge and facilitating a conversation with their tax preparer. BUT, if it’s about a backdoor Roth contribution (we’ve had two audits of this in the last 2 months), or a misapplied rollover, or a disallowed contribution, or a missed 1099, or fill-in-the-blank with a whole list of other things you could have impacted, don’t you want to be able to do more?
Next Friday, in our weekly newsletter, I’ll share my framework for approaching an IRS response so we can all help more clients.
Happy Tax Planning!
P.S. On February 12th, RTS will be hosting a CE-eligible webinar for just $47: “Where financial planning actually hits the tax return” to help advisors and their teams better understand where the financial planning they’re already doing comes through on the tax return. Sign up today!
