RTS #049 Your client is LIVID! And I have to hear about it
One of the “joys” of being a tax professional is helping taxpayers settle up with the IRS each year. That inevitably means breaking the bad news at times that it’s time to write a big fat check to Aunt IRS. Paying more in taxes right now isn’t inherently a bad thing if it’s intentional and part of a long-term plan, AND the client is expecting it. Where things go wrong is when the tax bill comes as a surprise…and 99 times out of 100, if there is an unexpected tax bill and you did any kind of tax planning, you, as the Financial Advisor, are getting blamed.
“Are you kidding me! How can I possibly owe that much?!”
“It seemed like a good idea at the time, but that’s a really big bill.”
“No way that is right; there must be a mistake.”
These are all things I’ve heard from clients. Thankfully for me, I work alongside tax-focused advisors who do a great job setting expectations on taxes, and resolving these concerns is relatively simple. It’s typical just reminding the taxpayer of the “why” behind the tax planning that was done, and that’s all they need to remember the original conversation with their advisor, and we get to move on. That only happens when the advisor did their job laying a great foundation around taxes AND the tax professional takes a collaborative approach (as opposed to what I more commonly hear about, which is “Yep, looks like your advisor really screwed that up. Why would anyone pay taxes before they absolutely have to?”).
But even for the best advisors reality does not always follow the plan. One client I worked with this year had completed a large Roth conversion at the recommendation of their advisor and paid the taxes on it at the time of the conversion. They felt good about the strategy. They even told me they felt good about the strategy…until I told them they had to pay the IRS $26k. Before I could explain any further, the client blamed the Roth conversion and the Advisor and regretted the whole thing.
Thankfully for this taxpayer, I take the time to understand the whole return and don’t cherry-pick. Yes, the Roth conversion was the single largest change from the prior year, but it wasn’t the only one.
Interest rates were up in 2023, so they had significantly more interest income on line 2 of the 1040, which has no tax withholdings.
Their investment portfolio also kicked out more dividends in 2023 which came through on line 3 and also has no tax withholdings.
Their income from line 5 jumped compared to the prior year, and I helped them understand that the new state pension income they were receiving did not have a single dollar of withholdings but was all taxable (we helped them resolve that issue moving forward as well).
We also reviewed line 12 together, and I showed them how they were back to taking the standard deduction after itemizing at a far greater level the previous year because of one-time life events.
In a matter of minutes, I provided context for why the $26k tax bill had nothing to do with the Roth conversion. Yes, I look at thousands of tax returns but nothing I shared with them was technical, it was high level stuff that anyone with a little bit of experience reviewing tax returns would be able to get through.
The more important question is whether someone in your client’s life is taking the time to review their tax return in a systematic way to ensure that the planning that has already been is being reported correctly and to check for future planning opportunities.
Whatever system you decide to use for getting that done, make sure you commit to having a system, commit to regularly using that system, and commit to practicing so you are always getting better at this incredibly important skill.
Happy Tax Planning!
Resources that can help you transform the tax return review process:
