Complete Pre-Year-End Planning for Select Clients

Editor:
Steven F. Holub, CPA
Aidman, Piser & Co.
Tampa, FL

Author:
Edward Mendlowitz, CPA/PFS, ABV
Shareholder
WithumSmith+Brown
New Brunswick, NJ

Editor’s note: Mr. Holub is a former chair of the AICPA Tax Division’s Tax Practice Management Committee. This column is adapted from Mendlowitz, Managing Your Tax Season (AICPA, 2006).

Pre-year-end planning for clients starts in late October and continues through December. Generally, the meeting with the client should last no longer than one hour. There are several approaches to the pre-year-end planning meeting. This column describes three and also addresses cross-selling opportunities.

Tax Projections Review

There are different types of tax season clients. Projections should typically be prepared for those:

• With higher incomes;
• With uncertain and varying income;
• With unusual transactions during the year;
• Subject to the alternative minimum tax; or
• Whose returns are affected by year-end actions.

Many clients obviously need projections, while others’ needs may not be so clear, so it is important to alert clients when to contact the firm for a projection. It is also a good idea to prepare projections for most of the new clients obtained toward the end of the year.

Why prepare projections?: Preparing projections serves as a tool to guide clients on how they can reduce taxes by accelerating deductions or deferring income. It also provides an opportunity to review a client’s financial situation and allows concentrated, unrushed time to discuss a client’s financial affairs. Some clients may be able to avoid underpayment of estimated tax penalties by increasing year-end withholding. Further, projections provide a road map that a reviewer can use to compare to the actual return, to make sure there are no overlooked items. Finally, a well-prepared projection can avoid a potential shock and a last-minute scramble for funds if the calculated balance due is higher than expected.

When to prepare: Projections should typically be prepared twice a year for most clients: once when the tax return is prepared, and again toward the end of the year, when the “results” are known. When the return is being prepared, the interviewer should ask the client questions about expected current-year income or changes from the previous year. This is needed to determine estimated tax payments and serves as a guide to the client’s current-year situation. Usually, the interviewer should be a higher-level staff person or a partner. If the information is sent in without an interview, the preparer (usually a lower-level staff member) should call the client to find out the information needed for the projection.

Meeting: At year-end, a partner or manager-level staff person should meet with the client to discuss the situation for the year and the expected outcome, as well as the opportunities for year-end tax planning.

In some cases, the projection should only be done during return preparation and followed by a phone call to the client toward the end of the year to determine whether there are any major changes and to discuss year-end tax planning. In other cases, projections should be prepared each time a quarterly estimated payment is due, to calculate the proper payment. This is usually done for clients with lower income than the previous year who do not (and should not) want to pay estimated taxes based on the protective prior-year tax. The pre-year-end meeting offers an opportunity to discuss a client’s affairs and concerns and determine any planning.

When there is no meeting and the information is obtained another way (i.e., via e-mail), a firm staff member should send the client a copy of the worksheet and arrange to discuss it over the phone. When there are major changes that will result in a large tax bill, the partner most knowledgeable about the client should call and discuss it.

By the time the firm is done, it will have reviewed the projections numerous times with many clients—with some clients, almost monthly. A tax projection memorandum can accompany a tax projection sent to a client. The memorandum helps to make the projection and information given to the client user friendly and reduces the need or urgency for a face-to-face meeting; a discussion via phone or e-mail may suffice.

Line-by-Line Review

In summer, the firm can meet with clients and review their returns with them, line by line. This accomplishes a number of things; it:

• Is done at a less hectic time;
• Creates an opportunity to involve clients more proactively with their returns;
• Is a good way to discuss financial planning (as well as tax planning); and
• Gives clients an opportunity to share their life goals.

Occasionally, this meeting points out errors on the return, although that is not the meeting’s purpose. Then, a determination has to be made, with the client, as to whether an amended return is to be prepared and filed. In some cases, the client should be told that the amended return will be prepared when the return for the following year is prepared.

Unprotected Estimates Review

For returns in which the client is not “protected” with “safe” estimated tax payments, the firm should put the estimated tax payment due dates in its tax control, to be followed up during the year before the September and final estimated tax payments. The tax control should also contain estimated tax payments for selected clients based on their needs and the firm’s involvement with them. In that case, the firm should mail the client the estimated tax forms about two weeks before the due date; see the exhibit below for a sample unprotected estimated tax payment notice.

Any unprotected client is a prime candidate for a projection; the firm should ask such clients to call about two weeks before the estimated payment due date if there are any changes in their situation. During that call, the staff member should define a “change” as:

1. An increase or decrease of more than 25% in the client’s regular income stream;

2. Sale of an asset not typically ex-pected to be sold (such as a business);

3. Change in marital status;

4. Purchasing or forming a business;

5. An inheritance or expected inheritance;

6. An unexpected disaster;

7. Winning the lottery;

8. Commencing or ending a lawsuit for financial damages;

9. Receiving or exercising stock options or employer securities;

10. Receiving a large promotion; or

11. Separating or retiring from a job.

Additionally, the firm should call many clients as needed, rather than waiting for them to call.

Cross-Selling Opportunities

Almost every tax client needs additional services that the firm can provide. The issue is not how to approach them with the suggestions, but when. Failure to do this removes an opportunity to serve clients better and to improve revenue and client relationships. The firm should collect copies of the tax return summaries or Excel spreadsheets. A partner should then review them to determine if there are additional tax or financial planning opportunities. The firm should also specifically review all clients who file a Schedule C to see whether a pension plan is applicable, and, if so, call them. Additionally, the firm could suggest opening Keogh plans, simplified employee pensions, savings incentive match plans for employees, defined-benefit plans, nonstatutory option plans and deferred compensation plans, when appropriate.

The firm might compile a list of clients’ birth dates and note which clients might have to take required minimum distributions from IRAs; when a client has multiple IRA accounts, the firm might note which account to take the withdrawal from.

The firm should also prepare follow-up lists when it reviews returns for additional services to be performed after tax season ends. Clients should be called around the middle of June. Note: If the additional service is time-sensitive, it should not be delayed; a partner should be advised and arrangements should be made to help the client in a timely and appropriate manner.