The Good, Bad, and Ugly of Adding Tax Services to Your Practice

Written by: Blake Pinyan | Anchor Bay Capital

It’s now 2023 and clients want more. They want more services added to your menu, beyond managing investments and providing general financial planning. This is not to say that those core offerings are not valuable, but it’s foolish to not acknowledge the vast number of large players in the industry that are marketing the same services. In addition to providing comprehensive financial planning, advisors can differentiate by offering tax preparation.

Most advisors refer tax preparation services to local Certified Public Accountants (CPAs) or Enrolled Agents (EAs), but there’s a ton of value in fulfilling both roles. Before going all in on this additional service for your clients, it’s wise to understand the good, bad, and ugly. 

The Good 

There’s incredible value in adding tax services to your practice. Summarizing it into four points; It can lead to:

1. New business opportunities & additional revenue

2. A more structured meeting cycle

3. Easier tax planning, and

4. An overall better client experience.

 

1. New Business Opportunities & Additional Revenue

When you prepare a tax return, you can better understand your client’s financial situation and potentially streamline the implementation of your planning recommendations. You quickly understand what they do, how much they earn, and what investments they have by reviewing tax forms like a 1099 or 5498 and by asking follow-up questions. For example, “Ms. client I see that you had a large rollover distribution from your 401(k), did you just retire?”

The pool of tax clients is also much larger and the barrier to entry to becoming a client is much lower compared to Financial Planning or Investment Management. As a result, converting a prospect to a client in your tax practice can be much easier than in your advisory business. Engaging a prospect to prepare their taxes can be the first step to a more comprehensive client relationship. You can continually provide additional value and advice that builds trust, likely resulting in building the client’s interest in your other services.

Furthermore, acquiring an investment advisory practice may be out of the question for many cash-crunched small practice owners, especially with today’s valuations. Tax practices may offer more affordable revenue or income multiples for practice acquisitions. You can potentially purchase a tax practice at a much lower cost and higher client count compared to an advisory one. The catch is that the Financial Planner needs to put forth the effort and time to convince the qualified, new tax-only clients that their other services are valuable additions to the advising relationship. But the work may be worth the reward for the right total acquisition cost, additional workload, and client base. It’s a great way to set yourself up for a long-term growth pipeline. 

The proposal of offering to be both a prospect’s Financial Planner and Tax Preparer may be the reason they choose to hire you. Most advisors don’t do both, which is why the one-stop-shop approach can be very attractive.

Lastly, preparing taxes is typically associated with additional revenue for your firm. The amount will vary on how many returns you do and your fee structure, but it’s another way for your business to generate revenue while providing additional value to clients.

2. Creating a More Structured Meeting Cycle

Most clients have adopted the cadence of meeting with their tax preparer in February, March, or April to get their returns filed before the April 15th deadline. Fortunately, this timeline works out well for advisors that have semi-annual client meetings. Since you already need to meet with your clients in the spring to discuss their tax returns, you can bundle other financial planning or investment topics into the same conversations. Six months later, you can schedule your second client review in the fall, which coincidentally, aligns with an important financial planning time of the year (open enrollment, year-end planning, etc.).

3. Easier Tax Planning 

Financial Planners that prepare taxes, particularly those with either a CPA or EA, can streamline tax planning for their clients. They can serve as a single point of contact for a wide array of services and integrate tax planning into the advice they provide in other domains, like investment management and benefits selection.

Additionally, advisors that do not prepare taxes may struggle to get time on a tax preparer’s busy schedule. Particularly, when you want to run a tax idea or strategy by your client’s tax preparer, you rely on their availability to discuss the topic before it can be implemented. If you try and reach out during their busy times of the year, there is a possibility they may be too preoccupied with other responsibilities to reply promptly. Moreover, they tend to take significant time off after the tax deadlines and may choose to unplug from work or email during these breaks.

It is also imperative that you and your client’s tax preparer are on the same page regarding tax recommendations for your mutual client. Failing to discuss a tax recommendation with the client’s preparer can result in a large tax bill that sours the client’s relationship with one or both of you. It may also impair your relationship with the tax preparer and, as a result, do a disservice to other clients who employ both you and the preparer.

Tax planning becomes easier when you prepare taxes for your clients because you do not go through the extra step of running it by their tax preparer. It’s also noteworthy that as a Financial Planner, you can avoid a common issue that Tax Preparers and Financial Planners have: the decision process of reducing taxes this year or reducing taxes over the long term. Serving both roles puts you in an ideal position to evaluate whether the client benefits more from a short-term write-off or a long-term tax planning strategy.

4. Better Client Experience 

Preparing taxes also generally leads to an advisor obtaining more tax education. Continuing education can increase the planner’s ability to offer timely advice and adapt the plan to changes in tax law.

 Like prospects, your existing clients may fall in love with the idea of you being their Tax Preparer and Financial Planner. It can make the relationship stickier and even lead to increased client referrals, solely based on you offering both services. Since most advisors don’t do both, fulfilling these two roles can be considered a unique competitive advantage.

The Bad 

Although it has many advantages, preparing taxes certainly comes with its own disadvantages. Two downsides to adding tax preparation to your practice are:

1. The initial setup and

2. The extra risk of liability.

 

1. Initial Setup

You don’t wake up one day and decide to start preparing taxes. Getting your tax division set up will take some time and effort. All preparers that would like to be compensated for their services must obtain a Preparer Tax Identification Number, or PTIN for short, from the IRS. This is inexpensive and typically not difficult to obtain. The time-consuming part can come into play if you live in a state requiring state-level tax licensing. For example, the minimum certification needed in California is the California Tax Education Council (CTEC) license. California preparers must be a CTEC Registered Tax Preparer (CRTP) to charge a fee for preparing a client’s tax return, unless exempted by virtue of being a CPA, EA, or California State Bar-licensed attorney. To become a CRTP, you must complete and pass initial exams on 60 hours of qualifying tax education material. You must also purchase a $5,000 surety tax bond, pay registration fees, and pass a background check/live scan. Each year thereafter, you will be required to complete a minimum of 20 hours of continuing education and pay additional renewal fees. Each state has its own unique set of rules so it’s best to check your state’s tax licensing requirements, as some are much stricter than others.

Furthermore, if you choose to pursue the EA designation, it will require passing three 100-question exams, paying registration and renewal fees, and completing 72 hours of continuing tax education every 3 years. Becoming a CPA is an even heavier lift than that, requiring higher levels of college education and a four-part examination, along with its own continuing education requirements.

You’ll also need to adopt and master tax preparation software. There are many types of programs out there, and some have a steeper learning curve than others. It will take a fair amount of practice to feel comfortable with your software and confident in filing client returns. Beyond this, you’ll need to familiarize yourself with the myriad rules and regulations that tax preparers must abide by at both the federal and state level to ensure your systems and processes meet these requirements.

2. Extra Liability Risk

Another drawback of preparing taxes is the extra liability risk. Financial Planners are subject to significant regulations even when not offering tax preparation and representation services. Adding tax services to your professional offerings introduces further restrictions and compliance rules, and the potential for incurring fines and disciplinary measures if these are not adhered to. There are many types of penalties that can be assessed against preparers, which range from small monetary fines up to multi-year imprisonment. Instead of just being compliant with the SEC, advisors that also prepare taxes must be in good standing with the IRS and their state’s department of taxation. It’s then prudent to place a high priority on attention to detail and consider adjusting your Errors and Omissions (E&O) insurance.

The Ugly 

The ugly, as you may have heard, is the stress of tax season.

Stress of Tax Season

The months of February, March, and April are the most chaotic months of the year for tax preparers. Long hours, little sleep, and pressure to meet filing deadlines all characterize this time. The workload depends on how many returns you file and what type of support you have, but it’s safe to say that your undivided attention during this timeframe is focused mostly on completing tax returns. Taxes are collaborative as well; you’ll need your client's engagement to some degree which can be frustrating if you are serving clients that are inattentive or prone to procrastination.

Preparing taxes takes enough of your time but overlaying that job with all your Financial Planning responsibilities can become a nightmare. The keys to success are time management, knowing your return capacity, and leveraging technology/your support systems:

• You should not be doing as many returns as a full-time tax preparer, as you wear many other hats.

• Lean on tax automation and workflows as much as you can.

• Efficient and effective tax operations are crucial for saving time and scaling your client count.

• If your personal capacity is an issue, you may consider hiring a full-time tax preparer to work within your firm, rather than taking on the full responsibility yourself.

Is it right for you?

Adding tax services to your practice is appealing to some, but it’s not for everybody. Hopefully, you now feel more informed about many of the benefits and drawbacks. Above all, those that are interested should know what they are getting themselves into before they go all in. Tax preparation can be an enormous value-add for clients, but it requires consistent diligence and hard work to provide.

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