The tax professional field has been a hard one to be in for several years now, and even more so since March 2020.  It unfortunately is expected to continue to be a rough tax season in 2023.  In this post, you will receive some perspective of what it’s like to be a tax preparer in the current environment, and get some tips on how to prepare your clients and lay the groundwork for them to collaborate effectively with their tax professional.

Background

What does a tax preparer’s life look like during a regular tax season?  Tax return preparation began in mid-January, but it really is going full bore by mid-February.  Many go without a single day off for those last 2+ months.  Those 7 day weeks will often range from 10-14 hours of tax preparation.  Their software will be changing on them regularly.  Federal and state forms may not be finalized until different dates well into the filing season.  Different states have different first-file dates, so clients will be anxious to file when the preparer is not yet able to.  You may find late fees starting being charged by tax preparers around mid-March, but it doesn’t staunch the tide.  Clients will call, email, and text constantly, along with wanting hours long individual consultations.  This will continue right up until midnight of tax day, with the last two or more weeks likely being a scramble to estimate taxes due and file extensions for all of the remaining clients.

With the COVID-19 related tax law changes, since March 2020, tax preparers have additionally had to deal with:

• Shifting deadlines
• December tax law changes for the tax filing season beginning in January
• Three economic impact payments (EIPs)
• Advance child tax credits (CTCs)
• Changes to RMDs
• Coronavirus-related 401k distributions

Newly impacting many 2021 tax returns were:

• Reconciliation of the monthly advance child tax credits (CTC), via Letter 6419, which clients may or may not have been eligible for.
• Reconciliation of economic impact payment (EIP) 3, via Letter 6475, that more clients than not had not received, noticed, understood, and/or remembered.
• An increase in the number of taxpayers trading crypto.  The various trading platforms provided differing documentation automatically (some sufficient for tax preparation, some not), causing the taxpayers to need to go back to their platform to pursue appropriately detailed levels of documentation to prepare the tax return.
• Spreading COVID hardship 2020 401k distributions across 3 tax years (so the 2023 tax season for 2022 tax year will also be impacted).  In many tax software packages, this new change did not have built-in carry-over of multi-year implications in the software, and the prior return a new-to-you client provides did not show that carry-over information either. 
• Service issues and backlogs with the IRS, resulting in unprocessed 2020 returns, and applications of 2020 overpayments to 2021 returns not being recognized (looking like a 2021 net underpayment).

Add to that the delays in tax preparation software roll-outs, stressed and confused tax payers who then come across as cranky, the aging demographic of tax preparers, and it being hard for tax preparers to hire staff; the result is that the ranks of tax preparers across the country have thinned.

With some planning ahead, you can help your clients have a good 2023 tax season, possibly pay less in tax preparation fees, and be your client’s tax preparer’s hero for helping get the pre-work done early.

What do I need to know?

You can have a big impact on your client’s tax preparer’s quality of work life by paying attention to the following items that impact many taxpayers:

• Tax deadlines follow the same general flow from year to year, but the exact dates occasionally vary.  The IRS provides a tax calendar, https://www.tax.gov/calendar/   
• Be aware that many tax preparers have updated their data collection and tax interview processes in recent years.  They may now have secure online portals for submission of tax documents, and meetings may be conducted virtually.  It is not essential to have a local tax professional.
  • Secure online tax documentation portals might be available to the clients year-round, if so encourage them to upload each document as it becomes available, to reduce the time and emotional commitment come tax season.  If not, if your financial planning firm includes any vault-type option for the client, you could encourage clients to use your online secure storage as a gathering location to the same effect.
• Remember that almost all tax preparers are backwards looking.  They are unlikely to come up with forward planning tax strategies; that’s where you come in.  You come up with the tax strategies, then coordinate with the client’s tax preparer to make sure 1) they agree it fits your client’s situation, 2) think that’s the right way to do it, and 3) they’re okay executing on it. 
• Help your clients finalize their year’s tax strategies, including deciding about annual gifts (family and charitable), making sure RMDs are taken, and that anything from a tax year perspective gets done. 

Be aware of some of the more painful gotchas

As the financial planner, you are the person who has the most tax knowledge who is also in contact with the client regularly throughout the year.  As you become aware of changes, try to stay on top of some client choices that are more tax painful than others.  These include:

• Rolling over a tax advantaged retirement account.  Form 5498 (IRA contribution information) is likely to be coded as distribution code 1, which means “Early distribution, no known exception.”  Help the tax preparer know to code it as a rollover on Form 1040, or your client will pay taxes on the whole amount.
• Selling a primary residence just barely before reaching the 2 year mark.  Passing that 2 year mark would qualify the sale for exclusion of capital gains.
• Exercising ISO’s that trigger AMT, which is tax at a much higher rate.  And if AMT is triggered, not applying the AMT credit in future years, resulting in paying more in lifetime taxes than necessary.
• Not keeping the tax paperwork trail when changing tax preparers.  Most preparers don’t provide the carryovers and depreciation schedules, resulting in clients paying more in taxes post-change.
• Thinking an expensive advanced degree as an independent adult is deductible.  In most situations it isn’t.

What if I have business owner clients?

Helping your business owner clients figure out their tax situation in advance of tax season will make for a lot less awkward and time-intensive conversations for tax preparers during tax season.

• Help your client understand that their work was as a business owner, as many freelancers and gig economy workers are unaware of the need to pay both employer and employee FICA.
• Verify that your client is paying estimated taxes.  If their income is highly variable, year to year or quarter to quarter, encourage them to reach out to their tax preparer to calculate the appropriate amounts.
• Have your client set up a temporary holding account from which they can fund their 401k and/or IRA late in the year.  Help them avoid accidentally over-funding their retirement accounts.
• If your client’s business is an S Corp, verify that they are running payroll before the end of December, and that a reasonable salary has been determined.
• Remind your client to proactively check on the risk of failing discrimination testing in their business retirement plans.
• Keep an eye on high temporary income, such as a beneficiary IRA payout.  It can possibly be offset by being drained to a pre-tax retirement account, such as by setting up a solo 401k.
• Observe if your client’s business is making money regularly.  Running a business that for multiple years in a row does not make money risks being classified as a hobby, in which case expenses and losses cannot be claimed.
• Discover if your client is taking depreciation on their assets.  Whether or not they take it, the IRS acts as if the client took it.
• If your client is headed down the road to business exit, help your client prepare for recapture.  Many owners do not realize that depreciation of business assets is subject to recapture, which can come when a failing business owner closing their business can least afford it.

How can I be the best help to my client’s tax preparers?

Tax preparers will appreciate if you:

• Help your clients be aware of deadlines.
• Encourage proactive communication between your clients and their tax preparers.  It can help avoid removing options, reduces stress, and can allow for more thoroughness/better planning.
• Prepare your client for any changes to their tax situation that you become aware of throughout the year.
• Expand your understanding of taxes, because taxation is the thread that weaves through every aspect of the financial planning cloth.

When should I be acting?

Here are key dates and timelines for financial planners and clients to be aware of:

Year round

• Encourage investing simplicity when feasible.  Most tax preparers charge by the form and for form complexity, so marginal investment gains spread across a number of more complex vehicles can result in tax preparation fees that more than eat up any investment gains.
• Encourage timeliness and proactivity
• Build a relationship with your clients’ tax preparers.

October

• Start laying the groundwork for timing expectations for your clients, letting them know their tax preparer will be much happier if all documents are received before mid-March.
• Help your client know what tax forms they should be expecting.  If their circumstances have changed throughout the year, also help them understand what are their specific changes to forms they should be gathering for the next tax year.
• Encourage clients to reach out to their tax preparer for fall tax planning.
  • If you quarterback this relationship, give the tax preparer a heads up that you are happy to review the tax return next tax season before it is filed, to see if any tax aspects you were expecting might not be reflected.  Some tax preparers are happy to do this, others find it threatening and will not.
• October 15^th – If your client couldn’t file this spring by the April deadline, such as if they had K-1 income from a partnership, this is the extension deadline for filing. 
• 2^nd half of October – If your client was dissatisfied with their tax preparation experience last season and is looking for a new tax preparer, after the 15^th is the time to form that new relationship.  A great tax preparer with experience, who is an educator at heart, and who collaborates well with both the client and the financial planner, would be an ideal find.

November

• Help your clients implement any tax planning recommendations that they wish to act upon.
• Make sure RMDs are taken for the year.  In December 2021, some custodians were no longer accepting current year RMD requests as early as December 3^rd!
• Review whether clients are expecting an e-W2 or a mailed W2, and update that to a preferred delivery method if necessary.

December

• Monitor for late-breaking tax legislation, and communicate with your clients so they know which among them might be affected. Case in point is the SECURE Act 2.0 that is expected to be signed the week between Christmas and New Years, 2022.

January

• January 15^th (17^th in 2023) – Fourth installment of estimated taxes is due for the prior year. This is common for business owners and those drawing Social Security.
• January 31^st – Last day for employers to mail W2’s.

February

• Early February – Encourage clients to get their documents to their tax preparer, as soon as they have received all of those documents.
• Mid-February – Remind clients to check for their W2’s; if not yet received then they should reach out to their employer.

March

• Mid-March – Remind clients to be getting their tax materials submitted to their tax preparer immediately if they have not already.  Clients who have late-breaking forms such as K-1’s should still be submitting their existing documents, and communicating with their tax preparer about which documents are not yet available.

April

• April 15^th (18^th in 2023) – Tax day.  Prior year tax reconciliation due.
• April 15^th (18^th in 2023) – First installment of current year estimated taxes are due for individuals.
• April 15^th (18^th in 2023) – Deadline to contribute to IRA and HSA for the prior tax year.

June

• June 15^th – Second installment of estimated taxes are due.

September

• September 15^th – Third installment of estimated taxes are due.

Thank you!

Be the hero for your clients’ tax preparers.  Using the tips given here, provide all of the information the tax preparers will need, and do it early so additional complications aren’t added to their already overloaded tax season schedule. Prepare your clients for any changes to their tax situation.  Help tax preparers look good for your financial planning clients.  On behalf of all your clients’ tax preparers, thank you financial planners for your support for the 2023 tax season and beyond.