As tax planner, you have frequent conversations with clients about possible tax strategies and strive to provide reliable advice in response to their questions. At what point do you begin to document that advice in writing? If the answer is “never,” we have trouble brewing. If the answer is more like “as soon as I get to it,” you may still be opening yourself up to more risk than you realize.
Having a system in place for promptly and clearly documenting your advice and the details of your tax plans is essential for a number of reasons:
Managing Risk and Liabilities. Even tax planners may find the constant shifts in tax policy and the long lists of nuances and exceptions for each law confusing. Our job is to simplify the tax planning process for our clients, but in the course of explaining the ins and outs of a tax strategy, misunderstandings can easily arise—even when both parties have good intentions. Unfortunately, in some cases, clients may also simply hear what they want to hear and turn around and misquote you if problems come up in the future.
No tax planner takes on a new client assuming they might one day have to face that person in court, but the best way to avoid negative outcomes is to simply be prepared. If you find yourself in a room with a judge, jury, and multiple attorneys, you need more reinforcement than your own memories of a conversation. You want clear documentation that states your recommendations to a client and how you will (or will not) be involved in implementing it to prevent any ambiguity.
Avoiding Incorrect Advice. To err is human, and yet errors are especially problematic for tax planners since there are financial and legal consequences involved. Even small errors can lead to significant complications, so it’s essential that your advice is precise, well-founded, and written. In fact, the law requires that. The practice of writing out your advice is much more likely to prevent oversights: neglecting important details or considerations, insufficient explanation of a tax strategy, or clarity on who is responsible for what. This also benefits your client, since reading through your documentation gives them an additional opportunity to confirm that they understand and are on board with the tax plan.
Enhancing Client Trust and Satisfaction. Your due diligence adds a sense of professionalism and shows your clients that you are trustworthy. After all, what bad actor would want their misleading advice to be clearly written out and signed off on? By confirming in writing that you and your client are on the same page with tax strategies and implementation, you demonstrate integrity and lay a foundation for a trusting relationship with your client. Extra steps like this, which so many professionals are willing to skip over for time and convenience, prove that you go above-and-beyond and that your tax planning services are worth the investment.
So what should go into your documentation? The best practices for tax research say that in each written communication you want to:
- Establish the facts
- Identify the issues
- Locate the authorities who can speak to these issues
- Evaluate the authorities, leaning mostly on primary sources
- Develop conclusions
- Communicate the results in language the client can understand
This process includes clarifying what information you are relying on, especially when it was provided to you by the client. If the client presented you with erroneous financial statements that you used to create a plan, the “facts” you established at the beginning will show that this data was the responsibility of the client. Also keep in mind that the “authorities” you rely on should be primary sources, such as text taken from current tax laws and guidance that forms the basis of your tax strategy.
Even if you’re convinced that documenting your tax advice is essential, the process does require time and energy that you may not feel you have to spare. This is where you will want to leverage the power of technology. Tax research software can improve the accuracy and efficiency of your tax planning process–-from initial ideas to final documentation—by helping you identify relevant tax strategies, fact-check your recommendations against the most recent legislation, and ensure you are in compliance with Circular 230 requirements.
Think Outside the Tax Box is simplifying the tax research process with our new Tax Law Pro software. This digital reference tool provides:
- A constantly updated law library
- A searchable archive of tax law court cases and code sections
- A tax news aggregator with options to filter by specific state or subject
- A full library of state audit manuals
- Expert analysis that provides context and discussion for these primary legal sources
These resources provide you with up-to-date information amid a world of constantly evolving legislative changes, court rulings, and IRS regulations, as well as expert guidance in how to interpret laws and apply them in complex scenarios. Tax Law Pro helps you minimize the risk of errors and demonstrate thoroughness when presenting a tax plan to your clients.
To learn more and purchase a subscription, visit TOTTB Tax Law Pro.
