What differentiates a proactive tax planner from a reactive tax planner? A reactive tax planner typically focuses on two things: compliance and mitigating problems. The yearly tax return can end up being a “check the box” exercise, and further work is only done if the client comes to you with a problem to solve. Proactive tax planning could not be more different. Effective tax planning requires you to think far into the future and leverage your knowledge of tax benefits to ensure the lowest tax bill possible year after year.
Proactive tax planning does require you to hone your expertise and invest more time into each client, but it also comes with a major benefit: a shift to value pricing. While tax preparers typically charge a lower set fee for each tax return they file, as a proactive tax planner you can set prices based on the expertise and strategic thinking you bring to the table.
Here at the Institute, we highly recommend shifting to value pricing. In the countless conversations we’ve had on this topic, we’ve noticed an interesting pattern: Tax planners are afraid to make the jump and even worry that charging higher prices is unethical. This is where our understanding of Circular 230 comes into play. We have an objective resource to instruct us on the duties, restrictions, and ethical standards for tax professionals. If we reference Circular 230’s perspective on pricing, we’ll see that there is no rule against value pricing, as long as the fees are not “unconscionable.”
In today’s blog, we’ll cover the ins and outs of unconscionable fees and how this applies to value pricing.
What Are Unconscionable Fees?
For those who are anxious about adopting value pricing, the actual definition of “unconscionable fees” may surprise you. An unconscionable fee is not necessarily a high fee, a fee that is more than you’ve charged in the past, or a fee that makes you somewhat uncomfortable to ask for. An unconscionable fee is defined by:
• An absence of meaningful choice for the client, and
• Contract terms that are unreasonably favorable to the tax professional
What might this look like in the real world? Let’s take for example a situation where a client has provided all of their information to a tax professional, and two weeks before the filing deadline the tax professional lets the client know that due to the complexity of their tax return they are charging a higher fee. These could meet the conditions for an unconscionable fee. The client is up against a tight deadline and feels stuck working with the tax planner who already has all their data. They will likely feel pressured to pay that extra fee just to get the task done. On top of that, imagine that the tax preparer is asking for twice as much money as they originally discussed with the client. Contract law could deem this unethical on the part of the tax planner.
Notice that in the scenario above there is clear evidence that the tax planner is taking advantage of the taxpayer’s vulnerable situation. This is not a mutually agreed-upon arrangement where the client is fully willing to pay the fee based on the value they expect to receive. That is the nature of an unconscionable fee. Value pricing is different on every level. In the value pricing model, the tax planner is able to speak to the benefits that come with that higher price—from the client’s peace of mind to the projected tax savings.
Does that mean that a tax planner can charge $1,000 or $10,000 for an engagement if the client agrees that the fee is worth the benefits? Sometimes tax professionals who are used to the “compliance only” approach instinctively balk at these prices. Consider it from this perspective: If you are estimating that you can save a business owner client $20,000 on their next bill, a $10,000 fee may be well worth it to the taxpayer. The key is that the fee is agreeable to both parties and that the client is free to take it or leave it.
Value Pricing in Real Life
Let’s look at an example: Maria prepared an amended return for a taxpayer that resulted in a $15,400 refund for her client. Her fee for the engagement was $3,900. Would that be considered an unconscionable fee under Circular 230?
Let’s consider what questions we need to ask according to the definition of an “unconscionable fee.” First, we need to know whether the client was under pressure to accept this fee. Did the client have freedom and enough time to walk away from the engagement?
Second, consider whether the arrangement unfairly favors Maria. Did the client agree that this was a reasonable fee for the value they expected to receive? The results seem to speak for themselves. Though from a tax planner’s perspective an amended return may be a relatively simple task, the taxpayer is paying for that expertise, that knowledge about when to file an amended return and how, and that time and money saved by relying on an expert. If the client agreed that Maria’s work was well worth the $3,900 paid (and $15,400 saved), there is no ethical issue we can detect here.
There is a final question to consider when we talk about contingent fees (check out our next blog to learn more — link here). For now, the important piece is that Maria’s fee is not based on the refund amount. It’s not “I’ll charge you X% of your refund when it comes back” but rather “I’ll charge you $3,900 based on the estimated value I can provide by handling your amended return.” The tax planner is simply being compensated for their knowledge and their work.
Summary
Value pricing can require a radical mindset shift for tax planners who are new to it. But if your fears revolve around the question of ethics, the key is to familiarize yourself with what Circular 230 does say and what it does not say. A truly “unconscionable” fee is tantamount to coercion, and that is strictly against the law. A high fee that a client is free to say “no” to is a different matter entirely. When you begin to work with clients who are saving thousands of dollars in taxes thanks to your expertise, you might be surprised at what they consider a perfectly reasonable fee. Value pricing can empower you as the tax planner to invest more time in each client’s tax strategy and can ultimately result in more satisfied clients.
To learn more about value pricing and best practice when it comes to setting thoughtful fees, sign up to be a Certified Tax Planner today!
