Stay in Touch With Clients to Avoid Tax Errors, Advisors Say

Incommunicado clients, along with inattentive and sometimes under-experienced accountants, are the root cause of many common tax errors the wealthy experience.

One major problem is that clients aren’t in touch with their tax preparer as frequently as they could be, practitioners say. They may not tell the accountant about a new investment, for example, and then it goes unreported at tax time.

Clients are equally famous for failing to mention tax-delinquency notices. They’ll just pay the bill instead of asking their preparer to look it over, even though in many cases the Internal Revenue Service or state-revenue department demand could be reduced or eliminated.

Advisors should school clients to forward to their preparer anything that remotely resembles a tax document and encourage year-round communication.

“Sharing new developments and information helps the accountant adjust the client’s strategies in real time,” says CPA/PFS Adrian Alfonso, a director in the tax department at Kaufman Rossin in Miami.

Business clients have a habit of neglecting to inform the preparer that their donations were made through their company. This can lead to double deductions on a charitable contribution, where it gets deducted on both the client’s business and individual returns, says Long Island CPA Raymond Haller, a tax partner at Grassi & Co. in Jericho, N.Y.

To prevent this, tax practitioners should question large contributions and review supporting documentation, Haller says. Is the thank-you letter from the charity addressed to the client individually or to his business?

It’s not always the client who is the cause of tax errors, practitioners say. Indeed, sometimes it’s the preparer who could stand to take a larger role.

Haller says accountants don’t always delve deeply enough into the economics of a deal to determine whether the at-risk rules apply. These persnickety rules limit the deductibility of losses to the client’s economic stake in the venture, and Haller has seen preparers either allow a loss that shouldn’t be taken or forego claiming a loss the client was entitled to.

When it comes to business and investment activities being improperly classified as passive or active, which is “one of the biggest mistakes we see,” says Kaufman Rossin’s Alfonso, “it’s either the prior accountant not taking the time to really understand the situation or the client not communicating on a regular basis with their accountant.” Educating clients about the significant impact these classifications can have on their tax liability gives them a better appreciation of the importance of being in contact with the accountant, Alfonso says.

Extremely wealthy clients sometimes encounter problems when utilizing an accountant who only occasionally handles the fiercely complex transactions of the uber-affluent.

“Many of our clients are in the top half percent [of wealth] and at that level of taxpayer we see positions taken by other firms that would not have been taken if they really knew the subject matter,” says CPA/PFS Timothy Speiss, partner-in-charge of the Personal Wealth Advisors Group at EisnerAmper LLP in Manhattan. “A tax advisor who isn’t familiar with the area may not be aware of a new revenue ruling or tax court decision that modifies an existing federal or state tax regulation or code section.”

Make sure the client’s accountant is up to the task. After all, sophisticated clients need sophisticated pros.