Help clients get value from tax prep services

Are we entering an era where automatic tax filing will become the norm not just for vulnerable Canadians but all Canadians?

As financial advisors, I’m sure many of you can outline the negative attributes and pitfalls of an automatic tax filing regime. But consider whether doing so is an attempt to substantiate your existing service offering.

Can you objectively and critically evaluate you and your firm’s value proposition associated with the tax preparation and filing services you provide to your clients?

Maybe your default response is that tax prep is an adjunct service, and the real value is in portfolio management. If so, automatic tax filing may be an appropriate solution for a subset of your client base; are you willing to promote this service and possibly lose fees?

My practice is not predicated on personal income tax prep; rather, a larger offering is terminal (death of a taxpayer) tax return services. Regardless, I do prepare personal tax returns. Prior to accepting such engagements, I query prospective clients about their expectations. Clients are often confused by the question. “I have no choice but to file taxes,” they say.

So, I break it down further and ask: “How will you evaluate my firm’s services? In your mind, what will a successful engagement entail?”

Common client responses are as follows:

• I will receive a tax refund.
• I will receive a larger tax refund than the prior year.
• There will be no differences between the filed return and notice of assessment (NOA).
• The CRA won’t audit me.

With respect to the first two responses, it seems some clients equate the size of their tax refunds with the performance of the tax return preparer. Yet, typically, the only reason taxpayers receive refunds is because they paid too much tax in the current or prior years.

I have observed clients who have been advised by their tax return preparers to increase their tax withholdings at source on their fixed-income sources. The rational for this action by the tax return preparer is they want to demonstrate to the client they are doing a great job by getting the client a tax refund that is greater year over year and thereby justify fee increases. These clients are not spendthrifts and would have benefited from the unnecessarily withheld funds.

When I encounter these situations, I explain to the client that I would like to reverse this trend and why. Post explanation, clients are usually onside. Yet in the subsequent tax year when there is no sizable refund, they seem disappointed, as if they have lost a gift and my services are not meeting expectations.

As for the next two common responses (no differences between filed return and NOA, and CRA does not audit the taxpayer), I explain that my services (regardless of their merit) will not affect whether the CRA audits them. As well, there may be differences between the filed return and NOA even though the filed return is accurate. I explain this is why my transmittal letter includes the following clause:

When you receive your notice of assessment, please forward it to me so I can determine if there are any issues to address and whether I should file a notice of objection within the 90-day deadline.

Thus, my service offering includes an evaluation of the difference (if any) between the filed return and NOA, and an outline to the taxation authorities why the NOA is or is not accurate.

On reflection, automatic tax filing may be the best solution for those clients who evaluate their tax return preparers based on refund size and CRA audits.

I have yet to have a client state (or hear of a client state) that a successful engagement means we met budgeted or expected tax liability amounts.

When I compare how corporations (that I have been affiliated with) deal with their tax liabilities, I observe a far more proactive, foresighted approach that would benefit the personal tax environment.

As a CFO for both public and private companies, my regular month-end (and annual) reporting protocol was to compare actual results vs. budget, forecast and prior year, and explain variances and review and update the companies’ tax provisions. This meant I regularly assessed the companies’ expected tax liabilities for the current year and implications for subsequent tax years. I needed to explain to stakeholders why the tax provision was off the mark vs. budget or forecast, and the implications. We used this information in the decision-making process and in our future-focused strategic and tax planning objectives.

I have never observed a similar approach for personal income taxes — even though taxes may be a taxpayer’s largest cash expenditure/outflow.

And I have confirmed with my colleagues that the typical service offering does not contemplate pro-forma tax return preparation nor any comparative evaluation outside current year actuals vs. prior year actuals.

The typical offering includes a tax checklist that is forwarded to the client. The client fills it out and provides tax slips and information. The tax return preparer reviews the provided information and compares it to the CRA’s information. The tax preparer updates their tax software with the information and meets with the client to review the draft return. The tax preparer finalizes the return and sends a transmittal letter to the client requesting authorization to e-file and other pertinent information. The last item is the NOA clause noted above.

My colleagues argue that clients will not pay for a proactive, forward-looking tax services offering.

However, I believe they will if the value is demonstrated, and the approach lends itself to better decision-making and optimizes cash flow and financial returns.

What is critical is to discuss with your clients how they evaluate tax return preparation services and what value means to them.

Michael Kulbak, MBA, CPA, CMA, TEP, is principal of Kulbak Trust Solutions in Mississauga, Ont.