Wealthy taxpayers are already clamoring for tax advice in this new era of tax reform with its potential to save thousands in tax dollars. Though there’s still a year before many reform changes take effect, it’s not too early for high-net-worth clients to start looking for the right tax preparer.
“What has the preparer done to … understand, apply and implement the new tax laws?” said Richard Kollauf, CPA, CFP, and director of business advisory at BMO Private Bank in Milwaukee. “This is the biggest [tax] change since 1986. Some previously proficient preparers at the end of their practice may not be incentivized to stay on top of these new laws compared with another preparer who will have to deal with the new laws for years.”
“What targeted continuing education have they engaged in with regard to the new legislation?” he added. “Have them show you their completion certificate. Ask for a copy of their tax information-gathering tool to make sure info that’s requested will meet new-law requirements.”
Taxpayers are responsible for all the information on their income tax return no matter who prepares the return, the IRS warns. (The agency also recommends checking the preparer’s qualifications on its directory.) Any tax professional with an IRS Preparer Tax Identification Number (PTIN) is authorized to prepare federal tax returns.
CPAs, attorneys and enrolled agents have unlimited representation rights before the IRS. CPAs are licensed by state boards of accountancy and have passed the Uniform CPA Examination. They must also comply with ethical requirements and complete specified continuing education. Enrolled agents are licensed by the IRS, subject to a suitability check and must pass a three-part exam to demonstrate proficiency in federal tax planning, individual and business return preparation and representation; EAs must complete 72 hours of continuing education every three years.
Your clients should avoid preparers who base fees on a percentage of the refund or who boast bigger refunds than their competition. When inquiring about a preparer’s services and fees, your clients shouldn’t surrender tax documents or Social Security numbers, and your client should review a return before signing and be sure the preparer signs the return and includes his or her PTIN.
The right preparer must understand your HNW client’s personal tax situation especially well this year. “If a divorce is pending, understanding the timing of the changes to alimony is critical. If the individual owns a business with $20 million of gross receipts, understanding the expansion of cash-basis reporting is critical,” said Christopher Wittich, CPA, senior manager with Boyum & Barenscheer in Bloomington, Minn.
HNW clients often have complicated investments, so it’s also key to make sure a preparer is experienced with those complexities. “Most CPAs use quite sophisticated software for tax return preparation, so that’s usually not a problem for CPAs,” said Mike Crabtree, CPA and partner at the Minneapolis accounting firm Boulay, but “clients must make sure the preparer has a full understanding of their investments and income sources.”
Many HNW clients in states such as Minnesota will also pay more in federal income taxes under the new law, “even though rates are lower, due to the elimination of state and local tax deductions,” Crabtree added.
Another key question: How will reform affect the client’s state return? “By raising the standard [federal] deduction and limiting income tax deductions on Schedule A, many taxpayers are going to be claiming the standard deduction – but that will also have an effect on state tax returns, which are often based on the taxable income from the federal return,” Wittich said.