Three serious tax season problems that tax preparers must consider
While there is a cacophony of taxpayer issues that tax pros must contend with each tax season, three problems, centered around tax resolution matters, stand out from the pack. They are:
- Taxpayer audit notices
- IRS inquiries requiring a response (involving tax credits)
- Identity theft incidents
Though these problems don’t occur very often, when they do, it requires time-intensive intervention from the taxpayer’s representative. That’s the tax preparer!
This article weighs a question. Does it make business sense for a predominantly 1040-focused tax preparer shop to take on individual tax resolution duties, or is it best for trusted third-party partners to handle them?
To own or delegate tax resolution work: the cost of wearing two hats
Realizing tax resolution matters will occur each season, tax professionals must determine a remedy that serves the best interests of the taxpayer and the health of the tax business itself.
Consider a high-volume preparer, primarily providing 1040 tax preparation services and supporting clients with tax resolution services as needed. For some tax pros, tax resolution work may not keep pace with the potential revenue from simply preparing tax returns.
Assuming they take on a “typical” resolution case, calling for three hours of the tax preparer’s time. The preparer charges their usual rate of $100 per hour, collecting $300. Meanwhile, the same professional could realistically complete three separate tax return appointments over the same three hours (at a rate of $150 to $200 per return), netting a total of $450 - $600 in fees.
Is a wave of new audit and IRS inquiries coming for your clients?
Experienced tax professionals know that in recent years the IRS has conducted more deliberate reviews of tax returns claiming Child credits or the Earned Income Tax Credit (EITC). These more intensive reviews often generate an automatic tax notice to the taxpayer. Unsurprisingly, these tax notices often find their way to the desk of the representative’s tax preparer, adding to what may already be a heavy workload.
In addition, the recently passed Inflation Reduction Act provides an estimated $80 billion in new IRS funding, with a significant amount of those dollars allocated for tax code enforcement (think audits and inquiries).
Will audits increase as a result of this new law? Who knows.
Given the increased tax code enforcement budget, it’s hard to imagine audit and tax inquiries decreasing. Simply stated, both of the factors just mentioned give tax preparers good reason to plan accordingly for the tax resolution needs their client base may experience in the near future.
The awkwardness of additionally billing tax clients
Tax customers, like any consumer, can make emotional decisions regarding who they conduct business with. Providing an exemplary product and service at a competitive price helps ensure a client stays with you long-term. But sometimes, things happen that are out of the tax professional’s control, such as an audit notice, IRS inquiry, or identity theft incident.
While these instances may be entirely random or coincidental, there’s always the risk that the client may associate the negative experience with their tax pro.
The customer’s negative emotional risk is further compounded because after paying their tax preparation fee, they have to pay an additional, separate fee for tax resolution services. In the end, it can permanently – and negatively – impact the client relationship.