How Much Tax Advice Is Too Much?


As tax season looms on the horizon, many advisors struggle to decide how to engage with clients about strategies that could be considered tax advice. This is because recommendations that involve the kind of tax avoidance strategies that are scrutinized by the IRS (and often require a CPA, EA, or attorney) can create real legal liability for advisory firms.
Taxes are a Necessity

There is a huge amount of value that advisors can create by bringing tax-related advice to their clients. This includes hard-dollar cash savings that can help them meet their financial goals. However, many advisory firms shy away from discussing taxes with their clients because they don’t have clear policies in place around what does and doesn’t constitute formal ‘Tax Advice’. And straying too far into the realm of Tax Advice can actually introduce additional liability for an advisory firm, even to the point where their E&O policies exclude coverage.

This is because some strategies involve the kind of tax avoidance that would be considered practice before the IRS and require an attorney, CPA, or EA to give advice on. And while others might simply be a matter of optimizing the timing or type of income recognition based on clearly established rules, these are often considered to cross the line into Tax Advice by an advisor’s compliance department.
Taxes are Complex

It can be confusing for advisors to know how much tax advice they can offer their clients without running afoul of compliance guidelines set up by their firms. This is largely because the definition of tax advice can be murky (for example, it’s a safe assumption that any strategy that involves setting up a new entity with the sole purpose of avoiding taxation would be considered “tax avoidance advice” under Circular 230).

However, it’s also important for financial advisors to have access to up-to-date information on changes in the tax code and to collaborate with their clients’ CPAs and EAs to get their opinions on how those changes might impact them. This helps them to create detailed projections and compare scenarios that can help their clients understand the nuances of different strategies and the potential consequences of following them. These steps can happen in conjunction with a client’s tax professional or by the advisor alone – it just depends on how far they want to go in discussing the benefits of implementing certain strategies.
Taxes Are a Way of Life

Taxes are a central component of most financial planning issues. Many strategies have significant tax implications and a good financial advisor would be able to add value by discussing the impact of different strategies with clients. However, many advisors are unable to discuss tax-related topics with their clients due to compliance department restrictions. This is because discussions about specific strategies can cross the line into ‘tax advice’ which can create liability for the advisor and their firm.

Luckily, there are ways to help advisors confidently engage with their clients on tax-related topics without crossing the line into tax advice. These include the use of “tax planning” which involves applying tax laws and regulations to a client’s situation but doesn’t go so far as to recommend a specific course of action. This could involve running detailed projections on the impact of different strategies or comparing the results of multiple scenarios. The most important aspect of this approach is ensuring that the advisor communicates clearly that their analysis doesn’t constitute tax advice and that any strategy they recommend should be reviewed by a tax professional before it goes into effect.
Taxes Are a Way of Saving

Taxes are collected for a reason, and that is to provide the services that the government needs to run the country like strong defense, education, healthcare, disaster relief, etc. Yet despite how important taxes are to our lives, many financial advisors find themselves prohibited from giving tax recommendations by their firms’ compliance departments – not because there is anything wrong or illegal about it (that would require designated tax professionals like attorneys, CPAs, or EAs) but because these recommendations can create real legal and financial liability for the firm if they stray too far into the territory of tax advice.

Luckily, there are some things that can help advisors work around this problem. One of these is understanding what constitutes tax planning versus tax advice. The simplest form of tax planning involves discussing a strategy with the client, but does not include any sort of specific action steps that could be construed as an actual recommendation. The other side of this spectrum are much more detailed tax planning activities, such as running a full analysis of a particular strategy in financial planning software for the client to see how it might impact their own circumstances.Steuerberatung


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