February 21, 2024

As the financial industry moves towards a more holistic approach to clients, advisors are often tasked with helping them find efficient ways to legally lower their tax liability, compute taxes on diverse investment portfolios and more. But when it comes to discussing and recommending tax strategies with clients, many firms are hesitant. This is likely due to the fact that if a strategy involves some type of interpretation of existing tax rules, it may cross the line into formal “Tax Advice” which can only be offered by CPAs, attorneys, or EAs. And if a firm does not have policies and procedures or the necessary in-house expertise to properly offer this advice, it can leave the company open to liability from both the IRS and clients who may be harmed by the advisor’s recommendation.

But not all strategies that involve interpreting existing tax laws and regulations constitute formal “Tax Advice” – in particular, those that are designed to avoid taxes, such as transactions and entities with the purpose of structuring income recognition to reduce tax exposure. Rather, most advisors would be able to safely give “Tax Planning” which involves the consideration, analysis and projection of tax strategies without taking the final step of making a specific recommendation to follow that strategy.

For example, an advisor may run a tax projection in software for a client to help them see the effect of following a particular strategy. While this does not necessarily qualify as a recommendation, it can still be valuable information for a client and helps the advisor demonstrate their ability to understand and explain complex tax regulations.

It also goes a long way to establishing an advisor’s competency in analyzing tax strategies for their clients and demonstrates that they can help them navigate complex regulatory issues. As a result, this type of “Tax Planning” can be very helpful to advisors who want to consider and discuss potential tax strategies with their clients but are worried about crossing the line into formal “Tax Advice.”

Another reason that advisors are cautious about discussing their opinion on tax strategies is because they are unsure how the IRS will treat such recommendations in the future. This is especially true for those who recommend more complicated strategies that involve the use of tax-deferred investments or rely on more sophisticated deductions and credits. However, as advisors continue to develop their expertise in taxation and make better use of increasingly powerful tools such as detailed projection software, they will be able to create a framework for working through these gray areas and recognizing which strategies might need a CPA or attorney’s sign-off before being recommended to clients. Ultimately, this will benefit the entire industry. As more advisors build up their own expertise in tax and learn to recognize which strategies require a more formal sign-off, the industry will be able to provide clients with much more useful and valuable advice. This will help increase the value that advisors deliver to their clients and help them meet their full potential as a trusted partner in their financial lives. Steuerberatung

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