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Why It is Important to Listen to Your Clients

Updated: Nov 13, 2020

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My bread and butter are clients who are coming from another tax professional, thinking that they are paying too much in taxes. Before I meet with the client, I ask for the last three years of tax returns to get an idea of the client’s tax situation. Outside of that, I get to do some networking with other accountants, and I often hear that they give “blanket” advice. That is my term for giving the same advice to everyone who walks through the door. There is a big danger in that.

First of all, it is important to analyze the prior years tax returns to see the reason for the high tax bill. I am going to make a statement with the possibility of sounding crass. Most returns that I examine have high tax bills, because the former preparer was just concerned with cashing the paycheck for the tax preparation. Some returns are single-member LLCs treated as disregarded entities for tax purposes. That means they file a Schedule C, with the net income being subject to self-employment tax. If the Schedule C has less than $15,000 in net income, I leave it alone. The self-employment tax on $15,000 is $2,295. It would cost more for me to do a corporate and personal return than they would be saving in taxes. However, anything over $15,000, I consider other options.

After the new tax law was passed, and even before then, I knew the past tax situation. However, I want to hear the client’s one- to five-year plans for their business. Unlike my colleagues, I have no interest in just cashing a paycheck, I want to know what the future will bring — what the client does with the money they make, how much money they need to survive, etc. The reason for all of those questions is for me to get an idea of how this person should pay tax.

I met with one particular client about a year ago. He just paid an attorney to do asset protection. He stated that his CPA gave his blessing on the new structure. The problem was this: All of the companies he set up were S Corporations. He was in the 39.6 percent tax bracket. He had a full-time job, so the income flowing to him was passive. His main company was in IT, which he was looking to grow and sell in five years. I introduced the idea of IRC §1202 stock for the IT company, which would require him to revoke his S Election. The 1202 stock — provided that the issuance of the stock commenced with the original shareholder — can be sold in five years. The first $10 million made from the sale is tax-free.

His attorney was in the room and retorted that no one will buy the stock. I explain to him that, especially with IT companies, the stock is usually purchased, and the original owner indemnifies the buyer against any known or contingent liabilities that may arise. At the end, I didn’t get the client because he listened to his attorney, and that set up a tax nightmare for his client.

Today, more than ever, I consider it malpractice to give blanket advice. A few months ago, I had to present at a luncheon with three other accountants. Before the presentation, we had a meeting to discuss our topics. My topic was that it might be time to convert to a C Corporation. This idea was met with backlash.

One of the accountants stated that she had a client that paid reasonable salary as an S Corporation of $100,000 and took $300,000 as a distribution. I commented that I didn’t think $100,000 was reasonable, given the distribution. She responded that they researched it. I left it alone. However, I have been involved in a few reasonable compensation audits. In this situation, the client hadn’t even met the Social Security max, which is one issue. Not to mention that their salary is one fourth of their distribution, meaning their distributions are not in proportion with their salary. She stated that if they converted to a C Corporation, they would have to pay double the amount of tax on the distribution.

Here is where it pays to ask questions. First of all, what would be the difference if you raised that client’s salary to $250,000? You would then advise them to start a Safe Harbor 401(k), which would allow them, between salary deferrals and matching to contribute $55,000 to the plan. The next thing is if they converted to a C Corporation, would be that they can take part in tax-free fringe benefits? For instance, health insurance, a health reimbursement account, corporate car, just to name a few. You could render the need for that $300,000 distribution useless by making most of what they use it for tax deductible. Upon conversion, you would issue IRC §1202 stock, in case they want to sell in five years. She said that they did the calculation, and it was better to remain a S Corporation.

The way that I was taught tax planning, and the way that I see others implement it, are EXACTLY wrong. They will tell the client to purchase equipment, whether they need it or not, so that they can either Section 179 it, or use Special Depreciation Allowance (SDA). This has to be the worst advice I have ever heard. First of all, people are selfish. I keep that in mind when doing planning. My goal is to get as much money into my client’s pocket, tax free. I charge a retainer for tax planning, and if I don’t save you double what I save you, I give your money back.

Finally, NEVER do something that only benefits you. I would meet with a client, and if they were doing something that was costing them more in fees than it was saving them in taxes, I would tell them to stop. The client will always remember that. Rather than take their money, I told them the truth.

Always tell the truth. The worst thing that you want to happen is for your client to seek a second opinion from someone like me that will tell them exactly that.


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