Financial PlanningIRSTax PlanningTaxes

Tax filing trends indicate future direction for professionals

irs2.jpgWe are only half way through the tax filing season but so far the IRS reports that tax filer behaviors are significantly different than a year ago. The number of tax returns filed has dropped by more than 12% and the number of paid preparer returns (often including the more complicated tax returns) dropped even more by over 25%.

This tends to indicate a positive trend for tax accountants like me. The reason is that tax preparation represents a smaller portion of our business than tax representation. Tax representation involves the reduction and removal of tax liability, interest and penalties. Tax representation service is often coupled with tax planning, accounting, and financial planning services to protect assets and avoid tax trouble in the future. Tax representation is a separate specialty demanding a skill set not of interest to most tax preparers. Most tax preparers, about 60% according to IRS, are not credentialed and in most cases taxpayers choose credentialed tax professionals (tax attorneys, CPAs with MT, and Enrolled Agents) for representation services.

Nonfilers are the most likely group of taxpayers to be caught and penalized by noncompliance. Despite the decreasing budgets and resources for auditing taxpayers, this group is flagged automatically based on computer data. Deficiency notices are generated with little human involvement. In my own practice, nonfilers represent the majority of tax representation clients. Typically the missed tax returns are triggered by some life stress – divorce, health issues, business failure, etc. – and the primary focus of my engagement is to get them back on a solid financial path. In general, I find that tax services combined with accounting and financial planning services results in greater overall value to a client.

We generally say that only about 7% tax filers has a need for tax representation services right now. In other words, one in 15 people have a tax problem today. But even a small increase in the number of non-filers would have a significant impact on the demand for tax representation services. For example, if 7% fewer people file tax returns this year and those result in deficiency notices and collection actions from IRS, that represents a doubling – a 100% increase – in the number of people who would benefit from tax representation.

The Tax Cuts and Jobs Act of 2017 was jokingly dubbed the “Full Employment for Tax Accountants Act”. We are beginning to see why.

“In general, I find that tax services combined with accounting and financial planning services results in greater overall value to a client.”

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