How to avoid the same mistakes as last year with your tax clients

Updated August 16, 2019 below in red.

Many taxpayers were blindsided by the results of their 2018 tax returns. While for many, actual tax went down, their withholding went down much more. Even though this means they received that money all year long, telling clients that they got the money all year long was little consolation when they normally receive refunds.

Now that we’ve passed the mid-point of yet another year, it’s a good time to reach out to your clients to make next tax season a better experience for all involved.

Face it, the more issues you can address in the off season, the easier and potentially more fun the tax season can be—or at the very least, you can alleviate the stress that unforeseen results cause at tax time.

So our first “better experience exercise” is to reach out to your clients now to review their withholding and make projections for 2019 tax results. Send letters, e-mail blasts, texts, and maybe even try a revolutionary medium called a telephone to reach out and touch your clients to show you care and are concerned. Who knows? You might actually get some billable hours out of this in the offseason.

Things to consider for client meetings:

• Gather year-to-date paystubs or projections of profit and loss for their business(es)
• Ask the client what has changed since you last met.  Job change, stock sales, children move out or start college—-get a feel for the client’s situation.
• Many commercially available software packages offer planning projection modules that can assist you with this process.
• Once you’ve determined a projected tax outcome, you can have the client adjust withholding at work.  Remember, claiming fewer exemptions withholds more tax; claiming more exemptions withholds less tax. Note: There is a new Form W-4 available for 2020, which should assist taxpayers to claim the proper number of exemptions. If the taxpayer is self-employed, you can recommend a change in estimated tax payments for the upcoming September and January payments
• Keep in mind that to avoid penalties, your taxpayer must meet one of three tests:

a.       Owe less than $1,000

b.       Have 100% of last year’s tax paid in

c.       Have 90% of this year’s tax paid in (Notice 2019-25 dropped the underpayment penalty threshold from 85% to 80% for 2018 tax filings only. Notice 2019-03 dropped the threshold to 85% from the normal 90% but then IRS went one step further). It’s fully expected that the threshold, which has returned to 90%, will stay that way all of 2019, but stay tuned for potential new developments.

Here’s another little tantalizing tidbit:  If your client already filed his 2018 tax return and paid the underpayment penalty based on 90% of last year’s tax, you can request a refund of the penalty by filing Form 843. Include “80% Waiver of estimated tax penalty” on line 7. Form 843 cannot be filed electronically.

Update: IR-2019-144, August 14, 2019

The IRS is automatically waiving the estimated tax penalty for eligible taxpayers who already filed their 2018 federal income tax returns but did not claim the waiver.

The automatic waiver applies to any individual taxpayer who paid at least 80% of their total tax liability through federal income tax withholding or quarterly estimated tax payments but did not claim the special waiver available to them when they filed their 2018 return earlier this year.

Over the next few months, the IRS will mail copies of notice CP21 granting this relief to affected taxpayers. Any eligible taxpayer who already paid the penalty will also receive a refund check about three weeks after their CP21 notice regardless of whether they requested penalty relief or not. This process will be done automatically by the IRS so there are no forms to complete or processes to follow.

Now you’ve shifted your role with your client from preparer to advisor—that trusted professional who has the best interest of the client in mind.

by Tom O’Saben, EA