Customized Tax Preparation as Key Strategy for Tax Savings

How Customized Tax Preparation Can Lead to Tax Savings

We routinely see mistakes in the reporting on tax returns provided by the previous tax preparer and the tax planning strategy provided in a legal memorandum, thus missing the tax savings desired. This can result for many reasons such as the client did not provide the memorandum to the tax preparer, the tax preparer did not understand how to report the tax strategy, practically the tax strategy did not work, or that the tax preparer and attorney advisor did not work together collaboratively. Our approach is to not make it the responsibility of the client to ensure the tax strategy is carried out, but to have advisors with legal backgrounds at the table with the tax preparer collaborating together to ensure the desired result is carried out.

This strong collaboration between legal advisor and tax preparer is needed for clients with complex tax situations such as international implications, small to mid-size businesses, and for executives or high-net-worth individuals. Too often, the tax preparers treat the tax return as inputting the financial statement numbers or other tax forms into a software program without thinking through the tax rules. For easier tax returns, this style of tax preparation is not an issue, but for more complicated tax returns, a strong knowledge of the Internal Revenue Code is required to result in the lowest possible tax obligation to the client.

A lot of tax preparers solely rely on tax softwares to prepare the tax return without thinking through the results and whether the tax software is providing the correct outputs. Tax software programs are sophisticated and good, but there are going to be gaps where a tax professional’s knowledge is required to get the right result.

For example, we reviewed a tax return where the client sold their interest in a closely held pass through entity which was not subject to the Net Investment Income Tax (“NIIT”). The tax preparer relied on the software for the tax return and the gain was subject to the NIIT on the tax return to the tune of close to $300,000. The tax preparation software was blamed for the imposition of the NIIT on the sale.

Sophisticated tax preparation requires more than plugging numbers into forms. It requires thoughtful review of the client’s entire tax picture to understand how to correctly report the income and expenses. Thoughtful review reduces errors and leads to tax planning strategies. We do not blindly rely on tax preparation software for our clients. We review the information and understand what the end result should be. At Praestans, we get tax, legal, and accounting professionals at the table to be attentive to client matters and provide the best tax outcomes.

Praestans Global Advisors is neither a law firm nor a CPA firm.

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