A little while ago I was with a friend who is long retired from his business. I don’t know what precipitated it, but he mentioned how his accountant overcharged him for the one tax audit his business ever had (in the 25 years he was in business). I was puzzled that he still remembered this and that it bothered him.
He explained that he felt the accountant did excessive preparation and wanted a ton of data that took quite a while to assemble. The accountant indicated that he might be able to settle the audit for about $20,000 and would target not having it cost more than that. The audit resulted in a “no change” and the fee charged was $8,000. This was about 25 years ago, so these numbers should reflect that they would be much higher today. He told me that he thought the accountant purposely scared him and had all the extra work done to justify the fee he charged.
I was shocked by this. I explained that the preparation the accountant did was likely the reason for the very favorable audit result. I also asked him if the result would have been an additional payment of $12,000 in tax, how would he have felt. He is very smart and a reasonable person. He thought about my question and replied that he probably would have felt good about the fee and result.
His reaction coincides with what I “learned” early in my career. My perception of my clients’ reactions was that they felt my fees were well earned when there was a tax due that was lower than anticipated, but there was always skepticism when there was a “no change.” For that reason, I always targeted a result that had a balance due that was lower than what the client expected, but not a no change. Further no changes led the client to feel they could have “gotten away” with greater deductions and that I was too conservative in what I did.
I also acquired an outlook that it was important for clients to understand they needed to be responsible in how they conducted their tax reporting and not to try to “beat the system.” I can assure you that none of my clients ever paid more taxes than they were required to pay. At the same time, irrespective of how I managed the legalities of their reporting and taking advantage of every benefit and loophole they were entitled to as well as resolving every gray area to their advantage, they would still try to skirt the law with picayune, and sometimes ridiculous, deductions. I never helped them break the law and, when I noticed some of the more egregious things they did, I stopped it.
I found out, from real experience, that small tax payments on an audit were much better for the client than a no change. And the client paid my fees more readily and cheerfully, not that this was my motivating factor.
As far as no change results, I had plenty, but they were when the audit involved issues about the application of certain parts of the tax law and not deductions the client was trying to get away with. As I write this, many experiences come to mind. The fees in every one of these situations were quite substantial and I never had the client upset about the fee. Instead, they thanked me for a job well done.
A takeaway is that delivering an invoice for any service, including a tax audit, is a marketing activity, and it cannot be assumed that the client understands the value. It must be explained and shown so the client appreciates the hard work and skill drawing on your knowledge and experience that was employed on their behalf. Work at this, and you will have happier clients and will also be happier.
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