How do you break the news...

[HV Ken]

Curious to gain some insight from others on how you break the news to a client who wasn't expecting to owe - especially THAT MUCH. In our case, we have a home office, so our interaction may be more personal with our clients than some of the store front offices can be.

Our practice is to handle this in person due to the strong emotional response this type of news induces. Inevitably this generates many questions, and the best way to explain what is going on is when all the data is in front of us and the client.

After their shock and emotional outburst (usually the wife yelling at the husband!), we try to say something like: "the tax return is like a report card - it merely reports on activity that has already occurred." And typically if people weren't expecting to owe the amount we calculated because they have variable components to their return, we would say something like: "given the many variable parts that make up your return, we would recommend you check in with us each quarter (e.g. June, September) so we can help you adequately plan while the year is unfolding."

Appreciate your insights and experience! Thanks!

[taxxcpa]

I generally compare the return to the previous year and explain what changed--increased income, decreased withholding, self-employment taxes this year vs all salary last year. Then I explain why they owe more this year.

The only problem is if someone else did their return last year, they will assume they made a mistake by switching to you. In that case, unless you see the prior return so you can explain it,they will probably go back to the first guy next year and you can't convince them you did it right.

[Booger]

Depending on the amount owed by the client, I make

sure that I get my fee FIRST. Seriously, it's been my experience that

most people are aware of what they are going to owe.

I just tell them "it is what it is".

[JohnH]

I understand your reasons for wanting to break the news in person, but I'm just the opposite. I call them on the phone or send an email, accompanied with the message that I realize this may be a shock to them but I want them to have the info as soon as possible so they can begin to prepare for it right away. I then offer to give them all the details when we meet.

If the circumstances warrant it, I usually try to make the point that they had the use of the money during the year, and that whatever they spent it on would not be in their possession now if they had paid the taxes when due. I also point out to them that they might be able to sell the boat, motorcycle, car, house, etc that they bought with their tax money, and that would make them better able to pay the taxes. When appropriate, that usually focuses their attention where it should be, because people will go to any lengths to avoid giving up their toys.

[Yardley CPA]

Depending on the amount owed by the client, I make

sure that I get my fee FIRST. Seriously, it's been my experience that

most people are aware of what they are going to owe.

I just tell them "it is what it is".

Each year I use the "Planner" and try to project the following years tax. Just to give the client an idea, if all remains relatively equal, what their next year tax will be. This way we can plan for anything "new" that they may know is coming.

If they owe a bunch, I compare the two years returns. I also look to see if their withholdings on their W2's decreased. In most instances, baring any type of large additional income or loss of deductions, the W2 withholdings dropped from the previous year.

[mcb39]

I just had to inform one via long distance last night that he is going to owe in excess of $8000; I told him that he grossed $160000 in Se and paid in no estimates, so what did he expect? I told him when he brought in the paperwork that it wasn't going to be pretty and I didn't have a magic wand. He said, "But, we applied $3000 last year. I told him that this tax was in addition. This is a nice guy, but has no clue as to money management. He is the one and only client that I have ever gone to audit with. Being in the same boat as you, Ken, with a home office and knowing most of my clients quite personally; it has been a hard lesson for me to learn. If they won't listen, it is their problem, not mine. (But it still bothers me) I just don't let them know it.

[rfassett]

In my opionion, your first mistake is to do that "in person". We respect the clients' privacy and their right to react in private - without an audience. We simply call them and say: "Wow, you had a really good year last year, didn't you?" And the response invariably is "yeah we did". And I say, "Well you know that that means more tax, right?" In other words, I lead them into the "bad news". By the time the call ends, they are thanking me with sincerity. This gives them time to do two things before I see them. They can brainstorm to see if they forgot to give me anything (which is rare) plus it gives them time to think about how they are going to pay there tax. By the time they get to my office, all of that is resolved. They give me a check, sign the efile sheets and take their voucher to send a check on the 15th.

[RitaB]

It is so good to have the prior year return for comparison purposes when liability changes. For that reason, I really try to get a copy of it if I didn't prepare it. I'm a little suspicious about why people are switching preparers, anyway. And, I admit that I like to see if I can find mistakes on the prior return, too.

Anyway, some clients get more sympathy from me than others. Here's an example of no sympathy: Monday, a couple came in who had won a $22,000 pickup, plus he was self-employed and of course had not paid any estimated tax payments.

I had to chuckle when HVKen mentioned it's usually the wife yelling at the husband, that's so true. But, this wife actually sorta blamed me: "OMG, you have given me a heart attack!" My attitude changed considerably.

Me: "Well, no, Mrs. Outburst, Fred's auto dealership gave you a vehicle, and Mr. OMG My Wife Is Embarrassing was compensated for work, and he's just now paying some tax on it. I suppose you could have refused the auto and the jobs, and paid less tax."

[JohnH]

Plus, they could still sell the truck and have the money to pay the taxes, plus maybe enough left over to buy a cheaper truck - one that they could afford to own.

[mcb39]

That just struck me as hilarious. When I get those, I wish they had gone somewhere else.

[BulldogTom]

If it is a client I already know, I make sure I can give them the exact reason why they owe what they owe. The Prior Year Comparison form in ATX is excellent and showing what changed. Depending on the client, I will usually break the news over the phone and then schedule the appointment to look at the final return. I don't go into much detail until they get to the appointment.

For new clients, I ask them to bring in their prior year return and we talk in person.

Tom

Lodi, CA

[RitaB]

Plus, they could still sell the truck and have the money to pay the taxes, plus maybe enough left over to buy a cheaper truck - one that they could afford to own.

LOL. Actually, he had already sold the truck, and had the money sittin right there in the bank! He was pretty cool about it, wifey is just so used to whining about money, she couldn't stop herself.

Have you guys read The Millionare Next Door? I think it's a great book. And it mentions this very thing, the wives are usually the ones pinching the pennies. So true.

[Tax Prep by Deb]

When this happens, I do like all suggested. I peer over the return until I find the difference. Then I try to explain. If it is due to taking a pension prematurely, or some other one time thing I make that clear that this is just a one time hit and that everything should go back to normal next year. I will even pull the info out that is making the problem so that I can give them the figures both ways so that they can seen it was due to something not normal.

Most of my clients appreciate this. If it is the first year for a client and they owe and I don't care if it's just one dollar, I usually do not get them back the next year. But if I have a client who walks in with a notice from IRS and I work with them, especially if I find errors on their return that will more than take care of the notice, I have them as clients for life even if the first year I do their taxes they owe.

People are funny. The problem I have is distancing myself from their woes. But I have tried very hard this year as I have enough of my own woes to worry about!

Deb!

[Cathy]

Curious to gain some insight from others on how you break the news to a client who wasn't expecting to owe - especially THAT MUCH. In our case, we have a home office, so our interaction may be more personal with our clients than some of the store front offices can be.

Our practice is to handle this in person due to the strong emotional response this type of news induces. Inevitably this generates many questions, and the best way to explain what is going on is when all the data is in front of us and the client.

After their shock and emotional outburst (usually the wife yelling at the husband!), we try to say something like: "the tax return is like a report card - it merely reports on activity that has already occurred." And typically if people weren't expecting to owe the amount we calculated because they have variable components to their return, we would say something like: "given the many variable parts that make up your return, we would recommend you check in with us each quarter (e.g. June, September) so we can help you adequately plan while the year is unfolding."

Appreciate your insights and experience! Thanks!

Ken,

My interaction is also more on a prsonal level with my clients. When I see that their refund/amount due is way different from the previous year, I print out the previous year comparison and highlight the areas where the differences occur. Sometimes I tell them that they owe DOUBLE what they actually owe, then when I tell them what they actually owe, they are so relieved! Works like a charm!

Of course, we then plan their withholding/estimated payment changes so we don't have the same situation the next year while reminding them I'm here all year and they should feel free to call me BEFORE they make any retirement disbursements, etc....

[Eli]

The only problem is if someone else did their return last year, they will assume they made a mistake by switching to you. In that case, unless you see the prior return so you can explain it,they will probably go back to the first guy next year and you can't convince them you did it right.

I get alot of these. Most of them have commuting mileage, everyday meals, clothing etc...

But of course they like the bigger refund so yes, they do go back.

Eli

[RJM]

I do what rfasset does, start with saying "you had a great year"... and lead into more tax owed and why. This seems like a sales technique (get the prospect to start saying yes). Most bigger returns with large balance due, the clients are savvy enough to know they would owe a bunch, and are comfortable with the interest charges by the IRS. But I get few of these because most clients with large or unusual returns contact me between July and December, and we do some mini tax planning, trying to adjust withholding in the later months of the year. So over the years I get fewer returns with large balance due.

[kcjenkins]

Well, this hits close today, because I had a client in today, who in the past usually had several thousand in refund. Last year it was "only $1200". This year, he owes slightly over $37K to feds, and slightly over $7K to state.

Why? Well, he quit his good-paying job to start preaching, went from W-2 with withholding to self employed but no estimated payments. [Yes, I warned him last year] But the worst was, he took &80K out of his retirement [he's only 50] to 'pay off credit cards and cars, cause he's making so much less now'. Not one penny withheld on that $80,000, even tho the penalty alone was $8,800. And of course, it threw him up to the 25% bracket,as well. And he lost the $2000 of CTC that he'd expected to get.

I used the comparison pages to help him see, and reminded him that those big refunds came because he was starting up his wife's business those last few years, with fast write off of her equipment, and now she is making a good profit, with not much expense. And over and over, throughout the discussion, I reminded them, no estimated taxes paid in...........

[jasdlm]

I have a new client; schedule C. Just came in 2 April. Owes $25,000 Fed and $5,000 State. Huge portion of expenses are Meals and Entertainment. I just sent him a CYA email asking him to verify that all M&E expenses were business expenses. Also recommended making certain he had receipts clearly marked as to who, why, etc. Yikes.

Like KC says . . . No estimated payments made!

[TAXBILLY]

Clients are funny ... they screw up during the year, don't call us before making dumb moves and act indignant and angry at us when they owe lots of money. I tell it like it is and do not make their problem my problem.

taxbilly

[Terry O]

I also have a home-based business, and start out with the "Wow - -made a LOT more money this year didn't you!" - -then proceed to the FABULOUS 2 year comparison - -going down line by line as to the changes - - - and I prefer to do it in person - - -I want to make SURE they know EXACTLY what is going on - - this way - - -I don't have the "you never told me" - -

Can't wait to see what the new witholding changes are going to have on the 2009 returns - - - OY!

[B. Jani]

Last year got a new client by referal and when papers are ready to efile, emailed him papers to sign and return. He owed lot of money because took out $40000 loan from 401k and then left job so loan became withdrawal. Being under 59.5, wind up with the penalty and tax. He thought i did not do good job. He told me that his old prepare always got him refund but do not understand why he owes now. Gave him paper back and told him to go to old preparer. Same thing happend. Came back this year and want me to do the tax. I ask for the last year tax return to reviwe. When i saw what i told him last year, gave him back his papers and decline to do his tax. I do not accept the client who refuse to understand eventhough they know that we are correct.

[bstaxes]

Yesterday client comes in and we start the return. Client has an IRA withdrawal for over 325000 plus a couple of small withdrawals and some normal interest and dividends. Told him no tax was taken out of it and he will owe the IRS a chunk of change. Trying to find the words to soften the blow of 96000 to the IRS and 19000 to the state, he says "Yeah I figure about 130000 to the IRS". My response after my initial shock that he knew he would owe "It's not that much but close to it".

He left and was going to sell stock to cover the tax bill. I can see next years tax return being fun.

[joans]

I have found that most people are somewhat aware when they take out a 401K early and don't take out taxes that they will owe. I had one guy say they figured it to be about 15K because his wife was self-employed and didn't pay estimates. So he was happy when we got it down to 11K with deductions and everything else. He had the money set aside so he was prepared. So, some are really good and some you just cringe when you tell them. I had one couple that were getting a refund and were upset because it was less than last year. Well, they made 15K more and had the same deductions. Different tax bracket. What can you do. They give you the numbers and you do what you can.

Sara

[HV Ken]

Wanted to thank everyone for their replies, suggestions, war stories, etc. This discussion has been very valuable for me - I gained some new insights and can consider some alternative approaches.

Thanks again!

[Terry D EA]

i got in this one late but just had a client today that owed 7800 to the Feds and close to 2k to the state. I do exactly as some of the others. I peruse the return for anything additional and offer the client suggestions on additional possible deductions. Then I tell them it is what it is. I genuinely feel bad for some that did some planning and didn't expect such a large hit. But, this guy is a personal friend and I told him last year to see me on June 30 or each quarter to re-evaluate the estimate. You got it, didn't bother to do so which doesn't make me feel so bad after all. Others that are not personal friends, and do not plan or even ask, then I don't feel bad at all.

Terry D.