TaxStatus's IRS-integrated tool seeks to disrupt tax planning market

A client's tax returns contain troves of useful information about their financial lives, from the obvious (e.g., the amounts and sources of their income, their household members, and their retirement contributions) to the more subtle (e.g., their medical expenses, charitable intentions, and debt levels that are all implied by their itemized deductions, or the existence of income-producing assets that client hadn't made the advisor aware of). Historically, however, in order to find all this information advisors needed to review their clients' tax returns themselves, which was a time-consuming process – and even if experience and training in knowing where in the return to look and what information to look for could make it somewhat more efficient, it remained a very manual task due to the sheer length and density of many clients' tax returns. 

Since the debut of Holistiplan in 2019, however, it's become much easier to get up to speed on the details of a client's tax situation without manually reading through the whole return. Holistiplan, along with other competitors like FP Alpha and RightCapital's Tax Analyzer that have emerged more recently, are trained to scan clients' tax returns and pull out the key information that the advisor might need to know. They then package that information into a core tax "snapshot" report, giving the high-level overview of the client's tax situation, which can then serve as a springboard for further review of the return and/or deeper tax planning conversations around actions like Roth conversions, charitable donation strategies, and tax-efficient investing (which most of these platforms have the capability to model in one form or another). 

What's notable, however, is that even platforms like Holistiplan and FP Alpha aren't entirely frictionless in how they gather and analyze client tax information. The advisor still needs to procure a PDF of the client's tax return and upload it to the software, which while not representing a major obstacle, does add another step to the client data gathering process that must be repeated each year whenever the client's updated tax return is available. And the software is limited to analyzing only the tax returns that the advisor actually has on hand, so if the client can't find a tax return from a previous year, there's no way of knowing what it might contain. 

Against this backdrop, TaxStatus emerged as a tool with the capability to pull in a client's last 10 years of tax history directly from the IRS, including not just tax return data but also forms like W-2s, K-1s, and 1099s that are filed for each taxpayer, as well as information on any outstanding taxes or penalties owed. At first, TaxStatus's main function seemed to be simply as a service layer to import client tax data from the IRS: Advisors could use TaxStatus directly to monitor their clients' tax situations and keep in the loop with any IRS notices received by any of their clients, or they could use the tool's integration with tax planning tools like Holistiplan to populate the client's tax information in the planning software automatically without the need for a PDF copy of the return. Either way, the role of TaxStatus (and its core business model) was about the tax data it provided – what the advisor decided to do next with that data was up to them. 

But given that TaxStatus had already built the pipes to the IRS's tax data, and an ID verification system that clients could complete quickly to authorize the advisor's access to their data, the obvious next step seemed to be to build their own full-functioning tax planning tool on top of their pre-existing data collection capabilities. And now with TaxStatus's recent announcement of their new "Financial Baseline Report", it appears that they may finally be moving in that direction. 

At a high level, the TaxStatus Financial Baseline Report appears to have a lot in common with Holistiplan's Tax Report and FP Alpha's Tax Snapshot. Which is to say that it provides a summary of the client's income, their marginal and effective tax rates, and eligibility status for certain credits and deductions, along with other key tax data. Notably, the report also contains a quasi-net worth statement, listing the client's assets and liabilities as reported to the IRS (e.g., via Form 1099-DIV for brokerage accounts, Form 5498 for retirement accounts, and Forms 1098 and 1098-E for mortgages and student loans, respectively), while also compiling an employment history for the client via their historical W-2, K-1, and Schedule C filings. 

At the same time, for all the comprehensiveness of its historical tax data, TaxStatus doesn't yet have the forward-looking planning tools – like projections of different tax scenarios or Roth conversion optimization calculations – that would truly make it a competitor to Holistiplan or FP Alpha in the tax planning category. But for almost any tax planning software, the "core" report, whether it's Holistiplan's Tax Report, FP Alpha's Tax Snapshot, or the new TaxStatus Financial Baseline Report, serves as the starting point for almost all client conversations around taxes, where the advisor can overview the client's current situation, point out inefficiencies or planning opportunities, and only then start to build out future scenarios to solidify the client's next steps. So it makes sense that TaxStatus would start there, with the possibility (and almost inevitability) of more forward-looking planning tools to come. 

Ultimately, while it may not be a full-fledged planning tool yet, TaxStatus's shift in the direction of tax planning is yet another signal that the days of Holistiplan's near monopoly over the Tax Planning category of the Kitces AdvisorTech Map may be drawing to an end. Between TaxStatus's new features, FP Alpha's release of their Tax Module as a standalone product, and RightCapital's release of their Tax Analyzer tool bundled with their core financial planning software, the competition is starting to heat up in a category that Holistiplan has long dominated. And if and when TaxStatus does build out more features to truly compete in that space, it will be well positioned to do so when it can offer the same capabilities of its competition without the advisor ever needing to ask for a PDF of the client's tax return. 

Ben Henry-Moreland is a Senior Financial Planning Nerd at Kitces.com, where he specializes in writing and speaking on financial planning topics including tax, practice management, and technology. He also co-authors the monthly Kitces #AdvisorTech column. Drawing from his experience as a financial planner and a solo advisory firm owner, Ben is passionate about fulfilling the site’s mission of making financial advicers better and more successful. 

Michael Kitces is the Chief Financial Planning Nerd at Kitces.com, dedicated to advancing knowledge in financial planning and helping to make financial advisors better and more successful. In addition, he is the Head of Planning Strategy at Focus Partners Wealth, the co-founder of the XY Planning Network, AdvicePay, New Planner Recruiting, fpPathfinder, and FA BeanCounters, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View.