Tax ‘advice’ more important than ever

Broker-dealers’ disclaimer boilerplates are replete with language about how advisers’ recommendations and suggestions should not be interpreted as tax, legal or accounting advice. But even if they can’t provide specific tax advice, advisers have always provided important tax-related information. With the passage of the Inflation Reduction Act of 2022, or IRA, providing such information is more important than ever.

As our Mark Schoeff Jr. reported in the wake of the law’s enactment, the Internal Revenue Service will receive $80 billion over the next 10 years, in part to update the agency’s aging technology and to strengthen its enforcement and compliance efforts. Of course, in our nation’s deeply divided political climate, more money for IRS is an instant hot-button issue, with a more muscular IRS seen as a positive on one side of the divide and a negative on the other. Setting aside value judgments, an IRS with better technology and more people no doubt will have greater ability to scrutinize returns.

The vast majority of working Americans who receive a W-2 form and take standard deductions probably have little to worry about from a more empowered IRS. The government already is a partner in every paycheck and there’s not much the average wage-earner can do about trimming Uncle Sam’s take. In fact, with more money to hire more agents and buy better systems, the IRS may win new friends simply by being able to answer the phone promptly.

AVOIDING TAX POTHOLES

Among those who earn more, however, the staggering complexity of the U.S. tax code, which creates many perfectly legal ways to position oneself for advantageous tax treatment, can snare and penalize even moderately affluent Americans — the bulk of advisory clients — who can inadvertently fall into tax potholes or even sinkholes they never knew existed.

By bringing important yet often unnoticed or obscure tax considerations to their clients’ attention, advisers can demonstrate their value in hard-dollar terms and earn loyalty — and referrals — for life.

Advisers can demonstrate their value in hard-dollar terms and earn loyalty — and referrals — for life.

Something as simple as explaining why investing in an exchange-traded fund could make more sense from a tax point of view than investing in a virtually identical mutual fund, for example, may be information that a client never had. Such information could prevent that client’s dismay at having to pay capital gains on profits they were unaware they earned.

INVALUABLE KNOWLEDGE

Advisers, of course, are aware of many more situations where knowledge of tax-related aspects of investing can have a major impact. Municipal bonds stand out in that regard, as do investments in limited partnerships and real estate. The interplay of taxes, insurance and estate planning is another area where an adviser’s knowledge can be invaluable.

Since business owners typically have the greatest opportunity to interpret the tax code to their benefit, it’s likely the Internal Revenue Service will focus its new efforts there. Advisers who use their knowledge to help business-owner clients steer clear of possible tax traps in coming years will be performing a service unlikely to be forgotten.