It’s amazing how many different ways we Americans find to avoidpaying the taxes we owe.
Our complicated tax code gives rise to ever-shifting gray areas of what’s illegal evasion and what’s merely sensible and creative avoidance. In a morally relativistic age and a culture that prizes getting something for nothing, helping clients understand where to draw the line can be one of the most daunting tasks for an advisor.
In situations like the ones that follow, your expertise and talents may help save a tax-evasive client from a big fine, a lifetime of audits, or worse. Special thanks to Gene Balliett of Balliett Financial in Winter Park, Florida; Joan Coullahan of Kurtz, Connor, Browning & Phillips in Vienna, Virginia; and Melissa Hammel of Hammel Financial in Brentwood, Tennessee, for contributing to this discussion.
One of my clients, a dentist, is obsessed with avoiding taxes. One day he showed up at our offices with an enormous leather briefcase full of notebooks and a video for me to review. He’d attended a seminar on how to escape tax by setting up a family limited partnership–one of those deals where you pay a huge sum of money to listen to a pitch and then they give you this briefcase full of stuff to do it yourself. It took the combined efforts of his attorney and me to discourage him from undertaking this complicated and expensive process. Why do so many people let themselves be lured into unsuitable tax shelters, instead of focusing on a well-rounded financial plan? You did well to pry this client away from the fantasy of a tax-free life. The reason why so many folks are seduced by get-rid-of-tax-quick schemes is that that we are an instant-gratification-oriented society, where the idea of the quick fix seems so much more attractive than waiting years for a possibly better payoff.
We Americans tend to fall short in appreciating the value of steady, thoughtful planning to reach our goals. Many of us spend too much, save too little, and plan for vacations more carefully than we do for retirement. Because our goals tend to be short-term, we often choose quickie solutions that are more expensive in the long term and create more problems than they solve.
So whatever you did to persuade your client that an FLP was not in his best interest, hats off to you and to your legal colleague. Bringing excited clients down to earth is rarely fun for them or you; but once they overcome any temporary feelings of deflation, I believe you will further cement their respect and trust.
My client is concerned about the IRS going after her 75-year-old father, who has given up filing tax returns since her mother died. Since investments are his primary source of income, my client feels it’s only a matter of time before her dad’s brokerage 1099s alert the IRS to his delinquency. She has tried to persuade him to go to a CPA, but he says he’s already paid enough tax in his lifetime. Can you suggest any way for her to get through to him? This question made me smile. When my dad was in his 80s, I was enlisted to help him write members of Congress suggesting what he called the Mellan Taxpayer Resolution: a policy that would exempt from income tax anyone over age 80 who had been a lifelong good citizen and faithful taxpayer. His proposal never went anywhere, but I understood the sentiment: he was feeling more and more overwhelmed by the complexity of filing taxes. Even getting the paperwork together for his accountant seemed too much to handle.
Your client’s father may be more inclined to change his behavior if you take over from her in pointing out the risks to him. Ask him to visit your office so you can discuss a matter that is affecting his daughter’s peace of mind. If he is willing to come, empathize as fully as you can with his sense of entitlement to a tax moratorium, without condoning his failure to file. He may also be feeling some paralysis (and possibly bitterness or anger) after his wife’s passing. Let him know you understand how a loss of this magnitude can disrupt the completion of normal everyday tasks. Tax returns may be especially painful, reminding him over and over that he is no longer part of a couple.
After you’ve listened carefully to his feelings, educate him about the perils of his situation. Look up some of the actual penalties visited on recent tax evaders, and lay them out for him. Then propose a way to resolve the situation that will help him overcome his inertia. Will he allow you (or your client) to make an appointment for him with an accountant? Are you willing to go to his house and help him find the papers he needs to do his tax return himself?
If you first empathize with him, then motivate him, and finally suggest how he can put this task behind him, you may be able to help him get past his debilitating emotions and do the right thing.
During the several years that I’ve had a graphic designer as a client, I’ve enjoyed seeing his business grow. But one thing hasn’t changed: he comes up short every quarter when it’s time to pay estimated tax. Saving money in a separate account doesn’t work, because he raids it to meet cash-flow shortfalls. Last time, I read him the riot act for paying taxes with his credit card. Do you think a psychological blind spot may be behind this money-management problem? If so, what can I do about it? Ask your client how he feels when it’s time to pay taxes and he doesn’t have the money. My guess is he will be at least a little embarrassed that he planned so poorly or spent so much on other things. But he may also feel somewhat hostile and rebellious about having to pay taxes in the first place. Whatever his response, listen without judging and try to validate any of his feelings and perceptions that you can get behind.