The financial industry is divided on whether or not financial advisors should be able to offer their clients tax advice. On one hand, providing guidance on taxes can help them bring significant value to their clients – and even generate hard-dollar cash savings. On the other hand, straying too far into the realm of tax advice could create a host of additional legal liability risks for them as well as their firms. And the rules around what constitutes tax advice are not exactly clear — which leaves advisors caught in the middle, often confused about how they can best engage with their clients on this topic without violating their firm’s unique rules or running into resistance from their own compliance departments.
While tax advice involves recommending strategies that cross into the realm of what the IRS might consider to be tax avoidance schemes – and thus require the involvement of a CPA, EA or attorney — there are more benign forms of tax planning that can also be very beneficial for clients. These might include advising on strategies that optimize the timing or type of income recognized based on clearly established rules (e.g., Roth conversions or asset location recommendations), or simply advising on the benefits of taking certain deductions versus others.
As the financial landscape continues to shift, the line between tax planning and actual tax advice will continue to blur as new regulations come into play. It’s important that advisors are plugged into these conversations and have an understanding of what kinds of tax planning activities might cross the line into advice — such as discussing strategies involving new rules that allow more flexibility on things like deducting medical expenses or maximizing the amount of retirement plan contributions.
In addition, it’s essential that advisors are able to communicate with their clients that while they may be able to explain certain changes in tax law and how they might affect a client’s situation, they cannot provide specific tax advice or recommend any particular course of action to follow. This is where it can be helpful for advisors to have the ability to run tax projections in their software to demonstrate the impact of various strategies and provide a more comprehensive picture of how different actions can affect a client’s tax bill.
Furthermore, advisors should also be able to communicate with their clients that subsequent developments may impact professional advice previously rendered with respect to significant matters — though they may not be required to do so under the rules of their professional associations, depending on how they define ‘significant’ in their policies. This will help mitigate risk by communicating that their advice is based on facts and laws as they understand them and are subject to change. This framework can help advisors feel more confident about engaging with their clients on this topic while ensuring they remain compliant with Federal and state laws and their own firms’ unique rules about giving tax advice. Steuerberatung