Why complete IRS data is key to effective tax planning

The financial advisory industry increasingly recognizes the importance of having complete IRS client data to deliver effective tax planning and financial planning recommendations.

However, gathering data for clients to build a complete and robust plan has become increasingly difficult, particularly when clients utilize multiple advisors or complex situations. 

With complete tax data, advisors are better equipped to offer accurate, customized, and compliant tax and financial planning recommendations, which is increasingly essential in today’s advisory landscape when offering additional value to clients.

Without it, financial advisors are at higher risk of making costly errors in tax planning, which can lead to unexpected tax liabilities, penalties, audit risks, and potentially faulty recommendations.

Data pitfalls

Traditionally, advisors have had limited access to clients’ IRS data, relying instead on information provided by clients, which can be incomplete or outdated. This makes it difficult to identify tax-saving opportunities, catch discrepancies, and ensure compliance. 

The foundation of successful tax planning lies in comprehensive financial planning based on a client’s complete financial picture. A financial plan is only as strong as the quality of the data it’s built on. For example, using generalized estimates, like a single lump sum for income, can lead to inaccurate results.

Not all income is the same – there’s ordinary income, non-taxable income, tax-deferred income, and tax-exempt income. Relying on a simplified income figure often results in either overpaying or underestimating taxes, both of which are costly.

An IRS data gap can also prevent advisors from delivering proactive, personalized service, weaken client relationships and limit business growth potential.

Some examples of tax planning mistakes from a lack of data include:

• Missed tax deductions and credits
• Overlooking unreported income
• Failure to adjust for tax liabilities on past earnings
• Incorrect Roth conversion recommendations
• Non-compliance with IRS reporting requirements
• Delayed filing deadlines due to missing information

As our industry ages and fewer new professionals join the field, the objective is to scale advice and make it more efficient. When advisors get better data at the front end, they can deliver better advice to clients. Ultimately, good tax planning leads to measurable financial benefits and an improved sense of control over a client’s financial future.

Growth opportunity

Industry studies show that the average firm sees only 3% organic growth, but that doesn’t mean growth is hard to find. The key is to locate the assets. Most high-net-worth clients work with multiple advisors.

The challenge, then, is discovering where all their assets are in order to make the best recommendations. The IRS knows where all the money is. Every custodian, whether a bank, brokerage, IRA, HSA, 401(k), or even LLCs and S Corps that generate income, reports all those details to the IRS. These transactions are captured in the tax records.

By accessing and analyzing this information, advisors can uncover numerous opportunities to help their clients and earn additional business. Advisors gain a comprehensive view of a client’s financial landscape, including held-away assets. 

This access also helps advisors provide more accurate and personalized tax planning, including optimized retirement and Roth conversion strategies, charitable contributions, and other tax-efficient recommendations. 

All this data offers insights that advisors wouldn’t otherwise have, enabling them to offer advice that other advisors might miss. With the whole picture in hand, advisors are in a much stronger position to make recommendations that could benefit the client, ultimately helping them increase client satisfaction and achieve more organic growth via increased assets managed, client retention, and client referrals.