Providing Tax Consulting Services to a Married Couple

Description

Each group of questions below relies upon the facts stated, unless the facts are later changed as described in later sections.  To receive credit for your work cut and paste the questions below into your reply e-mail (whether in the body of the e-mail or in a separate attached Word document) and type your response below each question.  ==================================================================== PART1 Case Study Continued –  (also see additional questions below):   Assume Jim agreed to pay half of your normal hourly rate for the first meeting, if the first 30 minutes is free.  So at the end of the 2 hour meeting he would owe you $225.  Assume you thoroughly discussed the pros and cons of the tax filing options, how to minimize tax problems for 2019 and beyond with his corporate tax return, and how Jim might be able to solve his 2010 tax problem.     How much should you quote for:   1) Preparation of the 2019 tax returns (personal and corporate)? 2) Preparation of 2020 and future tax returns ? 3) Solving his 2010 tax problem for “pennies on the dollar,” and how would you structure the fees:             i)  hourly, with an up-front amount; and, if so, how much up front?  Or,             ii) flat fee, and if so, how much up front and how much over time assuming the case will take 24 months to complete?  Or,             iii) a flat fee expressed as a percentage of the reduction of the tax liability [note: a percentage fee is only permitted under IRS regulations (as reprinted in IRS Circular 230) when there is a known tax liability. Such a fee is not permitted if a tax return has not yet been filed and you are filing the tax return or consulting about a tax return to be filed; also see California Board of Accountancy’s official pronouncement on contingent fees: http://www.dca.ca.gov/cba/consumers/commission_fees.pdf   The actual California CPA Society Rule of Professional Conduct is reprinted below:   Rule 302: A member in public practice shall not: 1.       1.       Perform for a contingent fee any professional services for, or receive such a fee from, a client for whom the member or the member’s firm performs: A.      A.      An audit or review of a financial statement; or B.      B.      A compilation of a financial statement when the member expects or reasonably should expect that a third party will use the financial statement and the member’s compilation report does not disclose a lack of independence; or C.      C.      An examination of prospective financial information; or D.      D.      Any other attest engagement when the member expects or reasonably should expect that a third party will use the related attestation report; or E.      E.      Any other services requiring independence. F.       2.       Prepare an original tax return for a contingent fee for any client. G.      3.       Prepare an amended tax return, claim for tax refund, or perform other similar tax services for a contingent fee for any client. H.      4.       Perform an engagement as a testifying expert for a contingent fee. The prohibition in (1) above applies during the period in which the member or the member’s firm is engaged to perform any of the services listed under (1) above and the period covered by any historical financial statements involved in any such listed services. Except as stated in the next paragraph, a contingent fee is a fee established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specific finding or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or result of such service. Solely for purposes of this rule, fees are not regarded as being contingent if fixed by courts or governmental entities acting in a judicial or regulatory capacity, or in tax matters if determined based upon the results of judicial proceedings or the findings of governmental agencies acting in a judicial or regulatory capacity or there is a reasonable expectation of substantive review by a taxing authority. 

A member’s fees may vary depending, for example, on the complexity of services rendered. The applicable portion of Circular 230 is reprinted below:   § 10.27 Fees. (a) In general. A practitioner may not charge an unconscionable fee in connection with any matter before the Internal Revenue Service.     (b) Contingent fees — (1) Except as provided in paragraphs (b)(2), (3), and (4) of this section, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service.   (2) A practitioner may charge a contingent fee for services rendered in connection with the Service’s examination of, or challenge to — (i) An original tax return; or (ii) An amended return or claim for refund or credit where the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return.   (3) A practitioner may charge a contingent fee for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service.   (4) A practitioner may charge a contingent fee for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.   (c) Definitions. For purposes of this section — (1) Contingent fee is any fee that is based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the Internal Revenue Service or is sustained either by the Internal Revenue Service or in litigation. A contingent fee includes a fee that is based on a percentage of the refund reported on a return, that is based on a percentage of the taxes saved, or that otherwise depends on the specific result attained. A contingent fee also includes any fee arrangement in which the practitioner will reimburse the client for all or a portion of the client’s fee in the event that a position taken on a tax return or other filing is challenged by the Internal Revenue Service or is not sustained, whether pursuant to an indemnity agreement, a guarantee, rescission rights, or any other arrangement with a similar effect.   4) Should you prepare a written engagement agreement? If so, in your own words, write some key terms you would include in such an agreement.  Hint: you can find sample CPA engagement agreements online.   5) Would you limit the scope of the work?  Why? If so, write some language in your own words you would include in your engagement agreement which limits the scope of your work.= ==========================================================  PART 2 Case Study Continued –    Assume you quoted a very reasonable fee and payment arrangement in exchange for likely settling the IRS’s $100,000 tax debt for $5,000 to $10,000 in a lump sum settlement payment.    Assume you also gently informed Jane of Jim’s tax problem and she took it well and was eager to help him resolve his problem by providing him with up to $10,000 from her savings to settle his debt.    Assume you also provided great advice on how to minimize the chance of an audit on Jim’s 2019 corporate tax return, and how to set a salary so as to avoid audit issues with the IRS in the future with respect to his corporate tax return.    Assume you felt you bonded with them like you never bonded before with any other prospective clients, and that Jane was eager to get started, but Jim said: “thank you so much; here is the $225 we owe you for your time; you’ve given us a lot to think about and we need time to absorb it, and look at our options about what you advised; we will be back in touch early next week with our decision.”  Two weeks pass.  You try to follow up by e-mail and leave voice mail messages, but you are being ignored by Jim.    1) What could have gone wrong? Did you do something wrong from a tactical or strategic point of view? What was it, if anything?   2) What could you have done differently to potentially avoid this result?   3) Did you provide a valuable service at the meeting? If so, how can we measure the value?   4) Do you feel like you provided way more value than the $225 you collected? Why, specifically?   5) Do you measure the value you provided based on your time invested and your hourly rate, or based on the likely result you can achieve for the client?   6) Can you, and should you, measure the value you can provide based on the client’s perception of the value of your work you will provide?   7) In this case, which specific problems identified by Jim would provide the highest value to him if you performed those tasks or solved those problems?   8) How valuable, measured in low, medium or high, is your ability to deliver the bad news to Jane of Jim’s $100,000 pre-marital tax liability? 
9) How valuable is your ability to manage her reaction so that she deals with it well and the relationship is not materially affected in a bad way?   10) What could have been the result if Jane was informed of Jim’s tax problem by a CPA that did not have the same level of people skills, compassion and empathy that you exhibited to achieve the positive outcome with Jane?   Could the marriage have been in trouble?    11) How much would Jim “pay” today to avoid a breakdown of the marriage?  Is it fair for you to measure your services value that way?  Is it ethical?   12) If it doesn’t seem right to put a dollar value on that, should we at least explore with Jim the possibility that severe turmoil can be caused in the marriage?  Should we consider outside help of a marriage and family therapist? If so, why?   13) Do you think you and Jim could have come to an agreement on fees before you informed Jane of the tax issues (and provided the huge value of helping them maintain favorable marital relations)?  If so, what will you do next time you have to agree upon fees and there is a lot of value you can deliver to a client’s situation?