Ask the average taxpayer today to describe a tax refund and they’re likely to compare it to a bonus payment at the government’s expense – and all too often, tax professionals don’t help to dispel this misconception.
Somewhere along the line the American taxpayer forgot that, apart from somewhat infrequent refundable credits, any money he or she receives back in the form of a tax refund was at one time their money. They once owned it (if only briefly, while it was stewarded by their payroll processors), but needlessly floated the government an interest-free loan by paying more than was due.
Ultimately the root of the problem is withholding, which breeds ignorance. If every wage-earner was required to first take ownership of his or her full wages and then pay estimated payments, we’d have a tax revolution spring up as the next filing deadline approached.
Unfortunately, everyday Americans rarely look at their pay stubs anymore, let alone put the pieces together to realize their refunds are merely the excess portions of amounts withheld on each paycheck. The take-home portion is really all they see or care about.
I think we as tax professionals owe it to the American people to help expose the true impact of the U.S. income tax on each taxpayer – whether they’re wage-earners or business owners paying estimated payments (the latter group being far more acutely aware of the taxes they pay than the former).
I’ve assembled a list below of the three things tax professionals should stop doing, and the three things they should start doing, if we’re to clear away this myth once and for all.
- Stop using the phrase “maximize your refund”, and don’t imply that it’s what your firm does. The refund should never be the focus of any tax engagement; if anything, the focus should be on “minimizing your tax to the furthest extent allowed by law.”
- Start looking for opportunities to use the “maximize your refund” phrasing against competitors who use it. You can’t watch TV during tax season without seeing countless commercials that prominently feature this tag line. You may think you’re in a Prisoner’s Dilemma, forced to use the term because others do, but what you’re more likely to find are appreciative would-be clients who are more willing to engage with you for providing insight into the true nature of tax refunds.
- Stop taking credit for big refunds, and coach your clients not to give you any credit, either. The last thing you want is a client who doesn’t have a clear grasp of what a refund really is, referring you to a friend or acquaintance based on the belief that you can work your mysterious magic to ensure a big refund for them, too.
- Start taking more credit for accurate tax planning and promote financially sound approaches to saving. I say this because some clients might defend refunds, even those who recognize that it’s been their money all along, because it serves as a de facto savings mechanism. Help your clients see that there are other functionally identical ways to achieve the same thing. For instance, help your clients fill out their W-4s to target net to zero come filing time, then advise them to adjust their direct deposit information with their employer to route an amount equal to the excess withholding into a new, separate savings or investment account.
- Stop basing your value – and perhaps your revenue model – on the speed of a client’s refund. Not only are there certain ethical concerns with this approach (like knowingly allowing a client to rack up a refund with the intent of offering them a bank product when they file, and taking a cut), it will never be a competitive differentiator for the average firm. National players completely own this market and any attempts to rival it are both futile and a danger to business continuity in the long term. Revenue from such activities has a limited lifespan.
- Start positioning the fact that you can help your clients keep more money on an ongoing basis with each paycheck, as a key differentiator from those who instead focus on “maximizing your refund.” As suggested in point #4, if you provide alternate and more financially sound approaches to saving money, you situate yourself firmly above your competitors in the minds of your clients.
This is not a battle we can win overnight – but should we win, it will go a very long way in elevating the tax accountant in the minds of clients, and expose the true impact of the income tax to taxpayers everywhere.