The Estimated Tax Letter Reminder Conundrum

Do you ever think to yourself, “Why are we preparing these estimated tax letter reminders?” In most cases, you send a reminder letter to your client, along with the payment vouchers, but, you never hear from them. Was the estimate paid? Did your client receive the reminder letter? Typically, this information is sent via secure email link or a portal that requires the client to log in and retrieve the information. 

This passive value added approach described above does not always meet the intended goals. It presents challenges throughout the process. For example, what if your client’s prior year tax return is extended and you do not have the necessary information to prepare an estimate? Based on a historical review of the client’s records, you know this client is supposed to make quarterly estimates. The client most likely will not have their current year information ready, especially if you are still waiting on prior year information. Most CPA firms will look back and try to predict future income; others will use the prior year tax information.

Another challenge, one that is often overlooked, is state nonresident withholding for pass-through entities. A number of states require that nonresident partners / shareholders must pay in quarterly. To make matters worse, the dates do not always conform to the federal estimated due dates.

The financial challenge of estimated taxes is twofold: (1) centers around the underpayment penalty for estimated taxes and (2) is your firm getting paid for the service provided. The underpayment penalty applies if your client did not pay enough tax throughout the year, either through withholding or by making estimated tax payments. There are some exceptions to the penalty as well as ways to minimize the penalty. For more information regarding the exceptions to the penalty or ways to minimize the penalty, please refer to IRS Publication 505 which can be found on the IRS.gov website.

Last but not least, the client typically does not see the value of this service. Therefore, billing and collecting for it presents its own challenges. Future CPA firms are moving from the more traditional billing by hour to a fixed fee approach. How do you prepare a fixed fee when situations change? This could be a losing proposition for your firm. So I ask again, “why are we preparing these estimated tax letter reminders?” How can the challenges presented above become a client strengthening procedure?

As CPA firms, we need to move away from the passive approach of blindly preparing and sending estimate letter reminders and create more of a dialogue between the client and the CPA firm. This is the most opportune time to catch up with your clients, understand any new developments, and potentially cross-promote other services the CPA firm offers. A generic reminder letter template could meet this objective. The letter should be very short and open ended, it should create dialogue for those clients that are interested in this service. It should not provide any details regarding what their estimate liability is, where to mail vouchers, or provide any other details that would allow the client to handle this matter without you. Furthermore, it saves CPA firms time by weeding out clients that may or may not be interested in making estimated tax payments, allowing your firm to focus on other billable work.

Now that we know our audience, the client is engaged and more willing to provide relevant information so that an estimate can be prepared. This stage is important in understanding new client developments, connect with the clients other advisors, sharing new tax law developments, promote the need for tax planning, discussing new or disposed of business ventures, discuss compensation or distributions, and/or obtain an updated fixed asset listing.

Once all of the necessary information is gathered and an estimate is prepared, the results should be discussed with the client. If you set up a client meeting, ask them to bring their checkbook so you can handle the mailing. If you are discussing over the phone, ask the client if they would be willing to allow the firm to make the payment electronically through EFTPS, Direct Pay or through the designated state website. Maintaining control of mailing the checks or making the payments electronically on the client’s behalf will allow the CPA firm to start building work papers for the current tax year. It will take the guess work, and future inquiries, out of busy season.

After the deadline passes, if your CPA firm bills for these services, the client will be more receptive to pay for the service that was rendered, especially if they understand that your services saved them money by avoiding the underpayment penalty or minimizing the estimated payment from safe harbor. At the very least, when catching up on the phone with your client, you can offer a fixed fee for the service and make your CPA firm more future ready. If your client understands the value, collecting on the fee should not be a problem. The challenges that CPA firms once faced will start becoming a strength, not only from an employee investment standpoint, but a financial one as well.

Craig M. Anderson, CPA, MT is a senior tax manager at Siegfried Advisory, LLC, an affiliate of The Siegfried Group LLP. Siegfried Advisory LLC provides leadership, financial and tax advisory services to entrepreneurial organizations and high net-worth families. To learn more about Siegfried Advisory, please visit the Siegfried Advisory website at www.siegfriedadvisory.com.