What are the differences of tax consulting versus tax compliance? This post answers the questions. It is more intended as a basic knowledge about tax services available which may helpful to both tax services users and tax pro wanna be. To the tax pro wanna be, this post may give a better [more effective] direction to which area your tax—career path should be warded to. And by knowing these tax services terms, a tax services user may get a little clue to least know where they should go for some tax services they are looking for. Read on…

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Throughout this post we are going to use the term “tax consultant” interchangeably with “tax professional [tax pro]”, “tax practitioner”, and “tax advisor.” In other words, they are lumped together all of the services of individuals who offer their tax expertise to clients on a fee basis.

Within the industry, services are classified as tax return preparation (compliance) and tax consulting. Tax compliance is the process of reporting past transactions, while tax consulting generally involves planning for future transactions. These two functions are often intertwined, with tax professionals discovering consulting work in the process of return preparation and doing compliance work while engaged in tax consulting. Although the term “consultant” sparks a more professional and attractive image, most tax professionals, except perhaps for attorneys, begin their careers preparing tax returns. Many spend the majority of their time throughout their careers in compliance work.

Summing-up: Tax compliance is the process of filling out tax forms while tax consulting is advising clients on how to save taxes in future transactions.

 

Both compliance and consulting require the same level of technical expertise. Jay Zack, a tax partner with RSM McGladrey, Inc., said, “We believe that you learn tax consulting best by doing compliance”.

The way most tax practitioners become very familiar with the rules for a particular transaction is by working through the IRS forms and instructions in order to report the transaction. Additional details might be learned by reading court cases, IRS regulations and rulings, and expert commentary.

Tax consulting often draws from knowledge learned in this manner. It is extremely difficult for tax professionals to consult properly with a client in an area in which they are not familiar with the reporting requirements. Therefore, tax consulting generally grows from a tax compliance background.

To the tax pro wanna be: Tax compliance work usually precedes tax consulting in a typical career path and teaches a tax advisor how to be a good consultant.

 

Small practitioners rarely get approached for consulting prior to doing compliance work for a client, unless they have established a reputation in a specialized area. Once a small practitioner gains experience and proficiency in a particular area and establishes a reputation for proficiency, pure consulting opportunities become available. Most small and sole practitioners remain actively engaged in compliance throughout their careers, however, because compliance is generally the bread and butter of a small tax practice.

Still, compliance work presents the best opportunities to discover the consulting needs of a client. During the very busy tax season, getting the forms filled out and filed are the primary responsibilities of a small practitioner. In the process of doing so, the practitioner must review and analyze all of the client’s financial dealings. This is the best time to take note of a client’s potential consulting needs, which can be addressed later during the not-so-busy season. Like a doctor who discovers the health needs of patients during their annual physical, practitioners should be scrutinizing clients’ consulting needs when they are financially naked at tax time.

Tax season: The time when most individual tax returns are filed—between January 15 and April 15. Many accountants are busy with tax return extensions and fiscal year filing deadlines throughout the year.

 

Ed Ryan, president of Edward M. Ryan, CPA, in Minneapolis, began his career in a two-member CPA firm doing primarily compliance work for individuals. Ed was eager to do more on the planning and business side, so he attended school at night to obtain a Master’s of Business Taxation degree from the University of Minnesota’s Carlson School of Management. After obtaining his master’s degree, Ed started his own firm, which has grown to about 15 members.

The fun is in the planning”, said Ed, who now spends about 90 percent of his chargeable time doing consulting. You have a target that you have to hit, but it is a lot more fun because there is a lot more reward that you are able to share with your clients. Families so often look for opportunities that will assist them in managing not only their business but their personal finances, and tax planning provides great opportunities to assist them in their financial affairs. So it is very self-fulfilling because you can see the results and they are reoccurring. It is really education. They are educating me about their family lifestyle and I am educating them about tax and planning opportunities. That is very rewarding—it’s the reason you get up every day.

 

Working for a larger firm presents more opportunities for initial consulting engagements with clients. Managers and senior managers of larger firms (those with six to 10 years of experience) sometimes spend the majority of their time on consulting engagements while at the same time supervising lower-level personnel. Partners with larger firms generally neither prepare nor review tax returns; these chores are left to lower-level personnel. Many partners in large firms are involved with tax consulting, but often only by supervising work done by managers.

To the tax pro wanna be: In larger CPA firms, entry-level professionals do compliance work while managers and partners do consulting.