Background and Methods of Integrative Tax Practice

Editor: Theodore J. Sarenski, CPA/PFS, CFP, AEP

Family tax practice is changing exponentially due to the rising complexity of personal finance. The CPA profession has been slow to properly adapt to the current contextual complexity of family tax practice, delaying the adoption of a holistic approach. Meanwhile, unaddressed financial planning needs gain importance as competitive forces gather momentum. Therefore, CPAs must assess the methods, skills, and tools needed for family practice, to better integrate clients’ most important personal finance concerns and reconnect with their professional roots, established before the federal income tax existed. To aid in this pursuit, the AICPA offers a vast array of resources in its Personal Financial Planning (PFP) Section and related credential, the Personal Financial Specialist (PFS).

Background

Ironically, the avalanche of personal finance complexity affecting Americans today comes from a tax law change in 1978 that received little notice at the time. Section 135 of the Revenue Act of 1978, P.L. 95-600, added a new subsection (k) to Sec. 401. In 1980, Ted Benna, a benefits consultant, noticed the provision’s potential for revolutionizing employee retirement plans and today is known as the “father” of the 401(k) plan. It and other alternatives to defined benefit plans took hold. Since 1997, defined contribution plans have held more assets than defined benefit pension plans (see Table E11, Private Pension Plan Bulletin Historical Tables and Graphs, U.S. Department of Labor, November 2012).

Along with other new tax-advantaged saving accounts for retirement, education, charitable, and health purposes, the 401(k) plan ushered in a new era of personal financial planning. While CPAs became well-versed in the technical tax aspects of these savings accounts, relatively few of them have explored how clients should use them strategically to attain their overall financial goals. In other words, relatively few CPAs learned to integrate tax implications with comprehensive financial planning. Today, the AICPA Personal Financial Planning (PFP) Section, composed primarily of tax advisers whose involvement in personal finance ranges from incidental to dedicated, counts only 8,000 members. This compares with total AICPA membership of nearly 386,000.

However, a truly professional group is needed to objectively help Americans with their growing financial planning needs and choices. The efforts of investment advisers to create such a professional group are recounted in The History of Financial Planning, by E. Denby Brandon Jr. and H. Oliver Welch (John Wiley & Sons 2009). Financial planning, as a stand-alone profession, has gained some stature, but financial planners still have an opportunity to successfully integrate tax services, and tax advisers can enhance their value and improve their competitiveness by systematically addressing clients’ overall financial concerns.

Meanwhile, academia has begun to prepare students for the integration of personal finance disciplines. For example, Utah State University set up its personal financial planning program as an undergraduate minor and added a specialization in its master of accounting program. San Diego State University offers a master of science in business administration degree with a concentration in financial and tax planning that prepares students to earn the Certified in Financial Planning and Chartered Financial Analyst credentials as well as the Enrolled Agent designation.

On the business side of the profession, CPAs already recognize business environment and concepts (BEC) as fundamental knowledge required for practice. Indeed, an entire section of the CPA exam is dedicated to it. Will the CPA profession acknowledge and integrate a corresponding “personal environment and concepts” as prerequisite knowledge? So far, the AICPA recognizes personal finance as a specialty area and provides a specialized community (the PFP Section) to support and promote it. In addition, for the past 25 years, the PFS credential has been conferred by the AICPA exclusively to CPAs with demonstrated financial planning education and experience. That the profession has yet to recognize basic personal finance education as relevant to all CPAs may stem from poor adaptation to the current 401(k) environment or from perceived restrictions.

One of the challenges for CPAs of providing comprehensive financial planning is the additional training needed to adequately address issues such as retirement, estate, insurance, and investment planning. In addition, the regulatory requirements of the Investment Advisers Act of 1940, if applicable, include registering and being regulated as an investment adviser. The Act provides CPAs with a narrow exemption from registration for advice that is “solely incidental” to the practice of their profession. Guidance on registration requirements can be found in The CPA’s Guide to Investment Adviser Registration issued by the AICPA PFP Section. [Editor’s note: Now available as The CPA’s Guide to Investment Advisory Business Models.]

Methods

These hurdles to establishing a holistic approach to family tax practice are easily addressed by distinguishing between two fundamental aspects of practice. On the one hand, the practitioner can guide clients through basic but crucial decisions that best order their financial affairs according to their priorities and goals. On the other, practitioners can elucidate issues that, while complex, may turn out to be only marginally important to the client’s overall financial well-being. In his seminal book Educating the Reflective Practitioner (Jossey-Bass 1987), Donald Schön uses this analogy:

In the varied topography of professional practice, there is a high, hard ground overlooking a swamp. On the high ground, manageable problems lend themselves to solution through the application of research-based theory and technique. In the swampy lowland, messy, confusing problems defy technical solution. The irony of this situation is that the problems of the high ground tend to be relatively unimportant to individuals or society at large, however great their technical interest may be, while in the swamp lie the problems of greatest human concern. The practitioner must choose. Shall he remain on the high ground where he can solve relatively unimportant problems according to prevailing standards of rigor, or shall he descend to the swamp of important problems and non-rigorous inquiry?

For example, if a client is considering a particular mortgage, a tax practitioner would be comfortable addressing the technical implications of the mortgage-interest deduction, escrow fees, etc. Some practitioners would be comfortable discussing the general features and implications of the mortgage (i.e., fixed, variable, or reverse amortization). Few practitioners would guide a conversation to uncover whether the mortgage fits the client’s overall financial planning situation. Yet that aspect of a mortgage could be far more critical than its tax benefits. Consider the dramatic scale of mortgage defaults during the Great Recession. Few Americans had professional guidance of any kind through the important swamp of nonrigorous inquiry to find out whether the mortgage fit into their long-term financial plan.

Simply put, the two distinct aspects of practice are the straightforward application of its science and the ambiguous side of its art. Tax practice is commonly thought to be concerned with theory and technical solutions. Yet client situations do not lend themselves to straightforward numerical input. At its best, the art of practice is the improvised process of inquiry, which identifies what is important, explores possibilities, identifies issues and the framework for solutions, and devises goals and strategies to reach them. By itself, that process of discovery does not require advice or technical solutions—although it does lead to identifying them.

That swampy, artful side of practice does have methods that can be applied separately from its technical aspects. For instance, the field of coaching, a nascent academic discipline, provides tools effectively applied to integrative medicine, executive development, business management, psychology, and organizational change management. The International Coach Federation defines coaching as partnering with clients in a thought-provoking and creative process that inspires them to maximize their personal and professional potential.

Coaching tools can help comfortably guide a conversation outside a tax adviser’s field of technical expertise. Seasoned practitioners know that the intimacy of tax appointments leads clients to open up on a wide range of personal matters. Indeed, tax advisers often face the complex issues of family dynamics, disease, death, divorce, and other personal dimensions of financial challenges. A coaching approach to such conversations can provide a framework to address them without offering advice, opinions, or technical expertise. Without the need to provide answers, the practitioner is free to focus on one of the cornerstones of coaching: listening.

As a pioneer of holistic medicine, a clinical professor of family and community medicine at the University of California San Francisco, Rachel Naomi Remen, teaches medical students the art of listening to patients. She prepares them to handle some of the most challenging situations by teaching them the power of undistracted attention, of simply being there and listening. Her only instruction is: Listen generously. In Co-Active Coaching (Nicholas Brealey 2011), co-authors Laura Whitworth, Henry Kimsey-House, Karen Kimsey-House, and Phillip Sandahl explain that most people do not listen at a very deep level. They mention three listening levels: internal, focused, and global listening.

In Becoming a Professional Life Coach (W.W. Norton & Co. 2007), co-authors Patrick Williams and Diane Menendez point out signs of lapses in being present and patiently listening. Professionals with at least one computer screen that captures most of their attention throughout the day may find some of them pertinent:

• Attending superficially, missing signals provided by clients’ tone of voice or body language.
• Interrupting clients, speaking as soon as clients finish a sentence, or beginning to speak while clients finish the last few words of a sentence—which does not allow them to elaborate.
• Breaking eye contact.

Another cornerstone of coaching is asking thought-provoking questions. The science of practice is concerned with providing answers, but its art relies on asking the right questions. While there are various types of coaching questions and methods of inquiry, in general, powerful questions are simple, direct, and open-ended. Asking “what” and “how” rather than “why” stirs the imagination and focuses on possibilities rather than causes. Research at the University of Sydney by Anthony M. Grant showed that solution-focused questions are more effective than problem-focused questions.

In his book, Choosing the Future: The Power of Strategic Thinking (Butterworth-Heinemann 2008), Stuart Wells presents a three-question framework to guide inquiry:

• What seems to be happening?
• What possibilities do we face?
• What are we going to do about it?

The PFP Section incorporated some of these coaching tools into a Personal Finance Report Card, which guides an assessment of a client’s personal financial situation. The report card lists 25 items in five categories: estate, investing, risk, spending, and goals. For each of the 25 items, specific questions help assess a client’s accomplishments and needs. Instructions also provide questions to prioritize needs, identify resources, address obstacles, craft an action plan, and create accountability.

A more integrative approach to family tax practice does not require tax advisers to become financial planners or coaches, but it does require them to expand their perspective and resources to guide broad inquiries, which may lead them and their clients to seek further technical knowledge from other professionals. Already, tax advisers often determine that a client would benefit from a particular type of trust and then refer the client to an attorney who drafts the documents. Similarly, CPA tax advisers could collaborate with PFS credential holders for financial planning expertise, with the added benefit of consistent professional standards of care. This would be similar to when a physician refers a patient to a specialized physician.

Although much coaching research and ensuing resources have been developed and applied to various fields, CPAs have few such resources specific to the profession. The PFP Section provides both communication guidance and financial planning technical resources. From them, tax practitioners can take just the resources they need for integrative tax practice or expand into some or all areas of financial planning. For example, the Forefield financial planning database included in PFP Section membership offers client communication tools such as life-event checklists, which help guide client conversations.

Summary

Integrative family tax practice can expand the art of practice and connect a CPA’s field of tax proficiency to its larger environment, thus making the practitioner more valuable without providing advice beyond his or her technical expertise. It allows CPA tax advisers to remain clients’ primary and most trusted personal advisers, amid growing personal finance complexity, relevance, and competition in the current 401(k) world.