The Hidden Costs of Responding to IRS Notices A Burden on Tax Practitioners
One of the most significant and often overlooked aspects of tax practitioner time is responding to IRS notices on behalf of clients. This task, while necessary, can be incredibly time-consuming and costly, especially in the post-COVID era where IRS notices have become more frequent.
According to a recent survey by the National Association of Tax Professionals (NATP), tax practitioners spend an average of 5 to 10 hours per week responding to IRS notices. This equates to a staggering 260 to 520 hours per year, which is time that could be spent on more productive tasks such as growing your business or providing additional value to your clients. Even at a low rate of $125 per hour, the time spent responding to these notices equates to tens of thousands of dollars in lost revenue if this isn’t built into your pricing.
The reasons behind the increased frequency of IRS notices post-COVID are manifold. The IRS has been grappling with a backlog of unprocessed returns, staffing shortages, and the implementation of new tax laws and stimulus measures. These factors have led to a higher number of errors and discrepancies in tax filings, resulting in a surge of notices being sent out to taxpayers. During the pandemic, the IRS paused collection notices. At the beginning of the year, automatic notices started flooding client mailboxes.
As a tax practitioner, you are often the first line of defense for your clients when it comes to dealing with these notices. You are responsible for reviewing the notice, gathering the necessary documentation, and crafting a response on behalf of your client. This process can be incredibly complex and time-consuming, especially if the notice pertains to a particularly intricate tax matter.
Moreover, the cost of responding to IRS notices is often not factored into the initial pricing of tax return preparation services. Many tax practitioners absorb these costs themselves, which can significantly eat into profits. This is why it is crucial for tax practice owners and managers to consider building the cost of responding to IRS notices into their pricing structure. Hourly services in addition to tax preparation prices are not always the best fit. Hourly billing on small tasks can be difficult to track accurately and clients may not fully understand why they’re receiving another bill. Clients perceive notice responses as part of the return preparation process.
By incorporating costs into the cost of return preparation, you can ensure that your practice is adequately compensated for the time and effort spent on this crucial task. Additionally, by being transparent with your clients about the potential for IRS notices and the associated costs, you can help manage their expectations and foster a more trusting relationship. Increasing return preparation fees can be presented as assurance that you will be available to assist with any notices at not additional cost. When framed more like an insurance policy clients stress is put at ease knowing that they can rely on you if a notice is received.
With the increased frequency of notices post-COVID, it is more important than ever for tax practice owners and managers to recognize the significant time and resources required for this task. By incorporating the cost of responding to notices into your pricing structure and communicating openly with your clients, you can ensure the long-term sustainability and profitability of your practice.
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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