Should a client pay for tax research done on his/her behalf?

I'm a CPA in Northern California. On my website it states that I offer taxation and tax planning services. I was recently contacted by a small business owner who asked me what my rate is for tax planning advice, and I told him my hourly rate and average fee. He then requested my advice about deducting his health insurance premiums on his personal Federal tax return and a few other tax-related questions he had.

After drafting a custom engagement agreement, I sent it to him by e-mail. The agreement included services I’d provide and my estimate of the fee according to the expected number of hours I’d need to spend on his behalf, including two to three hours for research. He said nothing about the research provision. He expressed contentment with the agreement.

Our scheduled phone call lasted nearly an hour, during which I gave the client most of the information he requested, and he sounded satisfied. He said he took notes of our conversation. I sent a follow-up e-mail to him with the answers to questions I didn't know the answers to during the call.

The client objected to my invoice that included a little more than two hours for research. He thought I’d bill him only for the phone call. He said it was his expectation that I wouldn't do any research before our phone consultation, but would do it after, instead. I told him I had no idea that's what he expected before speaking with him, that the research provision was made clear in the engagement agreement he signed, and that I needed to do the research before the phone call to know the answers to his questions, as the tax law is rather complicated in those areas. My reasoning made no difference to him. He withdrew from the engagement and said he wouldn’t use my services again. He did pay me, however, the full amount shown on my invoice.

I related this experience to my CPA friend in Arizona, who has been in private practice for many years. He advised me to tell future tax planning clients, in situations like this one, that I'm not an expert in the area(s) they need advice about, and that I'd need to do research before meeting with them to provide them with the information they're seeking.

Is this client like most clients in that they expect me to know the answers to their questions without having to do research? Or, did this client complain because the research portion of the bill was larger (by about 3x) than the phone consultation portion? Did my CPA friend give me good advice about how to properly communicate the need for research to a prospective client? Do you, who are reading this, believe that a professional like me shouldn't have to do research during a client engagement, or shouldn't charge for it?

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7

Gary - I concur with your friend in Arizona on setting the expectation that you would need to perform research/preparation in advance which may be 2-3 hours to provide the best counsel when you met. You are an expert but cannot be an expert on everything, especially their situation. This is something I've seen routinely with smaller engagements versus say a major engagement where a large firm is retained and research/analysis/review is done in an ongoing basis. I think it also ties to the issues around billable hours and what is billable versus non-billable and paying for the value of the service versus whether you spent 3 hours versus 1 hour; people can feel like they were cheated. Also, the expectation probably wasn't clear on whether you were going to have an exploratory call first versus being prepared to deliver solutions on the call - the client may have wanted you to listen first before using your full services per the contract. I think good research for a client is part of the value of the service and has to recouped in some form, whether part of an hourly fee that is essentially higher to include these non chargeable items or is part of the hourly work at a lower rate since these hours are charged

Ted, I agree with you and my CPA friend in AZ, and with Scott in his reply above, about the need to set expectations with a new client. This is something I've only learned about by doing; I've only seen it applied in a more general business context having to do with explaining the terms of a contract to a customer. However, in my interaction with this new client, there was more than one indication that the client clearly wanted the answers to his questions during our initial phone call. The most important was this sentence in one of his first e-mails to me: "Initially, I'd like to schedule a phone meeting to discuss a few specific questions, regarding ACA reporting and other matters." In the same e-mail, he said "I can scan recent documents and send them to you with my three or four specific questions in advance of that meeting." In that e-mail he went on to say that he's "looking for someone to assist in preparing his S Corp return for 2016."

Well said---I agree with you Ted

4

Gary: I concur with your CPA friend in Arizona. I think most folks expect that when they talk to a CPA, attorney, or other professional, that they know the answers to their questions without doing research based on past experience. Clearly you can't know everything but setting proper expectations with clients will go a long way to minimizing these type of issues. I know I spent thousands with Deloitte researching international tax requirements. I thought they would know the answers when I contacted them but they explained that things constantly changed based on the country, the specific type of product being sold, etc. This was explained during the initial call so the research was not conducted until after I explicitly approved it. They set the expectation so that I wouldn't be surprised by the bill. We also set a cap on the maximum time that could be used to research items without a subsequent "change order". In this way I could control my costs because some things may be way more complicated that either party initially anticipated. I also received the output of the research through the period that I paid for even if we didn't get to the final answer (which was the case in China).

Hi Scott, Thanks so much for your helpful answer. What you said about your experience with Deloitte sounds like a good example for me to follow. I explained to Ted in my reply to him that my client appeared to expect the answers to his questions during our initial meeting, so I won't repeat that explanation here. I'd like to add, though, that the client indicated a preference for receiving this information by December 15 in time for the Obamacare enrollment deadline, and our phone meeting was scheduled for December 13, as requested by him, only two days before that meeting. During the meeting, he sounded content that I answered his questions. I admit that it may have been more difficult to read his true intentions because our entire interaction before the meeting was by e-mail. Generally I found it harder to interpret the way someone felt in an e-mail than by speaking with them directly. Also I like to be proactive about delivering service.

4

Hi, Gary! I have found that spending time either in person or on the phone discussing an engagement proposal helps to prevent misunderstandings. In the discussion about the proposal you have the opportunity to help the potential client to fully clarify his needs and expectations and to explain your work process. Once you review and agree on the proposal then you're both ready to move forward (and get signatures).

My own business policy would provide for me to refund money in such a situation; however, that's a personal policy choice that fits my business model of value pricing.

I hope this is helpful; I can see you're receiving lots of good advice. All the best to you in the new year ahead.

4

Should a client pay for research undertaken on their behalf? Hell Yeah - regardless of your expertise discipline. In my practice research usually makes up over half of my billable hours. The effort put into the preparation of advice is invariably the most valuable.
It would appear Gary that your engagement proposal may be ambiguous. As a CPA you fall into one of the three worst professions at communicating effectively with non-accounting types (who obviously make up the majority of your clientele).
If your engagement proposal needs an explanation you need to rework it so that is no longer the case. When your fees and methodology are clearly understood and the prospect agrees, you will avoid this issue in 99% of circumstances.
There is however, that 1% who will always not want to pay the full worth of your services. Under these circumstances I recommend that you play a round of the USA’s preferred sport and litigate!

3

My friend, sad to say you are suffering a disease shared by many a CPA, Salesmanshipitis. Fortunately, it is a curable condition. First, stop being so smart and play dumb first to get to a commitment to work together. Ask yourself this question, how does all the time and effort you have put in to learning tax codes, insights, strategies compare to the time you have put in to learning the art of selling? The answer for you is not in the details of how to bill a particular service but on how you need to sell your services so your clients are happy to pay your bill (because of what they can save, or avoid, or make.) Since we can't teach selling in an advice column let me give you a couple of tips that would be part of the education. 1) No mutual mystification, you should know what you need to do, they should know what they will pay. 2) Nobody is going to buy a cow if you give the milk away for free. 3) Let your client answer your questions for research. Establish the potential value with questions and then ask how important that money is. Ask, "Would you be looking for me to give you a quick close answer or do you want to get this right?" "How much time would you expect would need to be billed as research for this kind of issue?" If they answer none, "I'm not sure you'd get a valuable answer without research, do you still want it?" If the answer is less than you want, "I have to be honest with you, spending an hour on this you could miss out on the payback, I'd be comfortable telling you that with 2-3 hours of billed research we could find what you're looking for, but maybe that's too much for you?"

These are crude examples but do the kind of research into the art of selling that you would solving a tax problem and you'll find yourself with happy clients and a black ledger for your trouble.

3

It is all about expectations from both parties and you must try to get that understood by both parties so confusion and backing out of a potential relationship does not happen. They have to know what your expertise is going to cost them, and would have been firm that it was going cost X to do the research and a total of Y when the reports were finished

Mr. Cox, That was the purpose of my engagement letter. The description of the services I'd provide, the anticipated fee I'd charge and the anticipated number of hours needed, including research time, all that was made very clear in the letter. The client read the letter and appeared to have no problem with it except for a couple of provisions relating to preparation of tax returns, which I corrected for him.

0

Hi Gary,
I think it is always best to be as transparent as possible. If there is something you do not know then tell the person I can find that information for you I estimate it will take two or 3 hours at X per hour. How would you like to proceed. This way there are no surprises and they make the decision. If this was for a larger organization you may decide to eat the cost in hopes of getting more business however that does not appear to be the case in this situation.

0

Each profession has its own set of guidelines. As a mortgage Broker, I cannot charge for telephone time and advice. However, whenever I am seeking professional advice from my CPA, attorney or medical doctor I expect to pay for it if it involves more than a very short answer not requiring much detail. If the client doesn't ask directly about the cost of your time, I think you need to be very specific in bringing it up in your initial discussion and including it clearly in your client agreement. If it is email correspondence, make it an attachment and be sure to confirm with your client before investing your time.

Dick, thanks for your comment.

The client asked only what my rate for tax planning advice was. I gave him my general billing rate per hour, and added that I could provide service on a flat fee basis instead. No mention of research or research time was made during our initial discussions. It was stated clearly in my engagement agreement how much anticipated research time would be needed. The time I spent researching was less than the maximum of what I anticipated. Thus I thought that the client understood there would be time spent researching his inquiry.

0

Hi I'm David in case my name doesn't appear below.

My advice is to not belittle yourself as it only detracts from your value as an advisor. Don't tell future tax planning clients, in situations like this one, that you're not an expert in the area(s) they need advice about (particularly if that is part of your focus as a practitioner). Do advise the prospective client you need to do research before meeting with them to provide them with the information they're seeking.

I'm an accountant in New Zealand. My understanding of CPA's in the US is that they are on the whole, general practitioners although some like myself tend to specialise in certain areas of interest such as audit, tax, insolvency, or business development, etc.

Even as specialists in a particular area such as tax, I suspect we all need a coach, mentor or another adviser specialising in that particular discipline to bounce ideas off, so it would not have made any difference whether we hold ourselves out as specialists or not.

My advice is that you hold your ground, although one suggestion is to continue to look at your client selection criteria more closely and don't try to be everything to everybody i.e. decide not to act for some people!

Having fun is important. This guy is not one I would enjoy working for, that's for sure, even if he does pay!

Hi David, Thank you very much for your comments. I'm very glad to hear viewpoints on this from an accounting professional outside the US, as well as from US practitioners.

I'll give this response by the client in answer to what you said about the need all of us have for a specialist to bounce ideas off. He told me that common sense indicates that the research would follow our conversation, once I had a better idea of what he was seeking. In fact he gave me a very good idea of what he was seeking in one of his earlier e-mails. I told him in reply that if anything, common sense would indicate that I'd need to do the research before our conversation, to prepare me to give him the information he needed by two days after our conversation.

I can only account for the client's myopic behavior by reasoning that he was under severe financial pressure, and was perhaps having difficulty making ends meet. On his P & L statement he reported a low salary and very little net profit.

Gary

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