Fred Katz's tax planning secret revealed: ask questions.

FREDERIC KATZ HAS AN INTERESTING PHILOSOPHY: "THE TIME TO DO TAX PLANNING IS NOT WHEN YOU ARE PREPARING A TAX RETURN."

Other than the more obvious reasons, "there are certain thoughts that go into planning during the year. There's an adequate amount of software out there, and, with adequate training, you can learn how to do preparation. However," Fred says, "it's the mechanical part--the preparation part--that is the culmination of good tax planning throughout the year. Otherwise, you're not performing the kind of service for your client that you should be."

After 34 years in public accounting, he has a well-rounded philosophy about tax planning and serving clients. Fred joined Braver and Company in Newton, Mass., five years ago as a principal. Prior to this affiliation, Fred was the managing partner of Katz, Baltimore & Company, P.C. in Newton, a firm that he created in 1973 and shaped for 26 years into a boutique accounting firm specializing in tax, financial planning and problem solving.

"What I do today is essentially the same thing but on a more limited scale," he says. "The number of clients that I care for now and the amount of activity per client is more focused compared to preparing a myriad of tax returns and trying to do tax planning for so many."

A member of the Tax Division of the AICPA, Massachusetts Society of CPAs (MSCPA) and Medical Group Management Association, Fred also serves as chairman of the MSCPA's Physicians and Health Care Committee.

He views his professional role as helping clients "from cradle to grave." That role began with a bachelor's degree in accounting and a master's degree in taxation from Bentley College in Waltham, Mass.

"I think back to when I originally thought about being an accountant, and I believe one of the things truly needed is people skills," says Fred, who feels he's not in a position to tell people how to spend their money. Instead, an accountant/advisor needs to have listening skills and introspection when it comes to talking with people.

"You don't talk to people. Whether they realize it, your clients are there because they want to share their thoughts with you, so what you have to do is have them express their thoughts by asking insightful questions. You're teaching people why it is in their interest to have different buckets, so to speak. If someone has income of, say, $100,000, and after tax it's $75,000, the question is: 'What is it that you want to accomplish?' Based on their aftertax income, you help them create a discipline for themselves. You don't impose your values on them, because everyone has their own priorities. Your role is to help your clients accomplish their goals."

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For Fred, the goal in financial and tax planning is to help clients define what is meant by point A and point B. "First, you help them find and understand what point A is by asking a series of questions--more for the purpose of them learning about themselves."

To help a client define point B, he throws out questions like, "Are you concerned about your children's education? Are you concerned about owning a house or condo? Are you concerned about retirement? Long-term care for yourselves? Parents? In-laws?" Fred believes the questions cause thoughts to germinate.

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He feels strongly that, when the clients are married, questions need to be posed to both the husband and wife. "I know that, in some cases, accountants meet primarily with the husband. Big mistake. Hopefully, husbands and wives have the kind of relationship where they share with one another, and, therefore, these are all joint decisions."

Staying Ahead of Tax Changes and Clients

To advise couples and individuals effectively, Fred stays abreast of the many changes to rulings affecting tax planning. He finds he must also stay "ahead" of his clients. According to Fred, a major issue that has hit the table in the last several years is the Alternative Minimum Tax (AMT). "If you are in a state where there is no state income tax, like Florida, New Hampshire, Texas and Washington, there is a table allowing you to take the equivalent of a state tax deduction based on income. But more and more people--predominantly in the middle- and upper-income brackets--are negatively affected."

He shares an example of new clients who came to him in January saying, "We've done our own financial planning this year, and we're really proud of ourselves."

"The upshot," Fred says, "is that they had a significant sale of a second home and thought, 'Let's be really smart and prepay our state taxes before December 31.' Well, because of a number of items, but particularly because they were in an AMT situation, the state tax they paid so dutifully was a wasted deduction that could have been carried over to the following year."

The clients made the early tax payment to avoid a $300 penalty, but Fred advised them to compare the penalty with the $35,000 state tax prepayment. They would have had the time value of $35,000 for approximately six months, and the $35,000 could have saved the clients $11,000 in federal tax if paid after Dec. 31.

Tax planners should assist clients to look at the macro picture rather than getting "hung up on minutiae," like paying a penalty. With a macro picture, "you have the yin and the yang. Every aspect has a different element, and you have to be very careful how you look at it." Additionally, he believes the financial lessons clients learn today "ultimately impact other members of the family--for example, children."

Some clients pay a big price for not seeking the advice of an accountant or financial advisor--especially when they think they can "outsmart the system."

Fred shares an example of someone who is about to sell a large amount of stock: Thinking he or she can avoid a huge capital gains hit, the person transfers "X" number of stock shares to a child who is under age 14, and, in theory, is in a lower tax bracket. A tax planner, however, knows that, typically, when appreciated stock is acquired as a gift, the recipient's basis is the same as the basis of the person giving the stock. Pretty soon, this person "finds out that they have made a major blunder."

One way Fred helps clients avoid major and minor financial blunders is to be accessible.

"All of my clients not only have my office number but also my cell phone number. A few of them have my home phone. So they can never say, 'Well, gee, Fred, I can never reach you.' It's not going to happen."

Some accountants might find such access invasive, but Fred believes "they need to understand that you never know when a client is going to be doing something. If I discourage phone calls, which I see with a lot of accountants, you will not be able to help the client in a way that you should. Accessibility is very important."

Accessible to the Community

While serving his clients is important to Fred, so is serving his community. He does pro bono work with an organization helping abused spouses. "Usually the abused person is the wife, and what she's missing is an education about finances and about what the state would allow if the case went to divorce. It's not like the couple signed a prenuptial agreement and were married for three years. It's more like they have been married for 20 years and started out with nothing, and now the husband may be hiding assets. I enjoy the forensic accounting because it's like doing detective work, but I enjoy the educational aspect of it more."

Education also is at the heart of Fred's role as an ad hoc member of the Financial Aid Committee at Harvard Medical School. "I'm an ad hoc member because I'm not a doctor. I couldn't do six stitches on your son. Basically, we try to help meet the needs of these students in terms of scholarship dollars versus loan dollars."

Fred explains that he was "invited to the dance" at the medical school by a dean for whom he had done a tax consulting project. "He said, 'You know, I've listened to you complain for years about how these medical students have too much debt when they graduate. I'd like you to go to a meeting with me.'" After Fred sat in as a guest a couple of times, the dean persuaded him to join the committee.

"That was a little over 12 years ago. I enjoy it because, if medical students were to choose specialties because of the amount of debt they had accumulated, would they really do what they want to do? And if they're not doing what they want to do, but doing it more for the money, that kind of defeats the purpose of kids who want to go into medical research, which a lot of them at Harvard, in fact, do. And so, you do your best to help them graduate without so much debt."

Sounds like another well-rounded philosophy of a tax planner who enjoys helping people accomplish their goals.

RELATED ARTICLE: Beware of Clients Not Telling the Full Story

"I find tax to be a hybrid between law and accounting," says David De Jong, who not only is a CPA and a certified valuation analyst (CVA) but also an attorney and nationally recognized speaker. A principal at Stein, Sperling, Bennett, De Jong, Driscoll, and Greenfeig, P.C. in Rockville, Md., David co-authored J.K. Lasser's annual tax planning book for 16 years and is a past president of the American Association of Attorney-CPAs.

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"I started out as a tax planner, and I've expanded what I do to include tax controversy and business planning."

One trend he sees as "the biggest pitfall in tax planning" is something that "good, lawful and ethical practitioners" need to be concerned about: "There used to be a clear distinction between tax avoidance, which is legal, and tax evasion, which is illegal, but it seems as if that fine line is becoming less clear.

"The practitioner always needs to be concerned that he is both following the law and following the ethics of his profession," he continues. "And the IRS is cracking down on practitioners who are not practicing within the latter, or, as the IRS would probably put it, 'within the spirit of the law.' I always thought I knew where that line is, and now I find myself thinking, when I provide sound tax advice to clients, 'That may be on the aggressive side.'"

David has learned that one of the biggest reasons that tax plans go awry is because "clients don't tell you the full story--either because they have forgotten, or they don't want to tell you."

In a recent IRS collection matter, he says, "I gave what I thought was very good advice: to do an offer in compromise but not take any other interim action because the IRS, according to the client, had not issued a Collection Due Process (CDP) Notice allowing them to levy. But, of course, the IRS had issued the CDP Notice; the client simply had not opened the correspondence.

"We are still going forward with the offer in compromise. Meanwhile, the IRS got some extra money."

Sometimes the best laid plans of a practitioner just won't work. "You go with the best possible strategy, often from a menu that isn't too great. Just be prepared for some surprises along the way."

On the other hand, sometimes it's the client who's surprised.

About a year ago, David represented a client who "is an academic type turned gentleman farmer. There were some things shown on the tax return that seemed so preposterous, the return was pulled for audit, and he became the subject of a criminal investigation."

Although the client lived in Maryland, his tax preparer was on the West Coast. "I flew out, met the preparer and concluded that, although he had been in practice for many years, he lacked an understanding of the law and even of what was right and what wasn't, and I determined the preparer was the individual responsible for the inaccuracies on the return.

"I was preparing to mount a vigorous defense, but--although it was never confirmed--I believe the IRS must have flown out, met the preparer and formed the same opinion. Before I began any sort of serious preparation for a criminal defense, I was advised that my client was no longer the target of an investigation."

RELATED ARTICLE: Tax Planning For the Manufacturing Activity Deduction

Tax Partner Michael Corrente of Kirkland Albrecht & Fredrickson, P.C. in Braintree, Mass., specializes in tax consulting, "which means bringing proactive tax planning ideas and projects to a variety of companies in order to minimize or defer their tax liability." He also is in charge of the firm's public companies group.

One specific way Michael and his firm are helping client companies tax plan this year centers on the new Manufacturing Activity Deduction.

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"The name of the deduction is kind of a misnomer because it really is a production activities deduction," he says. "If you're producing something domestically, you may be eligible for the deduction at the federal level." The deduction not only applies to manufacturing companies but also to construction industry clients, engineers, architectural firms and even the film industry.

For example, Michael explains, "if you're providing engineering services that require some type of engineering education, and the services are performed in the United States, and you're applying the specifics of that engineering activity as a consultant or in evaluation, design or planning, and the plan you develop for construction is in the United States, you may be eligible for the deduction."

Michael and others in his firm have been talking to clients about the deduction as they get more information about it. "We started talking to them last year during our tax return planning meetings. We had a seminar on it in June, and there is more guidance coming out later this month (September). When we meet with clients to do year-end tax planning in October/November, we'll talk further about how we can help maximize that deduction this year."

Sometimes the best tax planning happens when the ink on the ruling isn't even dry.