What Do Tax Advisors Do? And When Should You Hire One?

A tax advisor guides individuals and businesses through the complexities of federal, state, and local tax laws. These financial professionals help clients understand their tax obligations, accurately report income, claim eligible deductions, and meet filing deadlines. Their primary objective is to ensure compliance with current tax regulations while optimizing a client’s financial position. They help clients maintain good standing with tax authorities and avoid potential penalties.

What Do Tax Advisors Do?

Tax advisors offer a comprehensive range of services tailored to diverse financial needs.

Tax Preparation

A primary service is tax preparation, which involves accurately compiling financial data and completing the necessary forms, such as Form 1040 for individuals, or Forms 1120 and 1065 for corporations and partnerships. Advisors ensure all returns are properly filed with the Internal Revenue Service (IRS) and relevant state tax departments, adhering to strict deadlines like the April 15th individual tax filing deadline.

Tax Planning

Tax planning is a proactive service aimed at reducing future tax liabilities. This involves year-round advice on strategies such as maximizing deductions, utilizing tax credits, and optimizing contributions to retirement accounts like 401(k)s and IRAs, which have annual contribution limits. Advisors also provide guidance on investment strategies, including managing capital gains and losses and employing techniques like tax-loss harvesting. They help structure business entities, advising on choices like S-corporations versus C-corporations to optimize for pass-through taxation or corporate tax rates.

Representation Before Tax Authorities

Tax advisors also provide representation before tax authorities if a client faces an audit or receives a notice from the IRS or a state tax department. Advisors can communicate directly with these agencies on the client’s behalf, providing requested documentation, clarifying discrepancies, and negotiating potential settlements. This representation ensures that clients’ rights are protected and that all interactions with tax authorities are handled professionally. They can address various notices, from underreported income alerts like a CP2000 notice to full-blown audit inquiries.

Specialized Tax Advice

Advisors offer specialized tax advice for specific transactions or life events. This can include guidance on the tax implications of selling real estate, such as understanding the primary residence exclusion under Internal Revenue Code Section 121. They also advise on the tax treatment of inheritances and on complex international tax issues for expatriates or those with foreign income. Their expertise helps clients navigate these intricate scenarios to ensure compliance and optimize financial outcomes.

When Should You Hire One?

Several situations highlight the benefit of seeking professional tax advice.

Significant Life Changes

Getting married, which can alter filing status and impact deductions.
Divorce, necessitating careful consideration of alimony, child tax credits, and asset division.
The birth of a child, making a taxpayer eligible for credits like the Child Tax Credit or the Child and Dependent Care Credit.
Purchasing or selling a home, involving tax implications related to mortgage interest deductions and capital gains.

Major Financial Events

Major financial events also warrant expert guidance:

Starting a business, requiring advice on entity selection, which affects self-employment taxes and liability, and understanding deductible business expenses.
Receiving a large inheritance, which can trigger federal estate tax considerations or state inheritance taxes.
Selling significant assets, such as stocks or other investments, necessitating understanding capital gains tax rates.
Substantial investments in diverse portfolios, which can benefit from advice on tax efficiency and minimizing taxable distributions.

Types of Tax Advisors

Various types of professionals offer tax advisory services, each with distinct qualifications.

Certified Public Accountants (CPAs)

Certified Public Accountants (CPAs) are licensed by state boards of accountancy, requiring a specific educational background, professional experience, and successful completion of the Uniform CPA Examination. CPAs possess broad expertise spanning accounting, auditing, and tax matters, and they are authorized to represent taxpayers before the IRS. Their comprehensive training allows them to handle a wide array of financial and tax-related issues.

Enrolled Agents (EAs)

Enrolled Agents (EAs) are federally licensed by the IRS, granting them unlimited practice rights. This means EAs can represent any taxpayer regarding any tax matter before the IRS, regardless of where the taxpayer lives. Becoming an EA requires passing a comprehensive three-part IRS examination covering all aspects of taxation or having prior experience working for the IRS. Their expertise is focused solely on taxation, making them highly specialized in tax law and procedure.

Tax Attorneys

Tax Attorneys hold a Juris Doctor (J.D.) degree and are licensed by state bar associations, often pursuing further specialization with an LL.M. (Master of Laws) in taxation. These professionals specialize in complex tax law issues, tax litigation, and legal interpretations of tax statutes. Tax attorneys are particularly suited to handle intricate tax disputes, structure complex business transactions with significant tax implications, and develop sophisticated estate plans that minimize tax liabilities. Their legal background provides a unique perspective on tax compliance and planning.