Developing tax liability assessment procedures

Accurately assessing a client's tax liability is one of the most critical responsibilities of any tax and accounting firm. A streamlined, systematic approach not only ensures compliance with tax codes but also helps identify opportunities for tax savings. In this post, we'll explore best practices for developing efficient tax liability assessment procedures that leverage technology like Instead's tax planning software.

Step 1: Gather necessary documentation

The first step in assessing tax liability is to collect all relevant financial documents from the client. This includes, but is not limited to:

• Income statements and balance sheets
• Bank statements
• Receipts for business expenses
• Investment account statements
• Previous years' tax returns

Establish a checklist of required documents and a secure method for clients to submit them electronically, such as a client portal. Instead's software allows you to store and organize client tax data in one centralized hub.

Step 2: Classify income and expenses

Once you have the client's financial information, categorize all income and expenses appropriately. Properly classifying items is essential for accurate tax calculations. Key categories include:

• Earned income (wages, salary, tips, commissions)
• Investment income (interest, dividends, capital gains)
• Business income and expenses
• Rental income and expenses
• Retirement account distributions
• Itemized deductions (mortgage interest, charitable donations, medical expenses)

Instead offers integrations with popular accounting software like QuickBooks, making it easy to import and categorize financial data.

Step 3: Identify relevant deductions and credits

After categorizing income and expenses, determine which tax deductions and credits the client qualifies for based on their unique situation. Some common ones include:

• Standard or itemized deductions
• Business expense deductions
• Education credits and deductions
• Child tax credit
• Earned income tax credit
• Energy-efficient home improvement credits

Instead's tax planning software has a comprehensive database of over 18 tax deductions and credits, with more added regularly. The software guides you through a series of questions to pinpoint tax-saving opportunities for each client.

Step 4: Calculate estimated tax liability

With income, expenses, deductions and credits accounted for, you can now compute the client's estimated total tax liability. Key steps include:

• Determining the client's taxable income by subtracting deductions from total income
• Applying the appropriate tax rate based on taxable income and filing status
• Subtracting eligible tax credits from calculated tax
• Factoring in other taxes owed such as self-employment tax or alternative minimum tax

Instead automatically performs these complex tax calculations, ensuring accuracy and allowing you to easily model different scenarios to optimize tax outcomes.

Step 5: Evaluate quarterly tax payment requirements

For clients who are self-employed or have significant non-wage income, assess whether they need to make quarterly estimated tax payments to avoid underpayment penalties.

• Determine if estimated payments are required based on prior year's tax liability
• Calculate the amount of each quarterly payment
• Set reminders for clients to make timely quarterly payments

Instead's tax liability assessment report includes quarterly payment calculations and due dates if estimated taxes apply.

Step 6: Look for tax planning opportunities

An often overlooked part of tax liability assessment is proactive planning. Review the client's situation to identify ways to legitimately reduce their tax bill in the future, such as:

• Adjusting withholdings for wage earners
• Timing income and expenses strategically
• Maximizing retirement account contributions
• Bunching charitable donations or medical expenses
• Considering more favorable business entity structures
• Utilizing lesser-known deductions and credits

Instead's tax software includes a Tax Strategy Management feature that evaluates over 18 different tax planning techniques for businesses and individuals. Not only does this ensure you don't miss key tax savings opportunities, it allows you to deliver immense value to clients through proactive planning.

Step 7: Prepare tax liability assessment report

Compile your tax liability calculations into a clear, easy-to-understand report for the client. The report should include:

• Total income by category
• Deductions and credits applied
• Final tax liability estimate
• Quarterly payment amounts and due dates if applicable
• Recommended tax planning strategies

Instead auto-generates professional, detailed tax liability assessment reports that include clear explanations. Firms can customize reports with their branding to create impressive deliverables ready for client presentation.

Step 8: Review assessment with client

Schedule a meeting or call with the client to go over the tax liability assessment report. Key points to cover:

• Walk through report section by section
• Explain assumptions made and any gray areas
• Highlight additional information needed or potential red flags
• Discuss recommended tax planning strategies
• Answer any questions and address concerns

Instead's cloud-based platform enables you to seamlessly collaborate with clients, sharing reports and collecting e-signatures on engagement letters.

Step 9: Finalize and file tax returns

Once the tax liability assessment is reviewed and approved by the client, prepare and file their tax returns.

• Collect any additional documentation required
• Complete appropriate federal, state and local tax forms
• Have client authorize return for filing
• Submit return electronically or by mail
• Provide client with copies of final return

Instead integrates with popular tax preparation software, allowing you to quickly translate tax liability calculations into completed returns ready for filing.

Step 10: Plan for next tax year

As you wrap up the current tax engagement, set expectations with the client for the next tax year.

• Provide updated document checklists and due dates
• Schedule quarterly check-ins to discuss year-to-date financials
• Assist with implementing appropriate tax planning strategies
• Periodically check for tax law changes that may impact the client

Instead's tax software automatically monitors for legislative updates and suggests strategies to keep clients optimally positioned as laws evolve.

Choosing the right tax planning software

Leveraging technology is key to implementing an efficient, accurate tax liability assessment process. Purpose-built tax planning software like Instead can significantly streamline procedures while minimizing the risk of costly errors. When evaluating tax software options, look for:

• Robust calculation engine that can handle multiple scenarios
• Integration with existing accounting and tax prep solutions
• Extensive deduction and credit database that stays current
• Ability to assess both business and individual tax situations
• Easy-to-use, cloud-based platform accessible to your entire team
• Client collaboration features like document sharing and secure file exchange
• Professional, customizable reporting
• Expert product support from a team that understands tax

Instead was designed by tax and accounting experts to meet the unique needs of tax and accounting firms. By automating complex calculations, highlighting tax savings opportunities, and providing clear client deliverables, Instead enables firms to efficiently deliver best-in-class tax services.

Optimizing your tax assessment processes

Developing robust tax liability assessment procedures is crucial for modern tax and accounting firms. The key to success lies in combining systematic processes with the right technological tools to ensure accuracy, efficiency, and comprehensive tax planning for your clients.

For accounting and tax professionals looking to elevate their practice, Instead Pro offers a comprehensive solution designed specifically for firms. Our professional platform streamlines tax liability assessments while providing the advanced tools needed to identify valuable tax-saving opportunities for your clients.

The platform's sophisticated features enable firms to:

• Automate complex tax calculations
• Generate professional assessment reports
• Track multiple client scenarios efficiently
• Stay current with tax law changes
• Maintain thorough documentation

By implementing well-defined procedures and leveraging professional tax planning tools, firms can significantly improve their assessment accuracy while handling increased client volume. This combination of process optimization and technology enables firms to deliver consistent, high-quality tax services while growing their practice.

Success in tax liability assessment comes from staying current with tax laws, maintaining thorough documentation, and utilizing tools that enhance your team's capabilities. Whether you're handling individual tax situations or complex business scenarios, having the right systems in place ensures consistent, high-quality results for your clients.

To explore how your firm can enhance its tax assessment procedures and leverage our professional platform, visit Instead Pro today. Transform your tax practice with tools designed specifically for accounting professionals.