The Gift of No Surprises

“Oh…no.” In the silence that followed, I could feel the voice on the other end of the call frantically searching for solid ground. “That can’t be.” I had just delivered the news that this client’s company owed the Internal Revenue Service $84,000 in taxes. It was March 23. The amount wasn’t due immediately, but there wasn’t much time; the bill had to be paid by April 15. I reviewed the draft with the client—no missing information, no mistakes. The balance due was correct.

Whether it’s an individual or a multinational corporation, every person or entity that pays taxes in the United States hates negative surprises when it comes time to file a return. Nevertheless, I still make at least one phone call delivering this type of bad news every single year. The reason? Failure to plan.

The importance of tax planning can’t be overstated. If you want to avoid a scenario like the one outlined, you should go through a tax-planning exercise with your tax advisor in the last quarter of every year—at a minimum. More frequent reviews with a CPA throughout the year can yield even better insights, allowing you to adjust to any subtle changes that may have taken place.

Some may question why so much emphasis should be placed on tax planning. It comes down to three things: Tax planning orients you and the advisor. During my time in the Marine Corps, I had to learn how to do land navigation by day and night. No GPS, no Google Maps. Using only a topographic map and a compass, my fellow Marines and I were tasked with finding small boxes in the dead of night hanging on posts in the backwoods of North Carolina. I was able to find all eight of them in 30 minutes.

What does searching for something with simple tools have to do with tax planning? Quite a bit, actually. Think about it: Most people can read a map and a compass; however, they often struggle to find the “boxes” because they never successfully figure out where they started.

In tax planning and in the Marine Corps, hope isn’t a strategy. The basis of any mission is determining where you are and then building out a strategy to get to where you want to be. To borrow from the military’s lexicon, this orientation phase is equivalent to building a “base case.” The base case provides taxpayers with expected results if they continue on the current course with no alterations. This, in turn, ensures there are no tax surprises.

Tax planning helps identify alternatives. Once your advisor establishes a base case, he or she can then review the information and identify appropriate tax mitigation strategies. This step is not a formula—or at least it shouldn’t be. Any tax planner worth his or her salt will incorporate everything he or she knows about you or your company’s history, current results, and future goals to determine what tax planning strategies make the most sense for you or your business.

Approaching tax planning this way also highlights the value of working in teams. In the military or any other environment, no one knows everything, and everyone has bad days. Working as a team reduces the chances that you miss something obvious. It also fuels creative planning and typically yields better outcomes.

Tax planning gives you more time. Sometimes tax planning leads to lower tax liabilities; sometimes it doesn’t. What it always does, however, is provide you with more of one of today’s most precious commodities: time.

If your tax advisor is being proactive, he or she will schedule a meeting with you in November or December to review your base case, discuss tax mitigation strategies, and present a plan that includes costs and benefits. If the modeling suggests you’ll owe taxes, you and your advisor have four to five months to implement mitigation strategies and satisfy any tax burden. This allows you time to prepare without financially crippling you or your business by redirecting much-needed short-term cash to the IRS.

Tax planning is by no means a silver bullet, and it won’t eliminate all of your tax burdens; what it will unfailingly do, however, is produce the best outcomes possible. After all, as French scientist Louis Pasteur famously noted, “Chance favors only the prepared mind.”