MML #050: Tax Return Red Flags: Why Your CFP® and CPA Need to Talk

I've spent the past few weeks buried in tax returns. It's that time of year when we're aligning retirement investment strategies with proper tax planning, and frankly, you’d be surprised at the mistakes we see on prospect’s returns. 

Disclosure here: I don’t prepare tax returns. I run a wealth management practice catered towards the law profession where investment management and taxes are inseparable.

Just this week alone, two glaring mistakes. One involving improper RMD distributions. Another around a botched Backdoor Roth conversion. Both carry penalties that'll make your eyes water.

What’s troubling is these weren't caught because nobody was looking. The returns got filed. The clients assumed everything was fine. After all, a professional prepared them, right?

The Backward-Looking Problem

Let me be clear. I have deep respect for CPAs. The work they do is essential and complex (And yes, I know a few of you are reading this!). 

But ultimately, most tax preparation is exactly that—preparation. It's backward-looking. The CPA receives documents about what already happened, prepares a return based on those documents, and files it. There's often little thought given to planning forward.

I spoke with an attorney this week who's been searching for a forward-thinking tax professional for years. He’s still looking for one. These professionals exist, but they're rare. And that's not really the CPA's fault. Their training emphasizes tax preparation, not proactive planning.

Where Things Fall Apart

But here's where I want to shift the conversation. Instead of focusing on what CPAs aren't doing, let's talk about what should be happening on the financial planning side.

Your financial planner should be looking forward based on what's happened in the past. They should be building strategies that make sense for your situation. And critically, there should be healthy communication with your tax professional to ensure they approve of the plan and can execute it correctly when filing season arrives.

When professionals don't communicate, guess who gets stuck in the middle? You. The client. And that's not fair because this isn't your field of expertise.

The Details Actually Matter

Take those two mistakes I found this week.

The RMD issue: Someone missed taking their full Required Minimum Distribution. The penalty? 25% of the amount that wasn't distributed (Fortunately, this can be reduced if solved within 2 years). This return was professionally prepared and there was a financial advisor on the account. 

The Backdoor Roth problem: The conversion was done, but the reporting was wrong. And furthermore, it wasn’t a tax-free conversion because the prospect had other IRA assets that violated the pro-rata rule. 

Both of these situations happened because there was no conversation between the financial advisor and the tax preparer. The advisor implemented a strategy. The CPA prepared documents based on what they received. Nobody checked if the execution matched the intent.

What Should Actually Happen

Here's what proper coordination should look like:

Your CFP® develops a strategy—maybe it's Roth conversions, tax-loss harvesting, or managing your RMDs strategically. Before implementing anything significant, they communicate with your CPA. 

"Here's what we're thinking. Does this work? What documentation will you need? Are there reporting requirements we need to handle?"

Then, when tax season rolls around, your CPA isn't surprised. They know what happened and why. They have the context to prepare your return correctly.

And ideally, your CFP® reviews the filed return afterward to make sure everything landed the way it should have.

This isn't complicated. It's just coordination. But it requires professionals who are willing to pick up the phone or send an email to someone they didn't choose to work with.

What You Can Do

If you're working with both a financial planner and a tax professional, here are the questions worth asking:

"Do you communicate with my CPA/financial advisor about strategies before implementing them?"

"After my taxes are filed, do you review the return to ensure everything was executed correctly?"

"When was the last time you talked to my other professional?"

The answers will tell you a lot.

You shouldn't be the go-between for professionals who should be talking directly. You hired experts specifically so you wouldn't have to become one yourself.

The details matter in tax planning and retirement strategy. When they're missed, it costs you real money. And more often than not, those details get missed in the gaps between professionals who aren't communicating.

Make sure your team is actually working as a team.

If you’re interested in a complimentary review of your return, I offer a no-pressure consultation that you can explore here. The books for 2025 are closed, but there’s no time like the New Year to get your finances in order.

Have a wonderful holiday season, and I’ll be back next week for my last edition of Money Meets Law in 2025.

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