Paying Tax Prep Fees in Advance

In all my years I have not come across this situation before. I am talking to a new prospect who moved in our area. Supposedly his previous tax preparer in CA had him sign some engagement agreement that required a 50% deposit for the following years tax prep fee and the privilege of the tax preparer responding to tax notices, answering questions etc. Perhaps it is a retainer?

So for the 2019 tax season he already paid $400 for tax prep and paid an additional $200 for that deposit for 2020 tax season.

The problem is that if he does not use the services of this preparer he can't get a refund or adjustment for any future prep fees.

And there lies the problem. If he switches to me he loses $200.

Anyone run into such a situation? Do you pay or discount your fees to acquire the client?

Never had the situation, but I'm a no discount vote. This is not your cross to bear. That client willingly entered into the deal with his preparer, and while he is allowed to regret the decision, it is not up to you to make him whole.

Never had the situation, but I'm a no discount vote. This is not your cross to bear. That client willingly entered into the deal with his preparer, and while he is allowed to regret the decision, it is not up to you to make him whole.

I agree. I have conveyed to him that I am willing to accept the engagement BUT I can not get in the middle of his agreement with the prior preparer. He will have to get me the prior returns, books and records as needed for next tax season and I can not pay any of his contractual fee arrangement with the prior preparer.

If he comes back with any counter offer etc. I may suggest that he have the prior preparer do the 2019 returns since he has $200 already invested and then consider switching the following tax season, and not pay any more retainer to him.

Dang, that seems a bit unethical...effectively trapping clients by demanding a retainer, which many will not want to lose and thus they stay with a tax preparer they may not be happy with.

I would not get involved in providing any sort of discount, not your issue. The client would have to eat the loss, certainly not standard practice. There is a reason they are switching, so they are willing to forego the $200 for larger issues that exist.

Dang, that seems a bit unethical...effectively trapping clients by demanding a retainer, which many will not want to lose and thus they stay with a tax preparer they may not be happy with.

I agree. I don't think it is illegal (I could be wrong if certain state accounting boards/laws prohibit this practice), but essentially he had to pay a retainer to keep his accountant to help with any tax notices, questions etc.

If you think about it, in our practice where we don't have a retainer holding a client for the next season, he/she could chew up valuable time/resources and be a no show the next year!

If you think about it, in our practice where we don't have a retainer holding a client for the next season, he/she could chew up valuable time/resources and be a no show the next year!

That is why our engagement letters--which very few clients actually read--need to state that the fees only apply to specified services (that is, preparation of specific tax returns), not subsequent but related services. In cases like that, unless a fault of my own, I separately bill the client as needed rather than make them pay more now.

I view it as highly unethical to do anything to try to trap clients or force them to contact you if they wish to make a change, such as by not providing certain schedules (failure to provide Federal and State depreciation schedules are my two biggest irritants when it comes to other tax preparers). My goal is to keep them happy in the first place so they do not ever feel a desire or need to change CPAs!

Dang, that seems a bit unethical...effectively trapping clients by demanding a retainer

Not much different from Amazon, where they typically won't refund your Prime membership advance fee after the first 3 days, and worse still, they will auto-renew your membership without notification (it says so right in the terms and conditions -- I posted once about how they deliberately charged me on an expired credit card for the Prime membership, which I never authorized (they used this expired card still linked to my account when the primary card, by my choice, did not have enough credit available to pay the Prime fee).

The taxpayer freely chose to pay the retainer, so what could possibly be unethical about that? It's a non-refundable deposit, that's all. The tax preparer has honored the agreement, right?

I do agree, of course, that depreciation schedules and other critical worksheets from the software should be delivered to the client upon signing and paying for the return. But that is a completely separate issue from pre-paying next year's tax prep fee.