Value Billing - Yay or Nay?

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#1
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In the past, the following has been something I struggled with. I want to get TPT thoughts on it...

Over the past couple of years, I have regularly identify tax saving strategies for clients while preparing the returns and proceeded to implement said strategies after a discussion with the client(s). The tax savings are often not insubstantial.

In the past, I have just billed for time used to implement the strategy. These clients come out well ahead, the marginal increase is a few hundred dollars to me but they often save thousands or tens of thousands in tax.

A recent example is a expat client couple. Over the past few years we have taken the foreign earned income exclusion ("FEIE") for the spouse. This year, the spouse's foreign earned income was above the FEIE limit and I ran a quick alternate scenario, in my software, using foreign tax credits ("FTC") for the foreign earned income instead of the FEIE. I determined FTCs were more advantageous, and after a quick call (on 10/15 of all days), the client agreed and decided they wanted to revoke the election to use FEIE and use FTCs going forward. And yes, we did weigh the 5 year lock-in. It still is a no-brainer based on what's expected moving forward.

I saved the client roughly $7k in federal income taxes this year. The marginal time cost to me was 30 minutes, give or take, to run the alternate scenario, have a very quick call, then adjust the software to file using FTCs and add a revocation election.

So, in the past I would have billed 30ish minutes of additional time. I am thinking, however, of billing this client around 5-10% of the tax saved for the value-add, which I think is reasonable. Kind of a pay me or pay the IRS situation. I'm comfortable saying that many preparers out there would have just done same-as-last-year and wouldn't have even thought to make the comparison, therefore I offer a more compelling value proposition and should be correspondingly compensated.

What are your thoughts here? Yay? Nay? Any ethical or professional landmines that I should be aware of? To be clear, my overall fee is NOT contingent on the tax result, and that is the way it will stay. I just would like to make sure clients are compensating me appropriately for the big value-adds.

Sorry for the book. Hope everyone is doing better this Friday.
 

#2
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Wouldn't hesitate a bit in charging more for value added.
If questioned, it would be an easy explanation: "Remember that $7K I saved you? To do so, took extra time and education on my part to identify the opportunity, ensure I had thought through the various other consequences (i.e. 5yr lock-in), and executed it properly/timely."
~Captcook
 

#3
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You are absolutely right that most accountants probably would not have caught that.
On one hand I would assume the client EXPECTS you to know these things to save them money, and some might think it's just a part of your job. But I feel you did the extra legwork, and went above and beyond to properly service the client, and as such should reap some of the reward.
I do have an hourly billable rate, but try to use value billing as much as possible.
Aka a 20 minute tax return that arrives on 10/14 or 10/15 - 2 state, W2, schedule C, is not going to be less than $500. I tired to get a $750 retainer on that one but the client squawked so I backed it down.
 

#4
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Thanks CaptCook and Recked.

ReckedCPAEA wrote:On one hand I would assume the client EXPECTS you to know these things to save them money, and some might think it's just a part of your job. But I feel you did the extra legwork, and went above and beyond to properly service the client, and as such should reap some of the reward.


I'm comfortable enough explaining my value, which is one of the reasons I made this post -- because I had already made up my mind 95% of the way that I am going to start doing this.

It all comes down to one thing: "reasonable". 5-10% seems very reasonable to me. 50% would be unreasonable IMO. What would also be unreasonable? The client arguing 0% and digging their heels in after I saved them $7k because "it's part of your job and you're supposed to know these things". Well, I might be tempted to show them the door and tell them to roll the dice with some other preparer next year.
 

#5
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If you can avoid the justification process completely, it's a win/win.
What's the client bill for last year, and what's the normal price bump year over year, vs the add on value charge for this year.
If the bump this year isn't astronomical in relation to the total bill, it likely won't be questioned.
Once they start asking about the bill, you've pushed them past the comfort zone.
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I always strive for my clients to wince a little when they get the bill, but not enough to balk.
If they just happily pay it, I know they were expecting it to be higher and I lost some value (and potentially respect).
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One of the greatest recommendations I heard an acquaintance give another local area accountant.
"They are expensive, but it's worth it."
I want people to use the same descriptor, and I love hearing things like I wish I had called you 5 years ago, or they told me you were the guy to help me and they were right.
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Back to your example. $350-$700 on a $500 bill will likely raise an eyebrow, but if you are charging 750-1500 for the return, and a $700 charge on top, it will probably get their attention but nothing will be said perhaps. If it's a $3000 return and you're adding 700, that's just the cost of business going up (not really but you get what I mean).
 

#6
sjrcpa  
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Make sure your engagement letter allows for value billing. If it says "time spent at hourly rates" you could legally be toast if a dispute arises.
 

#7
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It's case-by-case Recked. I'm not going to put something on the invoice I would personally balk at and press "send" thoughtlessly. I'd carefully consider and then call the client to discuss before I press "send" If I feel the amount may be misunderstood or unexpected.

Very good point sjr. My compliance engagements are flat rate based on fact and circumstance, not hourly. And the language in the engagement letter is something along the lines of "I estimate the fee for this engagement to be $X,XXX".

I'd say about 5-10% of the time that estimated fee is different than what's in the engagement letter due to something that popped up during preparation that the client did not bring to my attention before the engagement letter was signed.

I don't view the situation in my original post much different than that.
 

#8
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I wanted to add to this, but I don't have much value to offer (ironically).

I've always kind of thought that client would resent paying for work that I didn't do, so I've steered away from it. I've read the value-add books and I understand that I'm probably wrong about that thought.

I am not shy, however, to bill high enough to make my clients wince.

But comparing the FEIE to the FTC, for example, is already built into my fee and I DO feel like it's my job to do that.

Who wouldn't do that?

That's the client's tax savings, not mine.

Since I'm excellent at my job (well.... at least I'm not dumb, I run a tight ship, and I care for my clients at least enough to compare the FEIE to the FTC for example), I charge a higher rate than the regional averages and my book of business is overflowing.

Clients "know" when you charge them for more work than as you do for them. They can tell. They might stay with you, but they won't provide as many referrals, etc.

Just my opinion.
 

#9
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ItDepends wrote:Who wouldn't do that?


I'd bet my bottom dollar that after the first year, most tax return preparers (which encompasses more than just CPAs) would NOT, especially not on 10/15. "SALY" is very common and prevalent. Have you met SALY? Preparers like to keep her hidden and get embarrassed if they're ever compelled to introduce her to a client.

Ultimately, it's everyone's prerogative to choose how they handle this in their practice. If clients think they're overpaying me, there is an alternative. That alternative is: go with the other guy, who may have you paying the IRS a significant amount more, but will likely be far cheaper and who may not have E&O insurance. Recked's words come to mind: expensive, but worth it. I'd like to not view my services as a commodity but rather a potential value-add. We're not taking old oil out of cars and putting new oil in. We're trying to save our clients as much as possible over their lives, and even after. Most of our balance sheet is intangible, and we shouldn't discount that.

Thanks for commenting.
 

#10
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I heavily practice value pricing. Clients like it because it helps identify the actual fee in advance, and I gain additional revenue. Hourly sucks for all parties.

I recently saved one client $30k in taxes for 2019 via a very simple suggestion that their former CPA would not have addressed. Unfortunately, I could not utilize ADDED value billing since I have a contract with them which includes the tax return. The flipside is the contract IS based on value billing and is, accordingly, quite profitable to me. Client reaps benefits of knowing they will remain in compliance, I am watching their back, and they really do not have to worry about anything.
 


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