Collections?

Let's say you have a client who refuses to pay you because they left and went somewhere else, claiming that the work was done incorrectly, but not offering specifics about what was incorrect...

You have a signed engagement agreement saying that they will pay you for your work if the tax return is prepared but the client decides not to complete it for some reason.

You have tried to politely reason with the client, ask for the specific errors, and explain the agreed upon engagement.

What's the next step?

Drop it?

Send to a collections agency?

ItDepends!

If the amount is less than $250 and I have tried various times to collect it and it is not collectable in a year I will generally write it off as a loss. If it is a business client it will be reported to DUNS and credit agencies in the normal course of business. Most collection agencies in my area are not interested in small amounts and if they are they charge like 30% instead of the usual 15%.

I have only filed a small claims action once because the amount was close to $1200 and it was paid the day before the court date. I had to write off the court filing fee.

I collect a 50% up-front deposit for all new tax preparation clients. That way, the most that can be lost is the other half.

Based on my initial conversations with prospects, I sometimes get that "gut feeling" which leads me to collect the full payment up-front -- this policy saved me a few times when clients decided to flake out in the middle of an engagement.

Aside from that, I'm also curious as to the experiences that others have had with collections. Based on my research, the collection agencies are typically interested in working on larger dollars amounts than those applicable to typical tax preparation engagements.

I would drop it. It could invite a letter from the ex-client's attorney threatening a lawsuit which you'd have to report to your malpractice carrier.

When you consider the after-tax amount involved, I wouldn't choose to poke the bear. Some people find joy in suing.

In our line of business at least for my billings most collection agencies are not interested. So either it is your persistent effort that gets the invoice paid or if it is worth it small claims court may do the trick. About 20 years back I won a judgement in Small Claims and to get it collected from a deadbeat was not worth the sheriffs fee for execution and attachment of property etc. But I got the satisfaction that there was a court record against the deadbeat

I like Alex's approach to get 50% upfront and with new business client engagements that is the way to go.

I sent a former client a ten day demand for payment for doing bookkeeping and a tax return. Fees were accrued after their first two retainers were used up and I started trusting them. Though she tried to get out of it by manufacturing complaints, she did send payment. Of course when someone owes the IRS and the state over ten years of returns and never made estimated payments, they don't threaten a tax preparer who knows all. She even paid the two late fees I added to both invoices.

I sent a former client a ten day demand for payment for doing bookkeeping and a tax return. Fees were accrued after their first two retainers were used up and I started trusting them. Though she tried to get out of it by manufacturing complaints, she did send payment. Of course when someone owes the IRS and the state over ten years of returns and never made estimated payments, they don't threaten a tax preparer who knows all. She even paid the two late fees I added to both invoices.

This reminds me of my boss in the 90s. He had a very clever way of letting "irritant clients" know that stiffing him may get the wrath of IRS if he is questioned by them. I still remember he had a Pizza Shop as client and the owner was a complete jerk. BUT he found a way to pay his prep bill "in cash" weekly

Tell them you received an inquiry from IRS and you're not sure how to respond, considering the unpaid bill. A bit unethical, but so is stiffing your tax pro.

If it is a business client it will be reported to DUNS and credit agencies in the normal course of business.

Can you expand on this? What is "DUNS"?

I agree with the others that below a certain threshold (which will be different for everyone), it's not worth pursuit and should just be dropped. Your "revenge" so to speak will be to never work with him again, nor any entity of which he is involved in management.

Although I'd need to check if permissible, I'd like to tell the other managers, members, stockholders, etc in the latter situation: "I'm sorry, I decline to provide ABC LLC with my services as John Smith is a manger. In the past, John Smith was a client of this firm, was invoiced for services provided, and refused to pay that invoice. As long as John Smith is manager or has management authority for ABC LLC, we will decline to provide ABC LLC services."

Talk about stirring the pot and causing the other managers/members to look at "John Smith" sideways... The only defense against defamation/slander/liabel is telling the absolute, specific truth.

When I first started, the original owner (then in his late 70's) used to tell 1040 clients that did not pay that he was obligated to contact the IRS and have the firm name removed as paid preparer. Most of the clients must have thought this would trigger some type of IRS action as he had a pretty good collection rate. Of course he never had any intention of contacting the IRS.

I've only ever had 2 people not pay me. 1x she was not in a good financial shape and her veteran husband had a stroke right after retiring from the military. I considered it a gift for his services.

The other was an obvious drug addict who's life was in a spiral after her husband died very young and unexpectedly. I considered it a gift to her young son who was going to have a difficult childhood.

The general advice from lawyers and E&O carriers is to never pursue collections for multiple reasons, two listed below:

1) If the client is dissatisfied, starting collections could prompt them to file a claim against you that would have otherwise not arisen

2) A client could make some sort of claim in an effort to not have to pay, and then you end up in a legal battle

If a client owes me money, I cease work. Interestingly enough, I do have one that owes me over $13k...problem is we are also friends, and I'd rather lose out on the $13k knowing I helped him than ruin the relationship. In other cases, if a past due client does not respond to my inquiries for payment, I eventually drop the matter and send a disengagement notice without a reason.

I had one last year, horrible client (total narcissist little blond).
Would spend the meeting staring at herself in the glass wall reflection behind me.
Had her pay for the business before I would release the work.
Tried the same with the personal, but it was due and I didn't want to be the reason it was filed late with penalty.
I sent invoices monthly, plus added interest, etc. She wouldn't return calls or emails. Wrote emails that I cc'ed my lawyer on.
She told me the check was at her office but when I went to get it her staff couldn't find it and they called her and she said it was at her house, etc etc.
She dodged me for about 6 months, and then I finally went and stood in her office when she was there until she paid me.
Collected the $2100 plus 375.07 in interest.

I really try to make it a habit of getting something before I will release my work now.

I may e-file for some clients I've had for awhile, but I no longer provide copy of return before payment.

I've adopted a policy of getting retainers from most clients, even those I know pay timely or have worked with me for most of my career. I am tired of fronting so much money to prepare tax returns. I then send them the final invoice before I send any of the tax documents, with only a few exceptions. Surprisingly, no one has complained about retainers, probably because I also make it very clear that I intend on collecting at least 50% of prior year's fee or of estimated current year fee before I will even schedule their tax work. In prior experience, the clients that balk at paying a retainer are the ones most likely to not pay for services.

And quite honestly, the single worst clients for payment (I really do not have a collections issue at this point, but it was a major issue at the first firm I worked under) were those that loved to talk about what good Christians they are and how they conduct themselves based on what the Bible says. I am a pretty devout Christian and found it very offensive they would make such comments and then not pay. That firm was small--gross revenue of around $400k--and a handful of "Christians" screwed the Firm out of over $100k in billed fees with nothing but empty promises. The principal was partly at fault for not cutting off the clients as they continued to become more delinquent. It is an automatic red flag to me if a new client starts talking like that.

If a client owes me money, I cease work. Interestingly enough, I do have one that owes me over $13k...problem is we are also friends, and I'd rather lose out on the $13k knowing I helped him than ruin the relationship.

I don't do any tax returns for friends because of that. You are risking your friendship when something goes wrong or you disagree on a tax position. My best friend will often call and ask me a tax question and I will answer with the usual caveats but I always tell him to check with his accountant for the final answer! He has asked me to prepare his and his children's tax returns and I have politely declined because I value the friendship more than the "discounted" fee I could earn.

Now if I could only do that with family

When I first started, the original owner (then in his late 70's) used to tell 1040 clients that did not pay that he was obligated to contact the IRS and have the firm name removed as paid preparer. Most of the clients must have thought this would trigger some type of IRS action as he had a pretty good collection rate. Of course he never had any intention of contacting the IRS.

The good old days.... a law firm in my hometown, or so the legend goes, in the 60s would pay your moving violation and tell you.. I spoke to the judge, your good. I know all the top brass in Govt. THEN charge you a fee about the amount of the ticket. BUT you always went back to them for everything. Wills, estates, etc. This was in the 60s before computers connected the dots.