September 15th is this Tuesday and that means Quarterly Estimated Tax payments are due. As a service to clients, many wealth management firms provide tax information to clients (and CPAs) to help calculate the amount of estimated tax payment due.
The information provided to clients primarily consists of year-to-date interest, dividend, and capital gain income from taxable investment accounts. If a wealth management firm is also in the business of preparing tax returns for clients, then the firm may also have access to wage income, self-employment income and expenses, and adjustment and deduction information and will use the data to tell the client what to pay.
This Website Is For Financial Professionals Only
Since tax payments are required on a quarterly basis, firms need to have workflow procedures in place to make the reporting process turnkey. If not, document preparation can turn into a drag on the firm's efficiency each time the quarterly tax payment deadline approaches.
Leveraging Portfolio Systems
The most obvious tool a firm can leverage is the portfolio management system. Ideally, all client transactions should be downloaded and maintained in the PMS program. But not all firms follow this rule, and as a result the information needed for estimated tax payments can be difficult, time-consuming, and costly to aggregate.
For these firms, the obvious opportunity is to examine what it would take to aggregate all income-related transaction data into the portfolio management system to facilitate year-to-date income report generation. A strategy to be avoided is manual entry of income-related transactions by staff; one wrong keystroke and misplaced decimal can lead to potential underpayment of taxes, subjecting the client to unnecessary penalties (not to mention the significant performance reporting errors, too).
Estimated tax report generation is much less complicated when income-related transactions for taxable accounts are present in the PMS program. Most leading PMS programs allow batch creation of reports, so generating the reports should be as simple as loading preset screening information (e.g. run for all taxable accounts and show the sum of the types of taxable income received) and clicking OK. But then the challenge firms face is the delivery of the data.
Tax Report Delivery
When delivering tax reports, clients aren't necessarily the ones who should receive the information. Typically the client's CPA will need the information so the CPA can determine the overall tax payment required based on the client's situation. But before sending client information to a CPA, advisors will need to obtain authorization from the client to share the client's information with third parties. Here, advisors must tread with caution lest they run afoul of various privacy laws, including those established by the Internal Revenue Code (Section 7216
), SEC, and Federal Trade Commission.
After third party authorization is obtained, how are the reports actually delivered? Sending reports by mail might be alright if only a few reports are generated, but if the number of reports created grows beyond, say, a dozen, electronic report delivery saves time and expense. Email is probably acceptable for report delivery, provided that sensitive data such as addresses and account numbers are scrubbed from the reports. Ideally, a secure document sharing system should be used in order to protect client data and restrict access to only those with proper permissions.
Simple Reports Not So Simple
As outlined in this article, something as straightforward as preparing quarterly estimated tax information for clients stands to benefit from both defined processes and procedures and technology utilization. What seems simple at the outset turns into a process that touches many of a firm's systems and employees. It's important that such services be systematized and streamlined all in an effort to minimize the time burden and cost to the firm.