How do you handle large tax amount due?

[KarenMM]

Hi Folks -
Just finished a 2019 return where H has schedule C and W is partner in law firm, where K-1 has both rental income and ordinary income, and she gets a W2. I know how to handle all of the tax issues involved, and feel comfortable with the finished return. They owe over 12,000. For 2018, they paid $4,000 on extension, and then owed another 1500 when it was done. I suggested minor changes to W withholding to cover 2019, based on similar income. I did not emphasize that throughout 2019, and I am not sure what they did. H income was slightly higher than last year, while W income had slightly lower of one kind and higher of the other....
They are concerned about owing so much more money .... with covid, I wrote them a long email, but have still not received a signed 8879 to file the return. I suggested a zoom meeting where I can point out the differences between the 2 years.
I know that their owing so much money is not my fault, but I am having a hard time figuring out how to approach this with them when I speak to them next week.
Any thoughts?

[Lion]

Do you include a year-to-year comparison with their return? Look at the largest changes. Write a one sentence or one equation explanation of each of the large differences. Sum up with any trend, such as withholding not changing while income increases or not making ES payments for SE and partnership income. Send that in writing via email or however you think they will read it. (With my younger clients, I email lengthy answers but have to text them to check their email or they don't see it for a week.)

I've been include the Y-T-Y at the front of returns, with yellow highlighting on the lines with the most significant changes.

I've had a few that are usually extended so pay a few thousand with extensions and settle up when we file, but this year they are filing "on time" due to the postponed deadline and paying it all at once. I have to remind them they are paying the same as last year, but in one lump instead of two.

Here's part of an email I sent today:

Your tax brackets are
IRS 22%
CT 5.5%
NY 6.21%

Your withholding was
H 11% IRS and 4% NY
W 9% IRS and 5% CT
So, you can see why you have balances due.

[KarenMM]

Lion - This is just how I handled it already - so THANKS for the feedback.... I don't think I emphasized the tax bracket versus withholding, so I will make that part of my discussion with them next week...

[Lion]

If they are trying to cover their taxes via withholding instead of withholding plus ES, then help them with a new W-4. Otherwise, ES vouchers or set up auto ES with their returns or give them the IRS's DirectPay link plus their state.

[Rapid Robert]

Agreeing with Lion, you should be able to clearly show how things changed using a 2-year comparison. It's extra work on your part that you may not be able to bill for, but if you think they might abandon you without payment to try to find someone else, then it's worth it (and maybe that is what they are doing, getting a "second look" from H&R or something like that).

There are usually at least 2-3 line items you can point to with major changes in the 5-digit range (tens of thousands). With a K-1 and rentals, the cause of some of the changes may not be immediately apparent, but they still can be highlighted. What is trickier is if the tax rate itself went through major changes, such as cap gains going from 15% to 20%, or NII kicking in, or similar. Also, losing credits or deductions due to phase-outs is a biggie. Or maybe they even had a one-time Min Tax Credit or something like that in 2018, due to TCJA changes. Or maybe some carryover losses were used up in 2018 -- this is where you add value, to be able to explain this.

I had one long-time client with a similar situation this year. I use a supplemental tax planner package from my software vendor, so I can produce some pretty detailed comparison and "what if" scenarios to show if I need to.

[KarenMM]

So here's the follow-up - It was a great zoom meeting where I shared my screen and pointed out various forms that they had obviously never reviewed! Qualified business income worksheet, passive activities limitations, net investment income taxes, etc! W was truly focused on how W2 income decreased, and not the interaction of all of the other parts of their income. I stepped into a (minor) ongoing dispute between them about H lack of mailing in quarterlies! One point that we all agreed on was that it was much easier for H to send in quarterlies than to adjust W's W-4, with all of the unknowns in her income streams.... That fight is now over By seeing the documents and having my long email on their screens about the line item differences, and hearing my voice answering with practically the same info, it all sunk in! It was productive and overall, solidified my relationship with them. Yay!

[ATSMAN]

I was tired of some clients with significant investment/rental income complaining that they always had a significant balance due at tax filing time so I gave them the option to consult with me third quarter, with their financial advisor in the meeting. If they chose not to do that then follow the estimated tax vouchers that I prepared based on their previous year's income and if their income exceed that then they are on the hook to pay the additional tax. I DON'T want any after the fact crying! I still have one lady who inherited close to $250K and stuck that in a bank CD because she does not trust the market. Every year I have her call the bank 3Q and get me the accrued interest and then I estimate her additional estimated tax to be deposited. She also gets some rental income from a 3 family house that her husband left her.