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By David GordonDirector, Eaton Vance Advisor Institute

How long do clients have to prevent a recurrence of an unpleasant income tax filing? The short answer is "the rest of the year." Therefore, if a taxpayer discovers underwithholding in May, there are only seven months to correct it before year-end.

Suppose your client's accountant discovers that your client has underpaid federal income taxes by $50,000, not including penalties and interest, due to an unusual compensation structure. If compensation is expected to remain unchanged for the remainder of the calendar year, then the same underpayment — and a subsequent penalty — could occur again next year.

To avoid a recurrence, your client could have her employer withhold more from each remaining paycheck this year. The extra withholding would happen over the time remaining in the calendar year instead of a full 12 months. If the tax discrepancy relates to investments rather than employment, consider asking the client questions to increase his/her available response time. Here are a few examples:

  • "Do you need all of the investment income you currently receive in cash?"
  • "Could better asset location improve your after-tax investment experience?"
  • "Could your account benefit from more thoughtful and deliberate tax-loss harvesting?"

Sharing your thoughts on these questions with your client and his/her accountant can go a long way toward improving your client's tax experience next year.

Bottom line: The sooner you can uncover and solve tax issues, the better the outcome — for your client and for you.

tax forward