How AE Tax Advisors Thinks About Risk and Compliance

Every tax position carries some level of risk, and every advisor has a view on how much risk is appropriate. This page describes, in general terms, how AE Tax Advisors approaches risk and compliance. It is a description of general approach, and it is intended to help you ask better questions of any firm.

Compliance as a Foundation

Tax planning operates within the law. The approach starts from the premise that recommendations should be grounded in the tax code, regulations, and published guidance, and that the goal is to use available rules properly, not to evade them. Compliance obligations such as filing accurately, paying on time, and keeping records are part of the work.

Supportable Positions

Recommendations are intended to be supportable. That means there is authority for the position, the facts fit the authority, and documentation supports the facts. Where a position involves judgment, the firm explains that judgment and its level of uncertainty. Positions that rely on facts that do not exist are not appropriate. If a strategy does not fit your facts, the approach is to say so.

Being Candid About Trade-Offs

Risk is not only about audits. It also includes cost, complexity, cash flow, and the chance that the law will change. A recommendation may reduce one risk and add another. The approach is to describe these trade-offs so that you can decide with full information. For example, a retirement plan may reduce taxes but require ongoing funding, and an entity change may save tax but add compliance.

Documentation as Risk Management

Documentation is one of the most effective ways to manage risk. Positions supported by contemporaneous records are far easier to defend than those supported by reconstructions. The firm's approach is to identify the needed records at the outset and to encourage clients to keep them. See How to Document the Advice You Receive.

Avoiding Abusive Arrangements

Certain arrangements are designed primarily to generate tax benefits without real economic substance, and tax authorities treat them as abusive. Some are identified as reportable or listed transactions. The firm's approach is to avoid such arrangements. Clients should be cautious of any advisor who recommends them. See Abusive Tax Shelters and Reportable Transactions.

Professional Standards

Tax professionals are subject to professional and legal standards, including rules governing practice before the IRS and standards for preparing returns. Those standards require diligence, accuracy, and honesty, and they limit what advisors can do. The approach is to follow those standards, even when a client would prefer a more aggressive position. If a client insists on a position that cannot be supported, the firm may decline to take it.

Client Responsibility

Clients are responsible for the accuracy of information they provide and for keeping records. If information is incomplete or inaccurate, the advice may not fit. The firm asks clients to disclose relevant facts, including unfavorable ones. Candor from clients supports candor from advisors.

Handling Errors

If an error is discovered in a prior filing, the approach is to evaluate options for correction, explain them, and help the client decide. Correcting errors properly is part of compliance. Ignoring errors is not a strategy.

Monitoring Changes

The firm's approach includes paying attention to changes in law and guidance and considering how they affect existing recommendations. Where a change affects a client, the firm explains it and discusses options.

Second Opinions

For significant decisions, clients may want a second opinion. That is reasonable, and it is not something to avoid. A confident advisor can welcome another perspective.

How to Test This

Ask any firm how it decides which positions to take, how it documents its advice, and what it does when a client wants a position it cannot support. See Questions About Strategy Risk and Documentation. The clarity and candor of the answers say a lot.

A Simple Illustration of Risk Discussion

Imagine a strategy that depends on documented hours. A responsible discussion would explain the rule, the records needed, the possibility of examination, and what happens if the records are missing. It would offer a template for a log and a schedule for reviewing it, and it would note that the benefit depends on the facts being real. It would also invite the client to decide whether the strategy fits their situation and their tolerance for compliance work. This kind of discussion is the difference between disclosure and salesmanship. The example is hypothetical.

Escalation and Second Review

For complex or unusual positions, a second review by another professional inside or outside the firm can add a check. Ask any firm how it handles this. Layers of review are one way firms manage the risk of error, and they are a good subject for your questions.

Your Own Risk Tolerance

Different people are comfortable with different levels of risk. Some prefer conservative positions with little chance of dispute, while others accept more uncertainty in exchange for a larger potential benefit. Tell your advisor where you stand. The approach is to explain risk and let you decide within the bounds of what can be supported.

Educational purposes only. This page is general education and is not tax, legal, or accounting advice. Descriptions of how AE Tax Advisors approaches engagements are general, and the scope, timing, and fees for any engagement are confirmed with you directly. Tax laws change and outcomes depend on individual facts. No result is guaranteed.