Questions About Strategy Risk and Documentation

When an advisor recommends a strategy, you need to understand what it is, why it works, what could go wrong, and what you must do to support it. This guide lists questions to ask and explains how to interpret the answers. It applies to strategies of any kind, from entity choices to depreciation to retirement plans.

What Is the Strategy, in Plain Language?

Ask the advisor to explain the recommendation in words you understand, without jargon. If they cannot, that is a warning sign. A good explanation states what will change, what the intended benefit is, and what conditions must be met.

What Is the Authority?

Ask what supports the position: statute, regulations, IRS guidance, court decisions. You do not need to read the sources yourself, but a good advisor can name them and explain the level of support in general terms. Ask whether the position is well established or involves judgment, and how the advisor characterizes the level of certainty. Be cautious of claims that a strategy is loophole or secret. Legitimate planning generally relies on rules that are publicly available.

What Are the Conditions?

Many strategies depend on conditions such as hours worked, ownership percentages, timing, entity formalities, or documentation. Ask which conditions apply to you and how you will know whether they are met. If the strategy depends on facts that may not be true for you, ask what happens then.

What Are the Risks?

Ask what could go wrong. Possible risks include an examination, disallowance, penalties, interest, changes in law, and costs of compliance. Ask how likely each is in general terms, and what you would do if the position were challenged. An advisor who says there is no risk is not giving you a complete picture.

What Documentation Is Required?

Ask exactly what records you will need to keep, who will create them, and by when. For example, a participation strategy may require time logs, a compensation strategy may require benchmarking, and an expense strategy may require receipts and business purpose notes. Ask whether the firm will help you set up systems. See How to Document the Advice You Receive.

Who Else Has Reviewed It?

For complex strategies, ask whether the firm involves other professionals, such as attorneys, actuaries, or engineers. A strategy that touches legal structure may require legal advice. Ask whether the firm coordinates with your other advisors.

What Are the Costs?

Ask about costs beyond the advisor's fee: third-party providers, filing fees, annual compliance, and the time you will spend. A strategy that saves tax but consumes more in costs and effort may not be worthwhile.

What Happens If the Law Changes?

Ask how the firm monitors changes and what it does if a strategy becomes less attractive. Ask whether it will update you and how you would unwind or adjust the strategy.

What Is the Exit?

Ask what happens at the end: if you sell a business, dispose of a property, or stop the strategy. Some strategies have consequences later, such as recapture or additional tax. Ask for a description of those consequences at the start.

What Would You Do in My Position?

Ask whether the advisor would follow the strategy themselves and why. This question can prompt candid reflection. It is not a substitute for analysis, but it can reveal how confident the advisor is.

Warning Signs

• Promises of specific savings before reviewing facts.
• Pressure to act quickly.
• Reluctance to provide written explanations.
• Strategies described as secret or exclusive.
• Fees tied to the size of the deduction.
• Strategies that seem too good to be true.

See Abusive Tax Shelters and Reportable Transactions for more on strategies that draw scrutiny.

Ask for It in Writing

For significant strategies, ask for a written summary of the recommendation, the reasoning, the conditions, and the risks. A written summary helps you understand and gives you a record that protects you if questions arise later.

A Short Worked Illustration of the Questions

Imagine an advisor suggests a strategy that depends on the owner logging a certain number of hours. Using the questions above, you would ask what the strategy is, what supports it, what the condition is, what happens if the hours are not met, and what records are needed. A good advisor would explain that the hours must be real and recorded at the time, that the position can be examined, and that the benefit disappears if the records are missing. They would offer a simple log template and a schedule for reviewing it. That is a very different conversation from one in which the advisor says the strategy will save a certain amount without mentioning the conditions.

Keep the Summary with Your Tax Records

File the written summary of the recommendation with your tax return each year. It will help you and any future advisor understand why decisions were made.

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.