A Totally New Way To Look At Tax Resolution

Are you looking to completely transform your tax and accounting practice?

Do you want a simple, focused strategy for getting started in tax resolution?

How about this from left field: Stop being an accountant.

When I was building my own firm, centered around the transportation industry, I became more than just a tax problem fixer: I became a business consultant to the trucking firms I worked with.

Many accountants take on a broader advisory role with some of their clients without even thinking about it. Consider the clients that you have an incredibly close relationship with, which goes far beyond just tax and accounting.

For many small business clients, you are there one and only source of tax, accounting, and financial information. Most of these business owners know an attorney, but do not have a close relationship with one. As such, it’s not uncommon for accountants to sometimes become de facto legal advisors on general matters, also (you shouldn’t, obviously, but the reality is that it happens more often than we all care to admit).

When I was working primarily with small trucking companies, here are just a few of the additional services I advised them on, beyond resolving their tax debt problem:

  1. Controlling employee costs
  2. Managing credit
  3. Brokering freight
  4. Factoring accounts receivable
  5. Adapting new technology, such as GPS tracking, electronic log books, and weigh station bypass systems.
  6. Managing tractor/trailer registration in other states
  7. Recruiting drivers (competitive CDL market at the time)
  8. Sales training
  9. Creation of policies and procedures to operate more efficiently

Taken as a whole, these services are typically classified as management advisory services or management consulting. I have never labeled myself as such, but in all reality, this is what I really did for a living. It just so happens that it was all anchored by the 941 representation, with the management consulting usually kicking in as a direct result of the federal tax lien impacting the company’s factoring agreement.

These additional services are precisely what allowed me to easily justify the five-figure fees I would routinely charge these clients. When a small, mom and pop business is paying you $8,000 to $12,000, on average, it ain’t just for the tax work.

Tax Resolution + Advisory Services = Higher Fees + Better Client Relationships + Fewer Clients

I consider myself to be one of the laziest people on Earth. Seriously, I’d rather sleep or play with the dog than work. Thus, from a business perspective, my goal is really to balance an above average income with below average hours. I would inherently rather work fewer cases at higher fees, and quite frankly, I’d be willing to bet that you feel the same.

There are many different routes to becoming a knowledgeable and effective management consultant, and there are many different routes to finding clients to work with. Tax resolution is just one of many possible routes.

But, since it’s the route I’m most familiar with, it’s the route you get to read about here. 🙂

The downside to taking this route with tax resolution is that the vast majority of 941 tax debtors come from a small number of SIC codes. In other words, the 80/20 rule definitely applies. I not only know this personally as a result of being in the business for the past eight years, but also empirically because I have the benefit of access to a database of hundreds of thousands of tax liens filed by the IRS each year. If you don’t have specialized knowledge of one of these industries, and you aren’t willing to obtain it, then this business model will not work for you.

The rest of this post is going to cover the primary industry sectors that comprise the signifigant majority of all small business tax debtors. I’ll present an overview of each general industry, along with the roles you can take for clients in these industries. I will also do my best to present the plan of action that I would take if I were making the choice to become an expert on any of these industries.

Note 1: I make no guarantee that the specific auto-didactic (self-learning) strategies mentioned for each industry will actually make you an expert worth 5-figure consulting fees in that industry. All I can do is tell you what I would do, based on how I did it for trucking. You will need to adapt the learning plan to your own starting point, strengths, weaknesses, etc.

Note 2: If I were starting my professional tax career over from scratch, but knowing what I know now, this is the business strategy I would personally follow.

Note 3: There is a huge difference between being self-employed and starting up a firm, and there isn’t a whole lot of crossover between the two in traditional tax and accounting. This is one of the few opportunities I know of that allows a larger firm to sprout from self-employment whenever desire and resources align for you to do so, or vice versa. Also, note that highly specialized, niche businesses always have and always will sell for higher prices and will have a greater pool of potential buyers. If you operate a generic 1040 prep shop in this day and age, you’ll be lucky to sell it for 0.7 to 1.0 times annual revenue, and it will take two to three years to find a buyer in most areas of the U.S. On the other hand, a highly specialized practice is worth a much higher multiple of annual revenue, will have a broader range of potential buyers, and will usually sell faster.

Let’s delve into each specific industry…

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Hospitality: Restaurants, Bars, Nightclubs

These types of business suffer from a number of different problems, but they are almost always rooted in poor management. It can be difficult to “fix” the person that starts such a business, especially because many such businesses are a person’s personal dream. Unfortunately, many would-be restaurateurs fail to understand basic math, and are thus doomed from the very beginning.

Also, because food and beverage distributors extend large trade lines to these businesses with no collateral, it’s easy for the average restaurant to quickly fall behind to vendors to the tune of tens of thousands of dollars. Add the lack of rapid IRS enforcement on missing FTDs, and these businesses get in debt pretty quickly.

Can these businesses be helped? Absolutely! Failing restaurant and bar owners primarily need math and basic business management education. Simplifying menus, controlling portion sizes, reducing waste, setting proper prices, and managing staffing levels tend to be the key elements of turning around these failing operations.

As ridiculous as it sounds, if you want to start doing management consulting in this arena I would encourage you to binge watch “reality” TV shows that focus on turning around hospitality establishments. Kitchen Nightmares, Hotel Hell, and Restaurant: Impossible, etc. Take notes while you watch these shows, and it won’t take very many episodes of each for you to discover a very distinct pattern. In other words, there is a process. This same process actually applies to nearly any business (including YOURS…ahem).

Construction: Plumbers, electricians, homebuilders, remodelers

Most mom and pop trades businesses get started because a highly skilled tradesman gets told over and over that his work is so good, he should start his own business. The problem with this advice is that being a great plumber does not automatically make somebody a great business owner. In fact, it’s usually quite the opposite. Most people would not trust a Harvard MBA type to rewire their house, so what makes a Master Electrician think he can run a business? I have no idea.

On top of this, construction is typically an industry where those on the bottom get paid last. In the vast majority of situations, sub-contractors are the last ones to get paid on a project, because money trickles down from the customer, then to the general contractor, etc. Many construction contracts also stipulate that sub-contractors have to eat the cost of change orders. In addition, small contractors typically don’t have the cash reserves necessary to maintain a flexible workforce, and fail to realize that they’re often better off NOT taking on large jobs that require them to add personnel for short periods (skilled labor is expensive). All of these factors compound to put small construction related businesses on the short end of the 941 tax debt stick.

More often than not, the key to turning around these small businesses involves convincing the business owner to only take on jobs that are within the scope of his existing workforce, or employing a flexible workforce. Outside the box hiring solutions should be explored, such as filling short-term needs from local day labor companies and union halls.

These companies also need to understand proper estimating, especially for small jobs. Many moons ago, I received some of the best repair estimation training in the country through the FEMA Disaster Housing program private contractor. Training from the large home inspector societies is also pretty good (and worthwhile for you, too, if you’re going to enter this field). Your local Home Builders Association may also have resources.

You’re also going to want to bring an attorney in on a lot of these type of companies, in order to help them re-write their service contracts. Coupled with sales training and helping these business owners to adapt a get-paid-up-front mentality will go a long ways toward turning them around.

Transportation: Primarily trucking companies, but also freight forwarders, regional package delivery contractors, etc.

Ahh, my personal favorite. This is another industry that suffers from the trickle-down cash flow issue, but with even less control over fixing it. Due to the fact that the transporter is holding valuable goods in their physical possession, the trucking companies have a form of collateral over the company they’re shipping goods for. As such, these companies will never receive full payment until shipments are completed. In fact, terms of net 60 are the norm in this industry.

And that’s why load factoring exists. A few large banks, but mostly small finance companies, will factor the accounts receivable for transportation companies in order to help the pa for current expenses. The terms are usually not that great. These are the payday loan companies of the commercial sector.

One of the keys to being a good consultant to truckers is having good referral relationships with the better factoring banks (emphasis on bank, rather than finance company). Also, you need to be solid on your skills in working with tax liens, especially subordinations.

For small mom and pop truckers, they also have inconsistent runs, and don’t optimize for efficiency. Carrying a load from Salt Lake to Los Angeles, but then pulling an empty trailer to Santa Fe in order to carry a load back to Salt Lake isn’t very efficient and obviously hurts profitability. Truckers use freight brokers and load boards to help fill in the gaps sometimes, but often don’t know how to maximize the value of these resources. Simply being on six load boards instead of one, and having the back office person at home know how to use each board and coordination amongst them — without underbidding on loads — is critical to the smaller trucking operators.

Lastly, securing contracts with larger haulers, regional warehousing companies, supply chain management (SCM) specialists, and the like, can all help make small truckers very profitable.

Doing It Right

I think the thing I enjoyed most about working this management consulting angle for tax resolution, besides the higher fees, was that I got to use my skills for a very practical purpose.

I’m not “classically” trained as an accountant, but the accounting skills I do have can be applied in two very different ways. One is traditional bookkeeping, which all businesses obviously need, but is boring. The other is using financial math to make business decisions and other pragmatic, day-to-day purposes: Estimating, bidding, workforce management, run rate control, etc.

Yes, I know, you thoroughbred accounting types have a technical term for this, but for the sake of simplicity, I like to think of it just basic financial smarts necessary to run a business day-to-day.

(Just as a tip, your clients don’t know what cost or management accounting mean, so avoid the jargon.)

If you want to go down this road, there is a lot to be learned. I’m happy to cover more of what I know in future articles if there is enough interest in me doing so, but here are some general tips:

  1. Focus your CPE on the management advisory services category for this year. If you’re an EA, take some CPA CPE in this subject area, even though we don’t get credit for it.
  2. Watch shows like Kitchen Nightmares and The Profit. Pay attention to the PROCESS. In fact, Marcus Lemonis oversimplifies his process, but at least articulates it: People, Product, Process.
  3. Attend conferences and trade shows for the industry you want to consult in. Meet people, learn things, learn THEIR jargon, etc.
  4. Obtain specific, formal education in some of the most important matters related to the industry. E.g., learning about factoring agreements and tax lien subordinations are required education if you’re going to enter the trucking world

Want more coverage on this topic? Leave a comment below if you’d like me to go further in depth on certain aspects of this business opportunity.
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