AARP Tax-Aide Volunteers - ethical question

[jj]

This is my third year as a Tax-Aide volunteer. I love the program and helping mostly seniors prepare their taxes.

We are remote at the moment due to Covid so this makes things slightly weird. I'm sure all you ER Board Tax-Aide volunteers can relate.

One of our 'counselors' (that's Tax-Aide speak for the IRS qualified volunteers who actually prepare the returns) has emailed our small group about this and I wonder what you all think.

TP is shorthand for Tax Payer.

'In 2021 TP's account sold $1,100,000 of securities (all short-term transactions) and realized a $7,000 net gain. However, because of the wash sale rule, TP must pay income tax on $25,000 of short-term capital gains. And that makes part of TP's social security taxable, so TP owes ~$3,000 of tax for 2021. TP informs me that the total value of the brokerage account is under $200,000. '

The counselor here is appalled at the churning going on in this account.

What can a volunteer tax preparer do in this situation? My considered answer is 'not much' - this is a free country and as a volunteer preparers we are not financial advisers.

What say you?

 

[PaunchyPirate]

I would politely consider it to be none of the tax preparers business.

 

[Midpack]

What does AARP leadership recommend? At the very least I’d anonymously make the TP aware, and let TP take it from there.

 

[cathy63]

Is the TP a day trader? Or is it an investment advisor churning the account? Day traders are out of scope for us in CA, but I don't know whether that's the case nationwide.

If this return were not out of scope and I found myself working on it, I would take some time with the TP to point out the wash sales and see if he seems to know what that term means. If not, I'd define it for him and explain the effect on his SS and overall tax liability. If he didn't seem to understand what's going on in the account, or if he was concerned about the effect on his taxes, I'd recommend that he talk with the financial advisor to get a better understanding of the investment strategy being used.

(This is easier because we are using the traditional in-person model. It would be much harder in a remote situation.)

 

[SevenUp]

I would take some time with the TP to point out the wash sales and see if he seems to know what that term means. If not, I'd define it for him and explain the effect on his SS and overall tax liability. If he didn't seem to understand what's going on in the account, or if he was concerned about the effect on his taxes, I'd recommend that he talk with the financial advisor to get a better understanding of the investment strategy being used.

Thanks for writing exactly what I was thinking.

 

[jj]

Is the TP a day trader? Or is it an investment advisor churning the account? Day traders are out of scope for us in CA, but I don't know whether that's the case nationwide.

If this return were not out of scope and I found myself working on it, I would take some time with the TP to point out the wash sales and see if he seems to know what that term means. If not, I'd define it for him and explain the effect on his SS and overall tax liability. If he didn't seem to understand what's going on in the account, or if he was concerned about the effect on his taxes, I'd recommend that he talk with the financial advisor to get a better understanding of the investment strategy being used.

(This is easier because we are using the traditional in-person model. It would be much harder in a remote situation.)

This is an elderly lady who has been to our tax site since 2016. It is an 'advisor' who is making these trades. Last year, the counselor also felt uncomfortable and mentioned it to the TP who recounted that the advisor had told her 'she should be happy as she's making so much money'. I doubt that the advisor will stop when questioned by the TP. I also suspect that the TP has no idea how much they are being taken advantage of.

 

[pjm-7]

I would suggest that she contact the FINRA securities helpline for seniors. The number is 844-574-3577 Monday - Friday 9am-5pm ET. Just casually suggest that she can contact them to "help her understand" more about her account. This is serious churning. Also, ask her if she has a POA or family member to assist with her investments. Another person should know what is going on with the TP.

 

[Jerry1]

Is the TP a day trader? Or is it an investment advisor churning the account? Day traders are out of scope for us in CA, but I don't know whether that's the case nationwide.

If this return were not out of scope and I found myself working on it, I would take some time with the TP to point out the wash sales and see if he seems to know what that term means. If not, I'd define it for him and explain the effect on his SS and overall tax liability. If he didn't seem to understand what's going on in the account, or if he was concerned about the effect on his taxes, I'd recommend that he talk with the financial advisor to get a better understanding of the investment strategy being used.

(This is easier because we are using the traditional in-person model. It would be much harder in a remote situation.)

Thanks for writing exactly what I was thinking.

Exactly. There’s nothing that should prevent a preparer from going over the return and the tax laws that are in play and why the TP paid the taxes they did. Beyond that, all you can do is recommend another professional to counsel the TP.

 

[TheWizard]

This is an elderly lady who has been to our tax site since 2016. It is an 'advisor' who is making these trades. Last year, the counselor also felt uncomfortable and mentioned it to the TP who recounted that the advisor had told her 'she should be happy as she's making so much money'. I doubt that the advisor will stop when questioned by the TP. I also suspect that the TP has no idea how much they are being taken advantage of.

Sounds like Elder Abuse to me.
*shurg*

 

[jazz4cash]

I would’ve expected AARP to provide guidelines for this to protect their tax aides and liability purposes if nothing else. Surely the tax preparer can see if letterhead on brokerage paperwork is from a reputable or questionable broker. What fo the big tax preppers do?

 

[SevenUp]

...from a reputable or questionable broker.

Unfortunately that can be in the eye of the beholder. Certainly agree with the sentiment, but giving every Tax-Aide volunteer license to opine on the relative merits of various financial advisors is probably a stretch.

 

[jazz4cash]

Unfortunately that can be in the eye of the beholder. Certainly agree with the sentiment, but giving every Tax-Aide volunteer license to opine on the relative merits of various financial advisors is probably a stretch.

Not so much, I think. If the brokerage is Fidelity or Vanguard, I’d say they’re reputable. If it’s Trader Tom, I’d consider that questionable. Granted the gray area is vast and reputable brokerages may employ questionable brokers but they likely have policies against that behavior.

 

[Philliefan33]

I would’ve expected AARP to provide guidelines for this to protect their tax aides and liability purposes if nothing else. Surely the tax preparer can see if letterhead on brokerage paperwork is from a reputable or questionable broker. What fo the big tax preppers do?

AARP TaxAide does give us guidelines. I’ve been taught that we can help clients understand tax implications of their financial activity, but we cannot give financial advice.

When I’ve encountered a situation as egregious as the OP, I explained the brokerage statement to the TP, including the line buried in the back titled “account fees”. Unfortunately, only a small percentage of clients get the “aha” moment. Most just blindly trust the financial advisor.

 

[The Cosmic Avenger]

Sounds like Elder Abuse to me.
*shurg*

If the TP doesn't understand wash rules, then it probably fits the definition of financial abuse, and this was my field for many years. I would contact a local Area Agency on Aging to talk about the particulars, because the laws and enforcement can vary by jurisdiction. Unfortunately, these can be very hard to prove, because the victim may have to either fire the FA or be declared incompetent, otherwise it may just be seen as their (poor) decision. Actually, I think my first approach might be to appoach the FA's licensing/governing board, they might be able to act just on the appearance of impropriety, instead of having to prove the TP's competency.

 

[jebmke]

We don't give financial or tax advice in our district. At the edge, I have sometimes made a point to make sure that the taxpayer noticed the high fees on an account but did not make any suggestion or try to imply that they should make changes.

 

[FANOFJESUS]

Could you say I use Vanguard and they charge me .3 for advice for example. You are only talking about you that way not them. I think they would have a hard time letting you go if that was all you said.

 

[jj]

Thank you to everyone who has responded so far.

Could you say I use Vanguard and they charge me .3 for advice for example. You are only talking about you that way not them. I think they would have a hard time letting you go if that was all you said.

As to this suggestion, I consider that we are expressly forbidden from recommending to TPs in this way.

 

[jj]

AARP TaxAide does give us guidelines. I’ve been taught that we can help clients understand tax implications of their financial activity, but we cannot give financial advice.

When I’ve encountered a situation as egregious as the OP, I explained the brokerage statement to the TP, including the line buried in the back titled “account fees”. Unfortunately, only a small percentage of clients get the “aha” moment. Most just blindly trust the financial advisor.

Exactly. Especially the point about blindly trusting their advisor.

 

[jj]

I would suggest that she contact the FINRA securities helpline for seniors. The number is 844-574-3577 Monday - Friday 9am-5pm ET. Just casually suggest that she can contact them to "help her understand" more about her account. This is serious churning. Also, ask her if she has a POA or family member to assist with her investments. Another person should know what is going on with the TP.

Thank you. I did not know about this helpline.

 

[jazz4cash]

AARP TaxAide does give us guidelines. I’ve been taught that we can help clients understand tax implications of their financial activity, but we cannot give financial advice.

When I’ve encountered a situation as egregious as the OP, I explained the brokerage statement to the TP, including the line buried in the back titled “account fees”. Unfortunately, only a small percentage of clients get the “aha” moment. Most just blindly trust the financial advisor.

That seems reasonable.

 

[ncbill]

encourage the taxpayer to contact FINRA.

though one of my former brokers (salesman) relinquished his broker's license so there wasn't much i could do about the cr@p he sold me.

 

[VanWinkle]

Is the TP a day trader? Or is it an investment advisor churning the account? Day traders are out of scope for us in CA, but I don't know whether that's the case nationwide.

If this return were not out of scope and I found myself working on it, I would take some time with the TP to point out the wash sales and see if he seems to know what that term means. If not, I'd define it for him and explain the effect on his SS and overall tax liability. If he didn't seem to understand what's going on in the account, or if he was concerned about the effect on his taxes, I'd recommend that he talk with the financial advisor to get a better understanding of the investment strategy being used.

(This is easier because we are using the traditional in-person model. It would be much harder in a remote situation.)

This is what I would do also, just educate him/her on wash sales and tax loss harvesting.

 

[SecondCor521]

We seem to be allowed and even encouraged in my district to do what we can to reduce the taxpayer's tax liability.

For example, this year we are asking all TPs to bring in their 2019 return in addition to their 2020 return in order to take advantage of the COVID19 EIC disaster rule. This rule might increase their EIC. (OK, technically not a decrease in their tax liability, but it helps them out financially.)

We've been encouraged in the past to look at the saver's credit and point out to taxpayers that they could get a bigger saver's credit if they contributed $X to their traditional IRA. Contributing to their traditional IRA can, in limited cases, reduce their AGI enough to get them into a better saver's credit tier.

We're also allowed and encouraged to help taxpayers with their future tax situations. The most common example of this is giving them general advice on changing their withholding so that their refund or amount owed is more in line with what they want.

Finally, we're expected to review the tax return with the taxpayer to ensure that they understand whether or not their tax return has been prepared accurately before they sign the 8879.

I regularly see moderate churning, high expense ratio investments, and ridiculous diversification, although the worst example I know of seems to be taxpayer self-induced and not broker abuse.

In those cases, given the other examples I listed, I consider it within bounds to educate the taxpayer as to how much of their tax liability is due to the churning - I think one could discuss tax structure of LT vs ST, qualified vs. ordinary dividends, provisional income and taxation of SS, etc. I think one could also go one step further and discuss hypotheticals of how dividends would have been taxed less if their trades hadn't happened.

At that point, it's up to the taxpayer to decide if the higher taxation is worth it to them compared to the perceived benefits. I would think it would be out of bounds to discuss FINRA, elder abuse, POA arrangements, and so forth.

ETA: Overall, I think the AARP Tax Aide ethics require that we not harm the taxpayer, not that we attempt to resolve harm to the taxpayer by other parties.