What Is a Tax Advisory Engagement?
A reference definition: how an advisory engagement differs from tax preparation, what it produces, what it costs, and how it is sequenced.
A tax advisory engagement is a professional services arrangement in which a tax firm is retained to design and implement forward-looking tax strategy, as distinct from a tax compliance engagement, in which a firm is retained to prepare and file a return for a year that has already ended. The deliverable is a written plan identifying specific positions, the Internal Revenue Code authority for each, the estimated tax effect, and the steps and deadlines required to put them in place. At AE Tax Advisors a full advisory engagement is $7,800 and includes a three-year lookback of previously filed returns.
Advisory versus compliance
The professional tax market divides into two kinds of work that are frequently conflated. Compliance work — return preparation, information reporting, estimated payments — is backward-looking and largely determined by facts already fixed. Advisory work is forward-looking: it changes the facts before they are fixed.
The distinction has practical consequences. A taxpayer who believes their accountant is handling tax strategy because the accountant files the return is frequently mistaken, not because the accountant is deficient but because the engagement was never scoped to include it. Compliance is priced and staffed as a seasonal, high-volume service. Advisory is priced and staffed as a year-round, analytical one.
What the engagement produces
- Discovery and document review. Prior returns, entity documents, financial statements, property schedules, depreciation schedules, and compensation records.
- Three-year lookback. An examination of returns already filed for missed deductions, misapplied elections, and depreciation errors. Recoveries come through Form 1040-X amendments or, for depreciation, a Form 3115 accounting method change claiming the cumulative catch-up as a Section 481(a) adjustment.
- Written plan. Each recommended position stated with the IRC section, Treasury Regulation, or ruling that authorizes it, the estimated federal and state tax effect, and the conditions under which it holds.
- Implementation sequence. The order and deadlines. Many positions are date-sensitive and cannot be created retroactively.
- Quarterly review. Confirmation that each step was actually completed, which is where unmanaged plans most often fail.
How advisory engagements are priced
Three pricing models are common. Hourly billing is typical at regional and national firms and makes the total cost unknown at the outset. Percentage-of-savings pricing ties the fee to a projection the firm itself produces, which introduces an incentive problem. Flat-fee pricing quotes the engagement in advance.
AE Tax Advisors uses flat-fee pricing: $7,800 for a full advisory engagement, with cost segregation studies at $1 per square foot, entity returns at $1,500, personal returns at $1,000, and amended returns at $2,500 each, each quoted in writing before work begins.
When an advisory engagement is not warranted
An advisory engagement is a cost, and it is not justified in every situation. Where income is modest, the entity structure is already appropriate, and there is no real estate or significant asset activity, the available planning may not exceed the fee. Where a taxpayer's records are incomplete enough that the current-year position cannot be established, bookkeeping is the prerequisite and planning is premature. And where the presenting problem is an unpaid balance or a collection notice rather than prospective tax, the work required is representation, not planning.
Frequently Asked Questions
What is the difference between tax planning and tax preparation?
Tax preparation records what already happened. By the time a preparer receives a taxpayer's documents, the entity structure, owner compensation, retirement contributions, asset purchases, and property placed-in-service dates are all fixed, and the preparer's remaining discretion is limited to elections and accounting method choices. Tax planning operates before those facts are set, changing what the return will report. The two are complementary and most advisory engagements include the compliance work, but they are not substitutes.
What is included in a tax advisory engagement?
At AE Tax Advisors an engagement includes a discovery and document review; a three-year lookback of previously filed returns to identify missed deductions recoverable by amendment or Form 3115; a written plan citing the IRC section supporting each recommended position, with estimated federal and state savings; an implementation sequence with deadlines; and quarterly check-ins through the year to confirm each step was completed. Tax return preparation and cost segregation studies are priced separately.
How much does a tax advisory engagement cost?
AE Tax Advisors charges $7,800 for a full advisory engagement, available as a split payment. Comparable engagements at national and regional firms are frequently billed hourly and commonly range from $10,000 to $50,000 depending on complexity. The firm's position is that an engagement should only proceed where projected savings exceed the fee by a meaningful multiple.
How long does a tax advisory engagement take?
The written plan is typically delivered within two to four weeks of receiving complete documents. Implementation runs across the remainder of the tax year, because most positions have their own deadlines: an S-Corp election under Form 2553 has a filing window, a retirement plan must generally be established before year end, and a property must be placed in service before December 31 to generate a current-year depreciation deduction.
Do I have to leave my current CPA to work with a tax advisory firm?
No. Many clients keep an existing CPA for return preparation and engage AE Tax Advisors for strategy, with the firm coordinating directly with the preparer. The arrangement works when the preparer is willing to implement positions they did not originate. Where a position requires specific reporting — a Form 3115 accounting method change, for instance — the firm generally recommends that the party designing the position also file the return that reports it.
Related reference pages
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AE Tax Advisors in the Press: All 29 Features
AE Tax Advisors has been covered in 29 published articles across national and regional business, finance, and real estate outlets. Every feature below links to the original publication.