As a tax professional, how do you ever really know if the price you charge clients is the ‘right’ price? Between the well-to-do socialite that never blinks an eye at your invoice to the penny-pinching spend-thrift that questions every line item, it can be difficult to gauge if your price sheet is where it should be.

To better understand the dynamics of what makes for a good pricing policy for client services, one must understand the following factors:

• Economic realities of your location
• Extent of services offered
• Experience and designations
• Strength of your value proposition in the market

Factor #1: location, location, location

If you are a tax preparer having just relocated from California to West Virginia, it is likely you may need to revisit the rates you charge for a traditional 1040 return with a single common schedule. Why? Because the economics between both locations tend to vary close to 20%. Furthermore, if you land in an ultra-competitive locale those numbers can differ even more.

Factor #2: supply and demand

While virtual tax offices are growing in number, making distance and location less a factor in everyday business, proper pricing can still hinge on how your tax service offerings stack up to local competitors. Can the consumer get all their tax needs met with you? Or must they inconvenience themselves by seeking other pros to take care of their full tax needs?

Factor #3: does EA mean “earn a lot”?

Do designations matter? More specifically, does all the work you put into becoming (fill in the blank with designation) matter to the everyday consumer? Survey findings provide a clear ‘Yes’ answer to this question. Not only do consumers prefer to do business with tax pros with designations (and the experience that comes with it), but findings also suggest they are willing to pay more for the designee’s services.

Factor #4: a strong value proposition

Taking the previous three factors into consideration, one of the most important factors to building your best and most profitable pricing policy is the strength of your value proposition. Your value proposition is important in that, if effectively communicated, it allows your customers to understand your value in helping them solve their problems. This added consumer confidence makes creation of a more profitable price sheet workable.

Want a deeper dive in creating a profitable price sheet for 2025?

NATP and Wolters Kluwer Tax & Accounting invite you to attend an upcoming free webinar on Thursday, Nov. 14 at 2 p.m. ET, titled ‘Pricing Your Tax Business for Profitability’. In this co-partnered webinar, attendees will hear from Jennifer Van Elzen, member relations & analytics director at NATP, and Loren Fogelman, CEO and success coach to tax firms at the Business Success Solution. Join this wide-ranging discussion as we take an informative look into the findings of the most recent NATP Fee Study report and talk about the steps required to build a value-driven price model for a more profitable tax business. 1 hour of NASBA credit will be offered.

Register now!

Question: John is an unmarried taxpayer and has a dependent son, Billy. Billy passed away in May of 2023. Can John still claim head of household (HOH) status in the year Billy passed away, if Billy met all the other requirements to be a qualifying child (relationship, age, support and joint return) except the residency test (Billy did not live with John more than half the year)?

Answer: Yes, John can still file using the HOH filing status, even if Billy passed away in May according to both IRS Publication 17, Your Federal Income Tax for Individuals, Page 27, and IRS Publication 501, Dependents, Standard Deduction, and Filing Information, Page 9. These publications say a taxpayer may be eligible to file as head of household even if the person who qualifies you for this filing status is born or died during the year. To qualify for HOH filing status, the qualifying person must be a qualifying child or qualifying relative who lived with the taxpayer for more than half the part of the year they were alive. In addition, IRS Reg. §1.2-2(c)(1), Household, provides the taxpayer and such other person, must occupy the household for the entire taxable year of the taxpayer. However, the fact that such other person is born or dies within the taxable year will not prevent the taxpayer from qualifying as an HOH if the household constitutes the principal place of abode of such other person for the remaining or preceding part of such taxable year.

The key condition is that the HOH requirement must have been met until the date of death, not the entire taxable year. According to IRS Publication 17, Page 31, Residency Test. To meet this test the child must have lived with the taxpayer more than half the year,. There is an exception for children who were born or died during the tax year.

Gary Thomas, through his attorney, went to court to challenge the IRS’s disallowance of his unreimbursed employee business expenses for 2016 and 2017. However, this isn’t about Thomas and the deductibility of his expenses; this is about his attorneys and their use of artificial intelligence (AI) when preparing their pretrial memorandum.

Thomas’s attorney, being new to the firm, had a new paralegal draft the pretrial memorandum for her, which is fine. However, the attorney signed the document without reviewing it and it is her signature that acts as her certification, making her responsible for its content.

Upon review of the pretrial memorandum by the court, it was unclear to what extent AI was used to prepare it because it had the hallmarks of being prepared with the assistance of a large language model (LLM), or AI.

LLMs are prone to “hallucinations.” AI hallucinations occur when a LLM perceives a word pattern and generates output that is inaccurate or even nonsensical. After reviewing the pretrial memorandum, the court informed Thomas’s attorney that it was unable to locate three of the four cases cited.

The court’s initial reading showed it conformed to what was expected. However, here is the where the issue comes in. In preparing for trial, the court discovered that none of these cases actually existed as cited, nor did their citations stand for the propositions they were cited for, meaning they were AI hallucinations. For example:

Case Cited	AI Hallucinations
Schluter v. Commissioner, T.C. Memo 1998-269, showing the Tax Court held that an employee who was required to submit business expenses for reimbursement, but who was not reimbursed by the employer, was entitled to deduct those expenses.	Schluter v. Commissioner, T.C. Memo. 1998-269, is actually T.C. Memo. 1970-67, a dependency exemption case, and T.C. Memo. 1998-269 is actually Schmitt v. Commissioner, a method of accounting case.
Meneguzzo v. Commissioner, T.C. Memo 1969-15, showing the Court allowed deductions where the employer had an obligation to reimburse the employee, but reimbursement was not made.	Meneguzzo v. Commissioner, T.C. Memo 1969-15, is actually 43 T.C. 824 (1965), a tip reporting case and T.C. Memo. 1969-15 is actually B-E-C-K McLaughlin & Assoc. v. Renegotiation Board, an excess profits case.
Gagliardi v. Commissioner, T.C. Memo 2011-194, stating that if the taxpayer provides credible evidence that the expenses were incurred and not reimbursed, the burden may shift back to the IRS to prove that the disallowance of the deduction was correct.	Gagliardi v. Commissioner, T.C. Memo. 2011-194, is actually T.C. Memo. 2008-10, a gambling loss case, and T.C. Memo. 2011-194 is actually Layton v. Commissioner, a collection case.

With regard to AI, professionals, including attorneys and tax preparers, have a variety of tools in their “toolbox.” Those we are most familiar with include software products, computers, printers (useful also in paperless offices), phones and office supplies. The new tool now available to professionals is AI.

However, professionals cannot blindly rely on the AI-generated results. To be certain the information generated is accurate, it is necessary to confirm the output.

As tax practitioners we have our due diligence and ethical standards we must maintain per Circular 230, §10.22 and §10.50. For example, if we utilize AI as a tool, we must not take it at face value without confirming its findings. That can be done through various sources such as those found at the IRS website.

In addition, NATP has a variety of tools such as our on-demand webinar on how to do tax research, Enhancing Your Tax Research Skills: Tools, Strategy and Documentation.