Can Tax Debtors Actually Afford Your Tax Services?

This is probably the most common question I get from CPA’s in particular. The key is collecting your retainer up front. If I know that a situation is going to take, say, $3,000 to resolve, then I tell the client that up front. I’ll let them pay on a retainer basis like a lawyer does in installments, but I insist on an up-front minimum of either 1/3 of what I expect the total to be, or $1,000, whichever is greater.

The next question that usually follows is this: These people and businesses owe back taxes, which implies they’re broke, so how do they pay you?

This comes down to selecting those businesses and individuals with a high cash flow, so they CAN pay you. There’s a little trick for selecting the best leads to start with, actually.

Here’s the secret: The average 1040 tax debtor owes for 3 or 4 years worth, and the average business lien will cover a median of 4 quarters worth of 941 taxes. Knowing that, and knowing the tax rates, you can work backwards from the tax debt amount, make an assumption regarding the ratio of penalties/interest to tax, and arrive at roughly how much their AGI or quarterly payroll is.

Based on what you’re comfortable with, you can then set a criteria for whom to work with. If you are comfortable bringing on clients with a $40,000 per year income, then you can find the tax liens to mail to and call that have that income level, based on their tax debt amount. If you’d rather work with clients that have a minimum six figure income,
and therefore are more likely to be able to afford your services, then you select the appropriate tax debt minimum. A lot of $100k to $150k earners with insufficient withholding or estimated tax payments will accrue roughly $10k to $15k per year, plus maxing out penalties, then multiply by 3 years, gives you a minimum lien amount of about $40,000 if you want six figure earners.

Do note, however, that these tend to be more sophisticated consumers, and therefore require better marketing systems to get them to come on board clients.

The same applies to payroll tax debtors. The higher their payroll, obviously the greater the business cash flow. I have found 8 to 10 percent to be a good number to use as a rough average for withholding across employees, plus of course Social Security and Medicare, so I tend to just take the estimated bottom line 941 number and divide by
.25 to get a quarterly payroll. Then, you need to divide that by whatever percentage of revenue payroll should be for what you consider a functional, profitable business — because that’s the business you want as a client for tax resolution.

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Many franchised restaurant operations, for example, are told by the franchising company that payroll shouldn’t exceed 20 or 25 percent of gross revenue. A small business broker once told me that a company whose payroll exceeds 50% of revenue is going down the tubes, and that 30 to 35 percent is a reasonable range to be in.

So the bottom line is to select leads with a minimum lien amount — that is the best indicator from the get go for finding clients with enough cash flow to pay you. It’s counterintuitive to a lot of folks, even those of us that run numbers for a living, but the higher the tax debt is, the better client they end up being. If they have a high tax debt and are in deep, deep financial trouble, chances are you won’t reach them at all, because they already went out of business. If you do reach them, they will tell you up front that they’re broke and can’t hire you. If they are still operating and have a high cash flow, then they’ll be able to pay your retainer or service fee.