Ep. 173: How the IRS Can Help Advisors Onboard New Clients, with Charles Almond, Tax Status and Jeff Schwantz, Morningstar

Come on in and sit back relax, you’re listening to Episode 173 of the WealthTech Today podcast. I’m your host, Craig Iskowitz, founder of Ezra Group Consulting and this podcast features interviews, news and analysis on the trends and best practices all around Wealth Management Technology.

Before we get into the interview, if you are listening now you’re an executive at a broker dealer, an asset manager or an enterprise RIA you should run not walk to a website, EzraGroupllc.com and fill out the Contact Us form on the homepage to meet with us about your technology platform issues. Our experienced team can assist with software vendor evaluations systems integrations, improving operational efficiency, software implementations and a whole lot more. You can take advantage of our free initial consultation offer by going to EzraGroupllc.com. Now, let’s kick this thing off.

Topics Mentioned

  • Partnering with Morningstar
  • A Data Pipe Straight from the IRS
  • How Does This Integrate?
  • Make the IRS Work for You
  • How Far Back Does the Data Go?

Episode Transcript

Craig: I’m excited to introduce our next guests, multiple guests on the podcast. We have two very special guests. First one is Jeff Schwantz, Global Head of Channel Partnerships for Morningstar. Hey Jeff.

Jeff: Hello.

Craig: And the man of the hour Charles Almond, founder and CEO of Tax Status. What’s up Charles?

Charles: Hey Craig.

Craig: Thanks for being here guys. I’m excited by this. I’m really interested in this product. This month we’re talking about startups FinTech startups. And while Tax Status isn’t necessarily a startup you’re very new to the wealth management space. And I’m pretty excited to share with us with everyone. Can you give us the 30-second elevator pitch for Tax Status?

Charles: Absolutely. Thanks for asking. Pleasure to be here. Appreciate it, Craig. Tax Status was created about 10 years ago. So they always say is that overnight success 10 years in the making. We as an application architect, I was building a lot of back end systems for the entertainment space and accounting and even the banking space building underwriting systems. And I came across a co founder who was a former CPA and tax attorney and he mentioned the pain that was involved in collecting tax information to help taxpayers. I offered to help out we started the company and what we’ve done is we automated the collection of IRS data. And now back then the whole point was to just gather everything we know about the taxpayer and not just one or two transcripts, but you have to see the whole picture to help a taxpayer situation. So for ten years, we’ve been doing that. And five years ago, some bank saw the output of the system. And they said, Oh my gosh, what is that? I need that. And I was like, oh, yeah, it’s just our thing, let’s take a look. And it was just not more or less just a summary of everything the IRS knows about a business or an individual and their eyes lit up and they almost rolled over and they’re like, wait, wait, wait, wait, I need that. I need that. I need that. So five years ago, we started signing deals with banks to help them and their underwriters manage their risk and underwrite quicker by looking at the entire picture. So you can see everything so it’s been really fun since then. And we just over the last few months, I’ve been working with Morningstar, who’ve been a terrific partner, because we didn’t know anything about the wealth space. And clearly they know everything about the wealth space. So it’s been a great relationship.

Partnering with Morningstar  

Craig: Yeah, I think you lucked out, picking a partner to come into wealth with Morningstar. We’ve worked with Morningstar for a while and we love those guys. And it seems like the perfect fit, this is one of those products that you look at and you go, Why didn’t anyone think of this before?financial advisor new client onboarding process

Charles: For real. No, it’s been it’s absolutely true. Every time we demo everyone says, oh my god, the first thing they ask us is how in the world is this possible, right? They’re just absolutely floored that this even exists. And then second question is, how can I get my hands on it? And I’ll give you the secret. The secret is this taxpayer owned the rights to their data. And so once you understand that, and you get consent from the taxpayer, you can electronically reach and grab the information on their behalf and give them their insights into what’s going on behind the scenes at the IRS. And here’s the sweet spot, which automates the entire process of collecting tax data.

Craig: And data gathering is such an important part of the advisor can experience initially when they’re first working with them, when there are prospects if you can smooth that over. Because I’m just thinking of all the paper or PDF files that the client has to bring to their advisor, especially ones that have kids or may have multiple businesses or may have maybe they’re middle aged so you could have you could have of gathered all of this financial data and many different accounts and you’re saying you can bring it all from the IRS into one place. Can you give me a list of all the different things that an advisor can get from your system?

Charles: Oh, my goodness. Yeah, absolutely. So as you can imagine, especially the more successful the customer, the slash client, then they’ve got more back tax documents, they’ve got their individuals, they’ve got the spouse, they’ve got the dependents, they potentially have all their businesses, right. So to ask them when you sign a deal and say, Hey, I’d love to you know, work with you. I’ll help you out financially. Then guess what, go home, and here’s an assignment, go grab all these tax returns. It’s a nightmare. So what we’ve done is automated at literally two clicks and checkboxes and button presses right on their mobile phone, and we gather all the consent and suck in all that data. So what does that data look like? It’s everything it’s all the reported income for the individual in the business. So we can literally see everything the IRS sees and the advisor then can be operating from the truth. Right? They can actually look at the de facto standard for what is all the reported income that the IRS knows about. And I’m we’re talking over 3000 data points and they’re everything from dependence to my gosh, all the financial income, how you’re making your income, all the businesses and we’re not pulling just the individuals but the business data as well. So they’ve got the for the first time ever an automated look at all of the data within the IRS.

Jeff: So Craig, let’s drill into that a little bit if we can. So wage and income is one of the transcripts that has is just rich in information for an advisor, so to Charles’s point, we can go look at their employers. So think about what the advisors are doing when they’re onboarding a client. They’re spending a lot of time like, tell me about your employers, how much are you making right now? Are you contributing to a 401k? are you contributing to a 403-b or 457 if you’re in other sectors, where all of your brokerage accounts at? Are you receiving dividends, interest? What did you pay from a mortgage interest perspective? What’s your principal balance look like? All of these things your advisors are going through today. All of that, by the way is included in the more than 600 data elements that’s just on the wage and income transcript alone. So think about the advisor like the problem that we’ve been at Morningstar focused on solving is advisors do an amazing job, but they have to ask all of their clients all of these questions, especially now as most advisors are acting in a fiduciary way.

Jeff: So how can we help them gather the best information that allows that advisor to serve those clients in a fiduciary way and by the way, on the other side of that clients don’t always understand the best information to provide to their advisors to help them get towards their you know, their needs, their goals, their wishes their wants. So you’ve got a way now to be able to level that playing field that as we always say, like how do we help advisors and clients get to the moments that matter faster, and you use those 600 data points that are in that wage and income transcript alone, that automates a lot of this information?

Jeff: So Craig, we’re now having a discussion around hey, I can see that you’ve got a couple of employers, you and your spouse. Oh, I can see that you’ve got partnership income. I see if you’ve got interested in because you’ve got K-1s that are there. Oh, I see you’ve got rental income. So you’ve got rents and royalties. Other clients you may be see well, I can see that you’re actually taking Social Security benefits already. All of that information, you’re not having to ask it and remember to ask it it’s there and you’re having a more validation discussion with your client, then it is typically Hey, tell me about this. Bring your shoebox bring your tax returns, aggregate your accounts. That’s the really the powerful you know, how powerful this data is because it allows those advisors to get to those moments that matter faster with those clients.

A Data Pipe Straight from the IRS

Craig: So I got the title for this podcast is let the IRS automate your onboarding process. That’s what you’re doing really, because normally, you got to tell the client get all this paperwork, get all the PDFs get everything, they gotta find it. I’m pretty organized, and it’s a pain for me to find all this stuff out and just to gather at all and then go through the form whatever intake process the advisor has even it’s an automated it’s a very smooth online process like some of Morningstar systems do this. You still clicking clicking, clicking go through screens, click click, click and entering manually entering data or they’re doing OCR on PDF files, but still, you’ve got to get the PDFs to them. It takes some time to do that. There can be some mistakes, you may have forgotten a PDF, your way. It’s all one stop and it’s it’s like a data vacuum cleaner. It’s pulling everything in and the client doesn’t have to remember so it removes I hate the word I said this before. I hate this buzzword it “removes friction from the client experience”.financial advisor new client onboarding process

Charles: That’s right and fact that you can use your word pain she does it is painful when you have to go back and if the more successful you are you don’t have these tax returns laying around anyway, right. They’re back with the CPA, you got to hunt them down. You got to make the calls. So yeah, it’s a nightmare. But here’s the wild part in today’s industry without this, right, you go through all that trouble to pull all this data in and what have you done, you’ve captured a single snapshot in time. That’s it one snapshot in time. You got to do it again. How are you going to take your stuff, right so you gotta go do it again next year, or heaven forbid, you’re looking at the quarter leads and making sure that estimated payments are being made. Okay, great. So you’re doing it every three months. Terrific. Guess what? With Tax Status, it’s a continuous consent. So the consent that we gather with the taxpayer is not a one time look. It’s not a peek into a moment in time is a continuous consent that allows us to keep the system up to date. And if the system can check every day, and make sure everything’s looks good, they can also keep you informed when things don’t look right. So it’s either way either way, everything’s wonderful and they can send you the quick notice that says, hey, everything’s great, or tax status, consider and say, hey, oh, we just saw something today that you need to know about, please contact your client and let them know.

Craig: So that’s a good point Charles, so give me an example what kind of things would come from your system and on an ongoing basis that would help an advisor save the client money, make it make their relationship stronger? What kind of information are we’re getting here? What are you talking about?

Charles: Oh, my goodness, it’s so many. What’s really cool about Tax Status is every advisor can lean in and select various topics that they care about things they want to keep an eye on. The two most important things ever is they want to make sure that all of the compliance matters are happening. So they want to make sure that all the filings are going in oftentimes the advisors will tell us that look, I we’ve instructed our clients to make their quarterly payments, and they will call them up as a reminder and say, Hey, I got on my calendar here a little tickle. I’m supposed to call you and confirm that you made it. Yeah, yeah, sure. I think I did. Right. They don’t have any proof that they’re actually doing this. What if they don’t do it? They get fined and penalized.

Charles: So the point here is that these alerts can come right back to the adviser to confirm all the actions that the taxpayer has been making. Yep. IRS schedule quarterly. Yep. IRS is happy. Yep. I respect your annual return. Now that’s on the positive side. Let’s say they’re missing them. Let’s say they miss them and then all of a sudden there’s a few if the IRS decides they don’t like the annual return that you filed, a lot of people are unaware of what happens inside the IRS and what happens is the minute you file your return, there’s an automated audit that happens every time right and you can see this audit happening in Tax Status as you look at all this information coming and going. You can literally see when the IRS is performing their automated audits, and you can see if there’s any balance calculated, you can see any letters or warnings that go out. You can see the adjustments to balances due or refunds coming. If you’re going to get a refund great, guess what we can tell you when it’s coming. Right. So all of that information is available in the IRS record, but nobody’s seen it before. So having tax status with continuous consent protects all of the clients and the advisor and lets them do the job they were hired to do.

Jeff: So Craig, let’s bring it all together. So we’ve talked about just automating the onboarding process. Obviously using that information in the financial planning process. Hugely important, the best financial planners are asking their clients today for their tax returns. Why? Because they know how to read that information to use it. Use it in the financial planning process. As Charles just talked about, think about the next thing of providing valuable advice between an advisor and a client. We know like lots of advisors are taking on other peripheral surfaces being able to provide so think about the ability to help help a client to understand what’s going on that use case Charles just described, you know, things that are going on between them and the IRS by the way, guess who’s going to get that call if the payment wasn’t made, and we need to raise raise cash. Well, that advisor well if you’ve brought the advisor into that experience, you’ve now created yet another service that that advisor to says, Well, hey, this is why you’re paying me 100 basis points or 110 basis points for managing your assets because I’m doing your investment planning. I’m doing your financial planning, and I’m helping you as Charles said, really on the protection side of mitigating what is for most consumers their largest annual expense, which is taxes. So if I can help you avoid penalties on your largest expense, wow, that’s a really valuable thing that as an advisor being able to justify the fees and the services that I’m offering, like, think about a new way to think about your practice and delivering value.

How Does This Integrate?

Craig: I selected my current advisor because they also do our taxes. So they also have CPAs. So having this data would have saved me a lot of time onboarding. And if they could have this and they wouldn’t be every year they would just get an update on whatever I’ve whatever I’ve got automatically. It would flow into as though they’re using financial planning software would flow into that. So you’ve already got all these integrations built. So will this already go into the top financial planning software, the top CRMs and how does that work?financial advisor new client onboarding process

Jeff: I’d say this is the exciting part of why Charles and the team came to Morningstar because we power the financial planning wealth. So the short answer is it does not yet exist. We can share with you we have been engaging in the last 45 days since we’ve been working together, engaging those FinTech firms, Craig that be it on the on the onboarding side on the financial planning side. That’s where we think, as more and more advisors want to do more financial planning. That’s where our conversations with some of the FinTech firms have started to go, wow, we we have to reevaluate our roadmap, because this would provide a tremendous amount of value to the advisors that they serve and the enterprises that they serve. So the integrations don’t yet exist. Those are the conversations that have started and where we’re heading towards of, how do we help provide a better experience for the advisors and those enterprises that serve or that those FinTech firms serve?

Jeff: That’s right. And what’s really cool, too, is that the Tax Status was built again, because of the my software background. It was all built API first, right, which facilitates the interface with Morningstar. Morningstar has a tremendous API today. So bolting onto it and adding this service. Literally as a matter of days effort to bolt this on, get it out there in the Morningstar customer hands is wildly beneficial, but for those companies that are smaller for the wealth advisors that are not on big systems and they don’t have a big, big crew, they can or a development shop like some of the others, they can literally reach in and they can use the secure portal to protect start protecting their families right away. So whether they use the API or the UI is completely turnkey for them.

Jeff: One of the questions we often get from the enterprises is how do they unleash this? So as Charles, you said, they are an API first organization. That’s what what we found so appealing Morningstar, data company, we understand other data companies. So what Charles in the team built was the ability for those largest enterprises to be able to take a little component and embedded in if they’re doing digital client discovery, like most of the financial planning a lot of the enterprise wall firms today, as you say, correct. They’re sending this information to clients gathering this information. So you take this little component to say, Hey, Mr. Mrs. client or household, you can spend the next you know, 2030 minutes walking through this fact gathering process, or you can allow our firm consented to be able to go directly into the IRS application and gather this information automatically for you.

Jeff: And by the way, if you’ve applied for a mortgage or to refinances is the same thing that banks do to complete your loan profile and the client walks through his trials, just said through those little components that are that the tax status team can embed in that digital client discovery and allows them to go through that consent. And then when when received deliver that information back so that’s what’s kind of amazing around the integration is part of it’s just it’s the authentication, think about all the the investment account aggregation that we all known, that a lot of the financial planning firms will do you go out and you provide your credentials to Charles Schwab as an example, right. You’re going out to the API, and the investment account is coming directly and think of it this is the same thing. Charles and the team have built an API directly to the IRS to get them to gather the same information using know the ways to gather the credentials and then deliver that information into the into the financial planning firm to the to the onboarding firm, however they see fit to use it. But as we touched on, kind of in the early part of the call, how do we help onboard clients? How do we then use it for investment management? Obviously, in the financial planning side, firms with all the focus on direct indexing, one of the biggest benefits of direct indexing is to reduce your clients tax as well. How can you do that in efficient in a fiduciary way without having an understanding of what that client’s actual their tax burden has been? Not only last year, not just static, what maybe for the last 10 years, what is that done being able to use that information to manage their assets potentially differently in a more personalized way?

Make the IRS Work for You

Craig: This is one of those ideas where you just hit yourself and go, Why didn’t anyone think of this already? It’s everything’s being automated everything that you’re we have we’ve asset allocation whether or whether data aggregation is pulling data from every financial institution, why not pull data from the source from the IRS and make them work for you in effect.financial advisor new client onboarding process

Charles: That’s exactly right. Our professional staff, it was almost like the perfect storm in that it had to you have to have three things really to to come up with this solution. The first is that you have to have the workflow system behind the scenes. You got to be able to support the entire taxpayer base, right. So that’s where I step in, because I can build those systems at scale. But you also need the IP you need to know how does the IRS work? What are the process and procedures internally what so what ends up happening is our professional staff are all former IRS.

Charles: So what that means is that we are already charged with all of the Think of it this way we think of it as having me a monopoly on competence, because we are second to the IRS with respect to the knowledge because everyone that comes out of there as they retire from all the different different divisions. They could be in collections. They could be the revenue officers, and audit exam. So the idea they come to work for us and they bring with us not only credentials to help us access and manage all the taxpayer consent, but they can also provide insights into what the data means, right? This is what is so key is that although we’re not creating all of these tools, we’re not trying to have feature bloat. We’re not trying to go over the top. We are an IRS data company. We’re going to show you exactly what the IRS knows. And we’re going to provide summaries because no one has the time to read 140 transcripts. So what we do is we take literally the information on the transcripts compile it into a single, easy to consume, report. And now everybody literally can use a tax status report. Those advisors can pull one sheet and get a high level big picture right now of where their clients stand with the IRS. And that again has never before been happen. Never before. Been available. And that is sort of again, it’s a blend of the the industry expertise, the and then and the technology to automate it all. That really makes it all happen.

Craig: Jeff, can you talk about which parts of Morningstar as tech are being integrated with Tax Status first and what will your clients see?

Jeff: Yeah, the thing that we’ve been again, but the fact that we power most well, firms today, they’re using Morningstar data, they’re using our API’s to power up a large part of their ecosystem today. So our first step is actually taking those API’s and serving going to those same large enterprise clients using the API’s that Charles has described here. So we’re actually focusing on the outbound powering those other applications. Financial Planning, we spent a lot of time with most of the financial planning platforms here. Because that is a huge use case. More firms. When we started to do product market fit. We were thinking about building something like this on our own a couple of years ago, right here at Morningstar. You may remember we built a software that an advisor can take a picture of their brokerage statement and immediately digitize that so that was really the training ground for us. And that’s how we do a lot of our data collection today, we are a data gathering process.

Jeff: So when we were out there talking to organizations, the largest than that we’re doing the most financial planning, they said, hey, you know, it’d be really great. I said, I know what your question is going to be. Can we turn this towards the tax documents? Because the best advisors that are doing financial planning really, really well? That’s where they’re going at. So we were looking at that, but we quickly learned all the things that Charles described, it’s a point in time and that’s some of the challenges limitations of some, let alone the OCR errors that exist. So when we were introduced to trials in the tax status team, needless to say, like we diverted our efforts elsewhere to to figure out how do we enable our well firms that are using our API’s in our data today? How do we help supplement that using the tax data? You know, back to how do we how do we help advisors serve investors better? There’s there’s not many more examples better than this. That really allows advisors to serve investors better.

Craig: And that just serve them better but save them time and gather all the fish and have everything rather than say, Oh, you forgot this and you forgot that Oh, don’t you know, it just makes the process so much simpler. And it is going to be clients want to provide this because they don’t have to do anything to do it.

Jeff: So let’s go there for just a second. So let’s put it into real numbers. And let’s say on in general, to do a really nice financial plan. It’s taking somewhere between six and eight hours. Well, what’s the value of that time? Well, let’s break it down. You have the advisor value, and you got the client value. So let’s let’s assume that your advisors making $100,000 a year so what’s their hourly rate? Right? It’s around $50 an hour? Well, let’s say that same client, their household income is around $100,000. Well, that’s also $50 an hour. So if we just say like that’s $100 An hour between the two parties right there, and it’s taking somewhere between six and eight, eight hours do that, that’s $800 worth of combined value to create a financial plan. So if you can enable a solution that allows you to get to those moments that matter faster without that amount of investment and time, by the way, probably more precision and more, you know, focusing on those things that matter and a fraction of that time, think about the return on investment. How do we help advisors potentially serve more clients, right? How do we help them grow their practices? Well, part of that is a redirection of where they’re having to spend their time today, to gather this information to act as a fiduciary to do a financial plan. If you can, you can make that a non issue. Wow. I mean, tremendous value everywhere in the ecosystem.

How Far Back Does the Data Go?

Craig: And just just as importantly as the data accuracy as you as you mentioned, that the client doesn’t have to get the latest of everything go you got the right form, but it’s not the not the latest one or you got where’s your 2021 tax trends is only 2020 All I put them in a different place are you Oh, with all the other forms or account statements that they have to drag up? Trying to get the latest one now, you know, they’re going to have it but also what about the history? How far back does this go and how useful is that?

Charles: Yeah, that’s what’s really terrific is that it’s the consent that we gather is dynamic, and what that mean by that is the scope can be dynamic, this scope, we can go back anywhere from two years all the way back to 35 years, we can go back as far as the advisor wants to go and as far as the as ultimately the taxpayer wants to to permit. So what we’ll do is we find that usually the advisors stick around 10 years because that’s often a statute of limitations on any liabilities that have come up over the last decade. However, the IRS will always allow us to go up to three years in the future on that initial consent, which means that we only have to ask for consent every three years to keep the consent active, ongoing and live to provide the real time updates. So the information so completely dynamic. And again, you don’t have to worry about the q&a and you don’t have to worry about making sure you don’t miss anything because you always get it all and you get it with respect to accuracy. You’re getting it directly from the IRS systems digitally. There is no OCR. They don’t hand us PDFs. And then we magically use OCR in the background. There’s none of that, we literally deliver everything in the latest JSON format to all of our partners through the API.

Craig: Jeff, now that you’ve partnered with tax status and seeing their capabilities and how really incredible this is, why is anything changing with the part of the other partners that Morningstar works with?

Jeff: Yeah, I’d see our clients you know, again, our clients are the enterprise well firms in the fintec wealth firms that serve those those organizations and advisors. And the short answer is, yes. Very akin to what the first time that we saw it, and when we understood the capabilities, and we started to do our due diligence, it was like, wow, and that’s the reaction we’ve seen from these firms. Is that we can’t unsee this capability. And it’s a rethink of the roadmaps that they had planned for the first half of the year. This general theme that we’ve heard, you know, and I’d say it’s a little over a dozen firms, right. So enough couple of data points to start to suggest a trend, but it’s, wow, this is pretty amazing. We need to go rethink our roadmap because this would provide tremendous value to the advisors that we serve, and the enterprise wealth management firms that they’re likely affiliated with. So it’s kind of a I can’t unsee this capability. It’s we need to think differently because and by the tail, this would power a number of other initiatives that most organizations had. We touched on earlier around decks, direct indexing, personalization, I mean, all of these things fit. You know, all of this data fits into that. Those different use cases. In one way or another and that’s why the firm’s that we’ve engaged with are starting to just think differently about what they had planned for the first half and and how do we how do they start to engage and bring this data in start to apply it to different use cases that because they see the value as well?

Craig: This is great stuff. I wish we had more time to talk about it, but we’ve run out. So Charles, please tell listeners where they can learn more information about Tax Status.

Charles: Absolutely. Thank you so much. Great. Yeah, just anyone go reach out to TaxStatus.com it’s one word, TaxStatus.com.

Craig: Awesome, guys. Thanks so much for being here. Really appreciate it.

Charles: Thank you. Take care.



The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at craig@ezragroupllc.com