Jeff Judy

Jeff's Thoughts -April 2, 2008

How Do You Handle Customer Tax Returns?

Note: My guest columnist for this issue is Michael Jellison, CPA and president of BankSems, LLC. I've known Mike for many years, since my earlier corporate life, when I was in charge of credit training. I particularly relied on Mike Jellison to educate our bankers about all the valuable information that is hidden in our customers' tax returns, and he has a few pointers on that topic to share with us in this issue.

Last week, a client (let's call him Andy) asked me a question I get often: "My bank asked me for my most recent personal income tax return. I'm not crazy about giving it to them, frankly. What do they do with it? "

Andy is very aggressive in tax planning. Any legitimate means available within the tax code to reduce his tax bill will interest him. As his tax CPA, my job is to present those opportunities along with their advantages and disadvantages, within the context of Andy's aggressive approach.

Andy also knows that I train bankers on how to use income tax returns in the credit approval process. So, his question makes perfect sense.

I told Andy he's not alone in being uncomfortable about giving his tax return to the bank. Most of my clients feel that way. After all, many clients are playing a rather sophisticated game of taxation, 'one on one,' with the taxing authority. It's not a spectator sport, so it is hard to welcome an outsider into the process.

If you're using the customer's tax return in the credit process:

  1. Tell the customer how you intend to use the tax return. If your intent is to extract the cash flows from the tax return, tell them that. Explain to them that knowing their cash flows is in the best interests of both the bank and the customer. You may know this intuitively, but the customer may not.
  2. Assure the customer the bank is not interested in judging their legitimate tax planning strategies. Rather, the banker is trained to recognize these strategies and how they affect cash flow computation.

Easier said than done, however. Make certain that your skills can back up your statements. If you 'bluff' and the customer calls you on it, you may damage the relationship.

Mike's Basic Rules for Using Tax Returns

I would share with Andy the key things I tell the bankers I train about how to use tax returns:

  1. When you get the customer's tax return, do a 'no questions asked' cash flow computation as soon as possible, even though you have an internal tax return spreading center. If you're serious about the relationship, you need a feel for the customer's cash flow before you hear back from the spreading folks. It's too easy to disconnect from the cash flow when it's done by someone else. I tell all my clients to ask their bankers whether they personally attempted the cash flow calculation.
  2. When calculating your customer's cash flows, be conservative initially. When cash inflow items seem questionable on an ongoing basis, assume they are one time only. When cash outflow items seem questionable on an ongoing basis, assume they are ongoing.
  3. Don't accept a partial tax return. Sometimes, customer offer only what they think you need, with the best of intentions. A partial tax return is worthless for assessing cash flow. All, or nothing. If "nothing" is the customer's choice, rethink the relationship.
  4. Don't be impressed by the 'adjusted gross income' reported on the return, it says nothing about cash. I've never seen a loan paid back using adjusted gross income. Only cash pays off a loan.
  5. Limited liability companies using Schedule C (for operating business), or Schedule E, Page 1 (for rental real estate), require extra attention. I teach bankers how to take a closer look at the actual cash flows available in these situations.
  6. A missing Schedule K-1 is never good news in cash flow determination. Many years of experience have taught me that "it's the K-1 you don't get first time around that you really need." If a customer balks at giving you a Schedule K-1, remember that the customer would be happy to share information that helped their cash flow picture. A withheld K-1 is likely to be one that hurts their cash flow situation.

Does all this make Andy feel more comfortable about what the bank does with his tax return? "Yes, somewhat - - - but I'm still not convinced that banker will see the tax return as the artistic work it really is."

Give them time, Andy. It'll grow on them.

About Michael Jellison

Through his company, BankSems, LLC, Mike Jellison has spent the last 25 years helping banks build profitable relationships with wealthy individual customers. With BankSems training, banks save time, reduce risk, understand their customers' financial data and their customers much better and make better decisions. Mike offers standard and customized courses in tax return analysis (both individual and business) and estate planning, and training is available in both live seminar and online formats. You can get a very thorough picture of all that BankSems offers by visiting