Most of the time, taxpayers can handle personal income taxes without too much trouble but there are times when a tax attorney can be either a handy resource or a required partner.
Both the IRS and the California Franchise Tax Board (FTB) can get quite aggressive when the rules are not followed, even when taxpayers are doing their best.
Sometimes, taxpayers make a mistake and have difficulty making it right on their own. Sometimes, they make the mistake worse by ignoring it. Then there are those who rely on a CPA or tax preparer to help them out of trouble, which is not the best idea when one is dealing with the IRS or FTB in a case that may wind up in litigation.
We will take a look at some differences between the IRS and FTB, why you might need a tax attorney, and when to hire one.
The IRS vs. The FTB
Both government organizations administer the income tax code; the IRS handles federal taxes and the Franchise Tax Board handles California state taxes. Because it has fewer resources, the FTB will piggyback off results of an IRS audit but focus on areas where the margin of taxpayer error is higher:
- Transactions including capital gains and losses
- 1031 exchanges
Beyond that, the FTB has a tendency to be more aggressive in its collection tactics. It will use information from local records unavailable to the IRS such as:
- Department of Motor Vehicles
- Property tax records
- Other state specific disclosures
In fact, the FTB typically requires greater disclosures of sensitive financial information on its financial statements than the IRS.
The deadlines are more demanding and the FTB is slower to resolve issues due to more levels of administration (Who would have thought a state agency could outdo the federal government for bureaucracy?) and more hurdles to leap.
It can take over a year to get a California state tax settlement approved.
Two Big Reasons to Hire a Tax Attorney
One of the most helpful advantages to hiring a tax attorney instead of a CPA is the attorney-client privilege inherent in the relationship. Your tax attorney cannot be asked to testify against you in legal proceedings.
Neither a CPA nor a tax preparer can provide that exemption.
The other reason to hire a tax attorney is to have the best guidance in making the right decisions. A tax attorney has the experience to achieve a tax settlement, not something the person on the street does every day.
Only a knowledgeable tax lawyer knows about all the programs you qualify for and can help you determine which the best is for you.
A CPA may be familiar with a few programs and, even then, will not necessarily know all the provisions of each program. Tax code and tax laws are complex and often change annually. If you are in the IRS or FTB collections process, the wrong advice can cost you dearly.
When to Hire an Attorney
Starting where the need is less acute, the following circumstances would be a good starting point for having a tax attorney helping you out.
- Figuring out your business and self-employment taxes
- If you have a high tax liability or assets in need of special protection
- When the IRS is ignoring your attempts to correct a mistake
Business and self-employment taxes add layers of complexity to your typical income tax process. A tax attorney can guide you through confusing IRS documents; there are almost 2000 different IRS forms and publications to wade through, many of them not written in simple language.
Businesses and people are taxed differently, which is how many taxpayers get into trouble. A tax attorney can also help you find ways to lower your tax bill in the future.
If you owe over $100,000 to the IRS, your case can be placed in the Large Dollar Unit for collection. This unit has the most experienced agents working for it; they are aggressive and they close cases fast.
A tax attorney can keep up with them and protect any businesses you have going. If you have potential criminal issues coming into the investigation, you definitely want a lawyer.
The IRS is not known for being overly responsive to taxpayers unless those taxpayers have money to hand over. If the IRS or FTB are ignoring your letters, a tax attorney can draft a letter that will get their attention. Also, most tax lawyers have direct contact information within the agencies and can settle things over the phone.
Now to look into times when hiring an experienced tax attorney is essential to your financial health.
If you are notified of an audit you should hire an attorney immediately. Most disputes are about one or more tax returns but there is a chance you could say or do something that causes the investigation to go sour.
An attorney can:
- Communicate with the tax agency on your behalf
- Be present during an audit
- Help negotiate a settlement
- Make sure you do not overpay
If you ignore notifications from the tax agencies, you could be charged with tax evasion or other criminal charges. A lawyer can help you either avoid being charged or defend you if charges are leveled against you.
Offers in Compromise
Having an attorney help you with an Offer in Compromise increases the chances the tax agency will accept it. There are many hoops to jump through to meet the stringent requirements for acceptance:
- You are unable to pay the full amount either at once or in installments.
- There is doubt about the amount of liability.
- Exceptional circumstances show payment in full would cause extreme financial hardship, would be unfair or would be inequitable.
The IRS can take up to two years to accept or reject your Offer in Compromise. You want it to be as convincing as possible.
Tax Evasion or Tax Fraud Charges
Now we move into criminal territory. A lawyer is essential in these situations. These charges are leveled at those who:
- Refuse to file tax returns
- Pay their taxes
- Reveal all their sources of income
The penalties for tax fraud and evasion include:
- Interest on taxes owed
- Prosecution fees
- Public humiliation
If tax agents show up at your door with questions, an investigation is open and anything you say can be used against you.
Removing Tax Liens and Levies
The IRS and FTB can issue liens against your personal or real property as collateral against your tax debt payments. An experienced tax attorney can help you negotiate installment payment plans, Offers in Compromise, and other remedies for your tax liability.
The IRS and FTB can make mistakes, so if you think you have had a lien placed in error, a tax attorney can help you prove it.
There are many situations where a tax lawyer is a genuine requirement. Tax laws and codes, whether at the state or federal level, are too complicated for most laypeople and they change too often for many tax professionals to keep up with.
Whether you just need someone to help you with your business income taxes or you have been charged with tax fraud, hire a tax attorney to help you out.
Frequently Asked Questions About Tax Attorneys
The only people who like taxes are those who collect them. Everyone else not only dislikes dealing with taxes, but they can be outright afraid of the tax agencies, not without reason.
There are a few questions that are always on the minds of those who are dealing with tax problems, including whether to hire a tax attorney or a CPA, when to hire a tax attorney, and how to find a good one.
We hope to help answer those questions here, so you know what to do if you find yourself in a “taxing” situation.
What Is the Difference Between a Tax Attorney and a CPA?
By offering a comparison between the two professions, it is by no means intended to disparage CPAs, whom we pride ourselves in having a good working relationship with. Rather, we firmly believe that people are a function of what they do and think the differences between the two should be highlighted.
A Certified Public Accountant (CPA) knows the ins and outs of financial documentation, planning, and the implications of various financial decisions, including those dealing with taxes. They are trained in maintaining business and financial records. Their focus is on compliance.
To practice, a CPA must:
- Put in substantial hours of study in accounting
- Pass a rigorous, four-part accounting exam
Not all CPAs prepare taxes, and so lack the experience or knowledge of the frequently changing tax codes.
You should hire a CPA for overall financial and tax strategy for:
- Your personal business
- Out-of-state tax returns
- Financial estate planning
- Asset management
- External audits to review and validate corporate financial accounting
A CPA can stand with you in front of the IRS, during an audit, and other situations with the IRS, but there is one thing a CPA cannot provide: attorney-client privilege.
A tax attorney is a lawyer specializing in the complex field of tax law. Tax lawyers learn every tiny piece of the IRS tax code, especially in areas such as:
- Estate planning
- Tax disputes
- Business tax law such as payroll tax issues and international business tax laws
A tax attorney must earn a JD or Juris Doctorate and pass the state bar exam for licensing. Some may continue their education and earn a Master of Laws in taxation or certification as a public accountant (CPA).
An attorney can represent clients before the IRS for audits, collections and appeals but so can a CPA. The big difference here and one you need to keep in mind is that a tax lawyer can provide attorney-client privilege, meaning your tax lawyer is exempt from being compelled to testify against you in a court of law.
A CPA cannot offer attorney-client privilege unless acting under the direction of an attorney to provide relevant information to the client. Otherwise, a CPA can testify against you even while working for you.
Tax attorneys are more familiar with the various tax settlement programs than most CPAs and know how to select the best program for your case and how to get you qualified for that program.
How Do I Know When to Hire a Tax Attorney?
If you are having a problem with the IRS or just questions and concerns, you need to hire a tax attorney. You want to locate and hire a good tax attorney as soon as possible because if you suspect you may need one, you probably do.
Do not wait until the last minute.
One area a tax attorney can help is if the IRS is not responding to your attempts to correct a mistake. An attorney can:
- Draft letters to the IRS that are guaranteed to get their attention
- Act with direct information about necessary branches of the IRS such as where specific matters should be handled
- Negotiate over the phone to put an end to the communication issue
If you are planning to itemize your deductions instead of taking the standard deduction, it would be a good idea to use a tax lawyer.
If you own a taxable estate, need to make complex estate planning strategies, or have reason to file an estate tax return, get a tax attorney.
Starting a business means determining the structure and tax activities surrounding the business. A tax attorney can help you avoid any pitfalls and save on your taxes. You especially want a tax lawyer if you are conducting international business and need to develop contracts and take care of taxes and other legal matters.
You definitely need a good tax attorney if:
- You plan to bring a suit against the IRS
- The IRS is bringing suit against you
- You need an independent review of your case before the U.S. Tax Court
- Are under investigation for tax fraud or tax evasion
- Are under criminal investigation by the IRS
Another important time to hire a tax attorney is when you receive an audit notice from the IRS. An attorney can communicate with the IRS on your behalf, be present during audits, help negotiate settlements, and keep you from overpaying as a result of the audit. Also, having a lawyer on your side can relieve a lot of stress.
Other reasons to hire a tax attorney include helping to:
- File an appeal of a tax court decision
- Take advantage of tax credits
- Requesting an Offer in Compromise or other tax settlement program or strategy
Anytime you feel in over your head with the IRS is a good time to hire a tax attorney. Tax law is complicated and constantly changing. Part of a tax attorney’s duty is to keep up with it, so you are protected.
How Do I Choose a Good Tax Attorney?
Your best source is word of mouth. Ask around for an experienced tax attorney and check the internet for client/customer reviews. When you interview your choice, ask for additional references, particularly from clients who had the same issue as yours.
Run, do not walk, if a lawyer tries the hard sell or asks you for all money up front. A retainer is fine, but you should not pay the entire amount right away.
Look for experience:
- How long has the firm been in practice?
- Has the firm handled cases similar to yours?
- Ask for an assessment with a potential plan of action.
- Look for the credentials listed under What Is the Difference Between a Tax Attorney and a CPA
- Find out if the firm is active in a professional legal association such as the Tax Law Association
Before finalizing your choice, ask how the firm bills. Is it hourly or does it charge a flat rate for cases like yours? See if you can get an estimate of your legal fees.
The tax lawyer you have in mind has all of the right credentials and testimonials. All of your questions have been answered. Should you hire this tax attorney?
If you can afford the fees, can agree to the type of potential solution offered, and have confidence in the tax attorney’s ability to help you, then yes. Yes, you should.
What Types of Matters Should You Retain an IRS Attorney for?
The decision to hire an IRS attorney is one that should not be taken lightly. Attorneys can be extremely cost-prohibitive and complicate matters unnecessarily when they can be resolved relatively easily.
In general, I am a big proponent of self-help legal solutions, especially given the variety of informational material that can be found online (including much of what I have published on the subject of taxation).
However, there are certain types of matters where I believe an IRS attorney is not only a benefit, but much of the time is an absolute necessity. Here is a quick checklist of the matters that I believe that an IRS attorney should be hired for.
1. Anything With Possible Criminal Consequences
Let us be entirely honest for a second. Criminal charges and criminal investigations can destroy lives and carry very serious consequences. Anyone who has spent time in prison can fill you in on the realities of prison life, but criminal charges often have a much more punitive effect that many people fail to consider.
Social stigma from friends and family is often an unexpected consequence as many people harbor hostility toward criminal actions and those who commit them. Criminal charges can also carry additional civil penalties (well beyond what is typical for civil tax matters). These are just some examples of the damage that even just a criminal charge can bring (whether or not a successful conviction is ultimately obtained).
My point is that when anything potentially criminal arises, even if you are just a potential witness to the matter, you need a seasoned IRS attorney to represent your interests against the prosecuting agency.
Many prosecutors are nice people, but tend to have tunnel vision when going after a potential criminal. Some may stop short of nothing to obtain a conviction.
This is one instance where you always need an IRS attorney watching your back.
2. Technical Tax Matters
There are many parts of an IRS attorney’s job that are seemingly routine. Most collection matters are handled in roughly the same way (even though each taxpayer’s circumstances and goals are different). Most audits follow the same pattern and, with proper preparation, an IRS attorney can work to mitigate the damage.
Where we earn our stripes though is on technical tax matters, which put our full skill set to the test. What is a technical tax issue? That is a difficult question to answer, but the best way I would describe it are matters that require the professional judgment of an IRS attorney to resolve properly.
There are numerous topics that I cover here on the blog that I think professional judgment is not necessary, but there are many topics that are impossible to give a straight answer because of the fact dependency of the situation. Anything that possesses this “fact dependency” as I would call it, you are going to want to bring in an attorney to consult with.
Even if you do not retain the services of that attorney, an expert point of view when dealing with technical tax matters can go a long way toward understanding issues and resolving them in an appropriate manner.
3. Independent Contractor Issues
This category piggybacks off of technical tax matters, as matters that involve independent contractors can often be the most costly and the most difficult for taxpayers to resolve.
For example, even IRS attorneys can be heavily tested in an independent contractor audit. When performing an independent contractor audit, the IRS and many state revenue agencies will use a multi-factor test with as many as 20 different variables. The variable (pardon the pun) nature of an independent contractor audit is something that overwhelms many practitioners, let alone an individual taxpayer.
Most IRS attorneys are extremely familiar with this multi-factor test and can help you strategize in an audit. In addition, both independent contractor audits and IRS collection issues are often high-dollar cases if they involve multiple attorneys and multiple years.
It is best to not leave anything to chance and to retain an IRS attorney to represent you in your independent contractor matter.
4. Foreign Tax Matters
Do yourself a favor: consider hiring or at least consulting with an IRS attorney for any foreign tax issue. Foreign tax issues possess many complexities that IRS attorneys are able to walk you through, but that are not likely apparent upon first glance.
For example, your foreign tax matter will likely have tax consequences in the United States as well in the foreign country that is involved. IRS attorneys can help you with both structuring any foreign tax issue (in order to minimize your potential tax liability) and with any reporting requirements concerning your foreign tax issue that you may otherwise be unfamiliar with.
Also, as any IRS attorney will tell you, foreign taxes and foreign assets are hot topics within the IRS because of their potential for abuse. As such, IRS attorneys are highly recommended for dealing with foreign tax matters properly.
5. Collections Matters That Concern Going Corporations and Businesses
One of my favorite sayings of IRS revenue officers that I know (which you will find throughout my website) is that the IRS is not a bank. As such, when a balance due is owed to the IRS, the IRS will often take aggressive action against a taxpayer to secure payment.
With an individual taxpayer, there are certain limitations on these actions as most taxpayers who have balances due do not have a plethora of assets for the IRS to seize or secure. However, this changes with business taxpayers, particularly those that are still in business.
Going businesses make particularly attractive targets for the IRS because they: 1) usually have a variety of business assets that the IRS can seize to satisfy the tax liability and 2) going businesses generate cash which can also be used to pay the liability.
As such, this is another area where I would recommend that the taxpayer hire an IRS attorney. IRS attorneys can often make the difference, particularly in matters where the IRS has been particularly aggressive.
In conclusion, these are just some of the matters where it is helpful to seek the assistance of an IRS attorney to resolve your matter. IRS attorneys can utilize their knowledge and expertise for the benefit of the taxpayer, oftentimes saving thousands of dollars in additional tax owed,
As with all decisions, you must be careful to weigh the cost/benefit of representation, but these are all instances where I would strongly recommend hiring an IRS attorney.