Why you need a tax attorney to represent you.

There are several types of licensed professionals who offer tax-related services to consumers. Some of those offering advice actually have a law or accounting degree (for example, they use the letters J.D. or M.Acc. on a business card, brochures, etc.), but may not actually be licensed as an attorney or a certified public accountant. Although many consumers fail to determine the difference between true licensed professionals and un-licensed consultants, it is actually fairly easy to do (keep reading). However, the importance of being represented by a licensed attorney is often not understood.

To understand why you need a licensed professional to help with tax and financial matters, first you have to understand what are the legal consequences if you fail to comply with tax laws. The first rule to remember is that with regard to civil penalties (e.g. fines), ignorance of the law is no excuse. Every taxpayer is presumed to know the law in full. However, with thousands of code sections in the federal tax code, and entire sections of law libraries devoted to tax “law,” it is obviously impossible for any taxpayer to know all the tax laws that apply to them. That is where tax professionals come into the picture. The average taxpayer is expected to hire a licensed tax professional to advise them in any situation where they are not sure of the law.

There are several types of tax professionals. Any licensed attorney who handles tax matters is authorized to give tax advice, and to prepare tax returns for a fee. If someone who was once an attorney loses their license to practice law for any reason, they are no longer authorized to give tax advice, unless they qualify under another license. Second, any certified public accountant who specializes in tax matters is also authorized to give tax advice and prepare tax returns. Like attorneys who practice in other fields, there are CPAs who do not handle tax matters, and are therefore not qualified to give tax advice. CPAs are also not trained to perform legal research and analyze and interpret case law precedent. Third, state laws often provide that licensed tax consultants, or licensed tax preparers can prepare income tax returns for a fee. These licensed tax consultants need not be attorneys or CPAs. A fourth category is Enrolled Agents. These are either former IRS employees (5 years minimum tax training and experience with the IRS), or they are persons who have passed an exam administered by the IRS. The exam tests knowledge of general income tax return preparation and tax principles.

Consumers should understand these differences when selecting the appropriate tax professional for their needs. In general, a tax attorney should be used when a business or individual needs someone to handle complex business transactions such as business organizations, mergers, and liquidations, estate and gift tax planning, tax dispute resolution and litigation with the IRS, and international transactions. Most people with significant income risk who are being audited by the IRS should hire a tax attorney to represent them. It can be dangerous to have the same person who prepared your return handle your audit, because under new laws, the tax return preparer can be liable for unpaid taxes and penalties under certain circumstances. This creates an incentive for a tax return preparer who might have made an error on your return, or given you bad advice, to blame the error on you during the audit, thereby insulating themselves from liability and blame. Beware tax return preparers who promise to defend you “at no extra cost” if your return is audited. This promise is difficult to keep for most tax return preparers, and when a tax due bill is levied by the IRS, they will make you pay it!

Generally, for high-income earners, self-employed, or people with complex returns, a CPA is the best choice to prepare tax returns and address questions about financial records, book keeping, accounting methodology, depreciation calculations, estimated taxes, and ordinary income tax questions. Because tax returns have become more and more complex, a CPA who understands accounting methods and principles is better trained than an attorney to prepare an income tax return.

Lastly, a licensed tax consultant or enrolled agent is best for preparing standard personal income tax returns that do not involve complicated questions of law.

As mentioned in the first paragraph, when selecting a tax professional, its important to determine the difference between a licensed professional and someone who is not. Here are some signs that you are dealing with a non-licensed person:

They do not use the term “Attorney-at-law,” “licensed attorney in the State of X,” or “CPA licensed in the State of X” on their marketing material.
They act more like an insurance salesman in their approach to dealing with you. For example, they focus on selling an idea, “structure,” or “platform” rather than listening to your needs without preconceived, cookie-cutter solutions.
They have legal and tax disclaimers stating that they do not engage in legal services or give tax advice. Usually these disclaimers are pulled out only after you have paid money to buy their ideas or structures. Always review the fine print in any written services agreement before you pay any fees.
They require you to sign an acknowledgment that you are represented by independent legal counsel “as a formality” (even when they know you are not.).
They are willing to spend more than a few minutes of their time with you without requiring a fee agreement or a retainer deposit.
They offer “finders fees” or other referral fees if you bring them customers. Most states have laws prohibiting lawyers from sharing legal fees with non-lawyers to prevent this kind of racket.

Here are some signs that you are dealing with a licensed professional:

They charge by the hour or on a fixed fee basis for giving any advice.
They use the term “attorney” or “CPA” prominently on their marketing materials and identify the state where they are licensed.
They usually hand you a written fee agreement up front stating that they are rendering legal and/or tax advice and services.
They ask you for a retainer in advance before giving any specific legal or tax advice.
Occasionally someone will come along who is unlawfully using the term “attorney” or “lawyer” on their literature even though they are not actually licensed as such. The best way to know whether you are being represented by a legitimate attorney who can protect you is to call the state bar organization where the attorney is licensed. Ask the bar for a certificate of good standing or other information on the attorney’s professional history. Some states, such as Oregon, actually have an on-line database of their licensed attorneys which makes checking credentials much faster.

Also beware of “tax consulting” firms that may list an attorney or CPA as an owner, or partner, but that dispense your tax advice through an un-licensed consultant. You must receive your actual service and advice from a licensed individual, and not just an employee of a corporation, partnership, or other business entity with ties to a licensed professional.