Is Consulting a Tax Lawyer in High-Stakes IRS Tax Audits the Right Call?

February 25, 2020 by

Any correspondence from the Internal Revenue Service is likely to cause immediate anxiety. However, when the letter indicates a taxpayer is under audit that anxiety understandably increases. Taxpayers may wonder if they should try to handle it on their own or call their CPA or other return preparer about handling the audit. While frequently overlooked, speaking with a tax lawyer before doing anything often is the best option.

Handling the Audit on Your Own

It is generally not a good idea to handle tax matters involving the IRS on your own. The Internal Revenue Code is a complicated statutory scheme unfamiliar to non-tax professionals. Also, the IRS itself is a labyrinth of multiple offices, procedures, and deadlines difficult to navigate without help. The results of making wrong choices along the way can be catastrophic both legally and financially. Missing deadlines can cause taxpayers to lose rights to challenge adjustments or incur additional penalties.

Relying on a CPA or Other Financial Advisor

Relying solely on your CPA or other financial advisor, at times, may be a reasonable option. However, in some cases the issues or amounts involved can mean the financial ruin of the individual or business and may warrant additional protections. Also, with the IRS publicly declaring the need for more criminal investigations and referrals, the stakes could mean more than financial consequences. In these situations, it can be a devastating mistake not to seek the advice, and possibly representation, by a qualified tax lawyer.

A tax lawyer offers additional confidentiality for sensitive issues, an independent evaluation of current tax positions, and the understanding and skill to argue legal issues that may ultimately resolve the IRS examination.

The Benefits of Consulting with a Tax Lawyer

First, tax lawyers offer a level of confidentiality that CPAs and other financial advisors cannot offer. In sensitive tax audits, especially anything with potential criminal implications, a taxpayer needs to be able to speak freely about all the details involved so that all options can be discussed. However, since conversations with a CPA are often not privileged – especially for criminal matters – these conversations can potentially create problems for taxpayers. Taxpayers, mistaken about what is believed to be protected information, can inadvertently disclose sensitive information to the CPA that doesn’t qualify as privileged and confidential. The other option is for a taxpayer to hold back regarding the most sensitive information, for fear of disclosure, which doesn’t help with finding a workable solution.

However, the CPA’s knowledge and experience can often be used in conjunction with legal representation, without sacrificing confidentiality, by using a Kovel letter. Named for a famous tax case, United States v. Kovel, 26 F.2d 918 (2d Cir. 1961), the letter can allow the CPA’s work to be done at the attorney’s direction and can bring that work under the attorney-client and work product privileges. The CPA can prepare the necessary calculations, reports, and other analysis related to the taxpayer’s financial and tax reporting and discuss significant issues and matters in confidence.

Second, the CPA’s greatest asset (i.e. intimate knowledge with the taxpayer’s finances and reporting) can sometimes be a detriment once the IRS starts examining the return. The CPA may defend the position recommended and researched to the detriment of the taxpayer in an effort to support the previous work. Potentially more damaging is the CPA blaming the taxpayer for failure to provide proper or sufficient information. Even if arguably true, this statement may provide the IRS with a reason for additional penalties that didn’t exist before. It is usually in the taxpayer’s best interest to have an independent tax professional, like a tax lawyer, review disputed tax positions and provide an independent view of the merits and risks of continued pursuit of certain claims.

Consulting a qualified tax lawyer, at the start of the process, can allow a taxpayer to present all available arguments and can help end the dispute as quickly as possible.
Further, because a CPA is likely to have all the taxpayer’s information immediately available, the CPA may over-disclose information to the IRS. Also, a CPA may turn over a stack of documents supporting the information on the return without considering additional explanations that may be required. Some information, on its face, may answer questions but others may require factual or legal explanations to avoid additional inquiry. Defending a tax audit is already a stressful and potentially expensive exercise. Increasing the inquiry to additional tax years or adding additional issues by failing to properly present information can be a costly mistake.

Finally, it is important to understand that some tax disputes cannot be resolved by merely providing documentation. Some tax disputes are only won through an analysis and persuasive argument of the legal issues involved. Having qualified tax counsel involved, at the beginning of the audit, provides the legal analysis that may resolve the dispute at the administrative level. This can potentially save the additional costs of defending tax positions in the U.S. Tax Court or Federal District Courts. Even if court action is required, the case will be better positioned for a successful result if a tax attorney has prepared and supported the necessary legal arguments throughout the audit process.

Prompt Resolution is the Goal

The goal of every taxpayer facing an IRS examination is to resolve the issues with the least financial or other negative impact. An IRS examination is an unwanted disruption to a taxpayer’s life or business that operates as a negative distraction until resolved. Consulting a qualified tax lawyer, at the start of the process, can allow a taxpayer to present all available arguments and can help end the dispute as quickly as possible.

 

Brown Fox is a business boutique law firm, primarily focused on serving businesses, executives, and entrepreneurs in the practice areas most common to their daily business needs: corporate, labor and employment, intellectual property, litigation and tax. The firm’s representative clientele includes start-ups; partnerships; small to mid-size, private Texas companies; publicly traded companies; international corporations; and C-level executives. Additionally, the firm represents numerous cities and governmental entities in governmental and municipal matters. Learn more about Brown Fox by clicking here.

Joshua D. Smeltzer
joshua@brownfoxlaw.com

Joshua D. Smeltzer is a tax attorney with over fifteen years of experience representing individuals, corporations, and formerly the U.S. Government in a variety of tax matters. Mr. Smeltzer uses the knowledge gained inside the government to represent and advise clients on potential tax risks, navigating the IRS labyrinth during audit examinations, arguing at the IRS Office of Appeals, and litigation in the federal courts. He also advises individual and corporate clients on a variety of tax compliance issues in an effort to avoid tax disputes from occurring.

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