Why should I have an attorney prepare my taxes?
There are several situations where a tax attorney's assistance in preparing tax returns is essential.
When prior year returns are being prepared, either because of an inadvertent failure to file or because of involvement in a tax protest movement, the confidentiality in communication enjoyed by an attorney's clients may be essential. Communications made to a tax preparer, enrolled agent or CPA may not enjoy the same confidentiality, especially in a criminal prosecution context.
Also, an attorney brings a broader view to one's tax returns, especially if there are real estate or estate planning questions, the answers to which have an impact on the tax return. And there are areas in which state law governs the treatment of tax return items.
There are other areas, such as foreclosures, sales of income producing property and multiple businesses where the discipline and imagination produced by a legal education can produce a better result.
When should I have a tax attorney?
If you ever are approached by an IRS representative who identifies himself as a “special agent,” you MUST contact a tax attorney immediately. Special agents work for the IRS Criminal Investigation Division and only investigate violations of tax laws. If you do not know the capacity of an IRS employee who contacts you, ask. They must divulge that information.
There are many classifications of IRS employee. The office auditor does tax return examinations at an IRS office. The field auditor does such examinations at the site of a taxpayer's business, typically for corporate or higher income taxpayers. A revenue officer or revenue agent is charged with the collection of past due taxes and unfiled returns, and the revenue officer has tremendous levy and summons powers to carry out those duties.
When contacted by a special agent, you should politely inquire about the matter under investigation. Who is being investigated? If the answer is not forthcoming, do not be unduly concerned. However, if the special agent notifies you that you are under investigation, say nothing further, and contact a tax lawyer IMMEDIATELY.
If asked questions, your next response should be to note those questions, and respond that before attempting to answer them, you wish to consult with your tax attorney. Then, immediately contact a tax attorney. At no time should you provoke a special agent, or try to engage him in debate about the validity of the tax laws. It's also essential to obtain the name and telephone number of the special agent.
If you maintain your composure and follow the above instructions, you will minimize your exposure to criminal liability for whatever investigation you may have been caught up in.
What is tax planning and when should I do it?
Tax planning is the process of determining, before the end of a tax year, the tax consequences of your transactions. It is done with a tax professional, and the purpose is to determine first, what are those consequences, and second, if anything can be done, BEFORE the year is ended, to avoid any tax you might owe.
If any of these conditions fit your life, you should consider tax planning:
- Your business is much more prosperous than the year before.
- You plan to buy or sell real estate.
- You plan to sell an asset with a large capital gain.
- You have inherited a substantial amount of money.
- You have started a new business venture.
- You have changed the form of your business, as from a sole proprietorship to a partnership or to a corporation.
- You are unsure as to how to present a tax transaction to the IRS on your tax return.
- You know you will owe a substantial amount of tax.
- You win the lottery, or receive some other windfall.
The area of tax planning is one in which it can truly be said that an ounce of prevention is worth more than a pound of cure.
What if I haven't filed tax returns for several years?
Sometimes a major change in one's financial life or other catastrophic event can cause one to fail to file an income tax return. This is often compounded by a continued failure to file, until pressure from the tax agencies literally forces one to file the backlogged returns or lose all of one's possessions.
While the WILLFUL failure to file tax returns can constitute a criminal offense, punishable by heavy fines, jail or probation, the tax agencies are very selective in their decisions to prosecute. They usually are quite happy to accept returns, even those filed late.
However, if taxes are to be refunded, there is a three-year statute of limitations for claims for refund, four years if a California tax return is involved. And if taxes are owed, the tax agency will add penalties and interest, as they are required to do by the law.
In this situation, it is essential to contact a tax attorney knowledgeable in the preparation of prior year tax returns, who can keep your client confidences, and yet prepare the most accurate return possible. Tax law and forms change each year, and a deduction or credit appropriate for one year may be forbidden in the next.
A tax attorney is also the most qualified to keep these matters confined to a civil context and avoid criminal penalties, as well as keeping your communications confidential.
What if I've been involved in a tax protest movement?
It sometimes happens that listening to misguided advice gets one involved in a tax protest movement, causing one to fail to file an income tax return. This is often compounded by a continued failure to file, until pressure from the tax agencies literally forces one to file the backlogged returns or lose all of one's possessions. When the backlogged tax returns are filed and the tax agency has you categorized as a tax protester, your returns take on a higher profile than normal.
What if I owe taxes and can't pay them immediately?
While owing money to the Internal Revenue Service is never comfortable, we are fortunate to find the IRS more cooperative than they have been in recent memory. The first fact to recognize is that interest and penalties continue to accrue on your debt on a DAILY basis.
For instance, on a $10,000 debt, interest and penalties are accruing at the rate of more than $100 per month, so a payment in that amount will not reduce the principal at all. And if the IRS classifies you as a hardship case and temporarily stops their collection efforts, the interest and penalties continue to accrue.
There are several techniques for handling tax debts. If you can afford to pay them in equal monthly installments over a year or two, then the monthly payment plan is a good alternative. If you have family or friends from whom you can borrow, paying the IRS now and your other debts later will prove less costly in the long run.
One caution about payment plans. The IRS insists that during any such plan you keep your current taxes filed and paid, and filing a tax return with a balance due will void any payment arrangement, forcing you to renegotiate it.
One can also propose an offer in compromise. This involves the preparation of the offer, submission of complete financial statements, a history of staying current on your newly incurred taxes, an explanation of how the taxes were incurred, serious doubt that the taxes were validly assessed in the first place or that they aren't collectible in full, and a promise by you to remain current on all tax filings and payments for a 5 year period. It takes expert assistance to prepare an offer in compromise that the IRS or State will accept, and a tax lawyer should be consulted.
There are other alternatives, such as bankruptcy; a lawyer versed in both tax and bankruptcy matters should be consulted.
I just received an audit notice from the IRS. What do I do?
Resist your impulse to panic. Look the notice over carefully. Often, the IRS is just questioning one deduction that appears unusual to them.
Even if the matter appears simple, there are pitfalls that can trip up even the most careful taxpayer. Although the standard substantiation requirement for any deduction is a proof of payment combined with evidence that the payment was for an allowable deduction, there are special circumstances, such as automobile use deductions that have extra substantiation requirements.
In addition, the 1993 Clinton tax reform act added a new type of substantiation requirement for charitable deductions over $250 in which you must have substantiation of the deduction in your possession BEFORE the date of your tax return.
It is an unfortunate fact that unrepresented taxpayers get a different treatment in audits than those who hire a representative. You should consult with your preparer, show him or her your substantiation, and see if he or she are willing to appear for you. If not, or you prepared the return yourself, you should definitely seek help from an experienced tax professional before going to the first audit meeting. Then, make the decision whether or not to go to the audit, after you've determined your potential tax exposure as opposed to the cost of the representative.
What if I have to go to IRS Appeals or Tax Court?
If you are unhappy with a tax audit result and want to explore your procedural rights before a tax is assessed, it's time to consult a tax attorney. While licensed tax preparers and enrolled agents are trained in the mechanics of preparing tax returns, and CPAs add a complete understanding of accounting to the tax knowledge, only attorneys are trained in the complexities of procedure.
If a tax audit has resulted in your receipt of a 30-day "notice of tax examination changes" letter with which you disagree, your next step is IRS Appeals. IRS Appeals officers are the best trained IRS personnel, and their mission is to resolve disputes before they end up in tax court litigation. So while your explanation of your deductions may not have convinced the tax auditor, the Appeals Officer has more training and understanding of tax law, and will usually give you a fair hearing.
However, Appeals Officers are also more versed in the tax law, and will often require a cogent statement from you explaining the basis for your deductions. The same principles of representation apply here as with audits: The taxpayer who represents himself often has a fool for a client.
If you receive a "notice of deficiency," often called a 90-day letter, you must respond within that period or your procedural right to contest the assessment before payment will be lost. You must file a written petition with the Tax Court in Washington D.C., accompanied by a filing fee.
In tax court, since the matter is now in litigation, it is even more important to have legal representation, since you will be dealing with IRS attorneys who are intimately familiar with the procedural rules of the Tax Court, and your failure to follow those rules exactly may prevent you from the tax court trial you were expecting.