Dealing with tax issues can be complex, and most people need the expertise of tax professionals to ensure everything is handled properly.
CPAs and tax attorneys have closely related functions which sometimes overlap, but they are not the same. Some situations can be handled either by one or the other, but in some cases, you may require the expertise of both. Read on to discover the functions each type of tax professional can perform for you, as well as the situations where having both a CPA and a tax attorney on your team would be most beneficial.
Most people and businesses will use a CPA if they need help preparing their taxes. Some companies may have one or more CPAs as employees, serving various functions from tax preparation to internal auditing. However, smaller businesses and individuals often hire outside accountants to help with financial matters when necessary. Of course, not all CPAs deal with taxes, but many do.
If a CPA discovers a mistake on a previously filed tax return, their immediate reaction may be to file an amended tax return on behalf of their client. But this could be the wrong step, as it has the potential to be construed as an admission of guilt. If the mistake is serious enough, rather than filing an amended return right away, your CPA should alert you and you can then consult with a tax attorney about the best course of action. There may be other legal consequences and options to filing an amended return.
While tax attorneys are well-versed in the tax code and might be qualified to prepare your taxes, they usually do not. Unlike a CPA, a tax attorney’s focus is not on how to maximize deductions; instead, they are hired for their expertise in the fine details of the tax code and an understanding of the underlying business transaction. An individual might need help with setting up a trust, estate planning, investments, tax disputes, and business-related tax law. You might also seek a tax attorney's advice if you are starting a business and want advice about the most desirable structure from a taxation perspective. You may also want to consult a tax attorney to determine how to report a transaction on your tax return.
In cases where there is a dispute over the legality of a previously filed tax return, or where you are being audited for a previously filed tax return, you will most likely need a tax attorney to help you work with the IRS to resolve the tax or legal issue. As in the previously mentioned example, you may have originally had your taxes prepared by a CPA who spotted a mistake and advised you to file an amended return. A tax attorney can assist you with the case and determine the safest course of action to resolve the matter and minimize the risk of an audit. They can help you reduce or avoid IRS penalties if you paid too little, or help you plead your case so you get a refund for the amount you overpaid. If you owe a large amount in back taxes, a tax attorney may be able to negotiate a settlement with the IRS for an amount less than what you owe.
Tax attorneys are experienced negotiators. They are accustomed to dealing with the IRS and have knowledge of other tax cases with precedents that can be applied to your case. This means they are the right professional to call for representation if the IRS forces you to challenge the audit in court, or if you plan to sue the IRS. In addition to their legal expertise, a tax attorney offers another major benefit: attorney-client confidentiality. A CPA can be compelled to testify against you in a court case, but your tax attorney cannot – unless they have waived the right to confidentiality. If you are under investigation by the IRS, or have committed a tax-related crime, you will need to retain a tax attorney to protect your legal rights and minimize the risk of criminal exposure.
Do not hesitate to consult a tax attorney if you think you might need one. They can save you time and money, and in some serious cases of tax evasion or fraud, they may help you avoid a criminal conviction.
In some situations, it is in your best interest to hire both a CPA and a tax attorney and use their combined areas of expertise.
If a tax attorney signs your taxes as the official preparer, they waive the right to attorney-client confidentiality regarding any information contained in the return. This is because they are providing an accounting opinion rather than a legal opinion. If the IRS reviews your tax return, believes you have committed tax fraud or evasion, and pursues a criminal case against you and may investigate your tax preparer for potential wrongdoing. This might compel your tax preparer to testify against you.
Another instance when you need both a CPA and a tax attorney is if you and your CPA are considering a tax position that could be challenged by the IRS, perhaps related to an area of the tax code that the IRS will aggressively challenge. Seeking a written legal opinion from a tax attorney before you file a tax return may be prudent if the IRS calls upon you to defend your position later.
The best way to avoid these conflicts is to use both a CPA and a tax attorney. Have your tax attorney advise you about the relevant aspects of your business, while using a CPA to prepare your documents, but making sure to maintain the distinction between their roles. Don’t take any chances with your personal or company financials. When there’s so much at stake, it’s always better to be safe and certain as to your risks.