Family lawyers know to engage a forensic accountant in all but the simplest cases. In addition to normal divorce related tasks like investigating finances, the accountant will sometimes be asked to perform tax services. There are occasions, however, when the client would be better served by involving a tax lawyer. Some of these are:
When income tax returns have not been filed: The knee-jerk reaction of most CPAs to file immediately is a trap for the unwary. The failure to timely file tax returns can be a civil tax or criminal tax matter. If it is a criminal act, filing the tax return later does not erase the crime. There is no red-line separating neglect from willful conduct. Only a tax lawyer can investigate and advise someone about the consequences of filing delinquent returns. An accounting trial-expert cannot be clothed in the attorney client privilege.
When prior filed returns contain serious errors or omissions: The considerations are similar to filing delinquent returns in that the amendment does not erase a crime committed although is can be offered to suggest that no crime was intended. Filing an amended tax return is an admission that the return filed was inaccurate and of the amount of understated tax on the original return. Only a tax lawyer can safely investigate and advise if returns can be amended without increasing the risk of criminal sanctions or excessive civil penalties.
When tax returns under audit contain the potential for tax fraud to be charged: This is sometimes called an “eggshell audit.” In a sense you are walking on eggshells hoping that the revenue agent will not reach that conclusion. If the agent feels there is fraud, he will suspend the audit and refer the case to the IRS Criminal Investigations Division. The taxpayer wants to cooperate as long as the case is not a criminal matter and he or she is not thereby waiving Fifth Amendment rights. A CPA should not handle this kind of audit.
An IRS audit of your client has resulted in a large proposed additional tax liability: Only a tax lawyer can properly consider the optimum procedure for appealing the disagreeable result. While a CPA can file a protest, which may or may not be appropriate, he cannot practice in the United States Tax Court and is unfamiliar with concepts of choice of venue in tax disputes.
When property is to be received in a divorce settlement after IRS tax liens have been recorded. Even if your client has filed separate income tax returns the liens can attach to his or her interest in marital property that was jointly owned. The priority of tax liens is a legal matter that should be handled by a tax lawyer.
When your client has received an IRS summons, Notice of Federal Tax Lien, Notice of Intent to Levy, Statutory Notice of Deficiency or similar formal notice from IRS. These are important procedural notices that require definite steps to preserve legal rights under the Internal Revenue Code. Only a tax lawyer can properly assess the implications of such notices and your client’s legal rights.
When an IRS Special Agent contacts your client. The Special Agent is a criminal tax investigator. He doesn’t care about collecting the tax. He job is to collect evidence that will put the client, and sometimes the lawyer as well, in jail.
When IRS contacts your client about a tax debt that he or she believes is attributable to a former spouse. Form 8857, Request for Innocent Spouse Relief, is a tricky, legal document that requires skilled legal preparation.
When the division of marital assets anticipates a transfer of money or property out of one spouse’s controlled corporation. Corporate distributions may have unintended tax consequences unless the transfer is made part of a properly structured corporate redemption or reorganization. These are complicated transactions that should be overseen by a tax lawyer.
When a QDRO, a legal document, is required. If a non-lawyer prepares the QDRO and gives it to the family lawyer who files it with the court, the family lawyer may be adopting the non-lawyer’s work product as his or her own. Using a tax lawyer to draft the QDRO eliminates that concern.
These are some matters that come up during divorce cases and are more aptly handled by a tax attorney than by the forensic accountant. If the tax lawyer feels accounting assistance is necessary, he or she will engage an accountant to assist in rendering legal advice to the client. In this way, the accountant comes under the attorney-client umbrella.
© 2007 by Robert S. Steinberg, Esquire