Tax Target: Yes, the IRS Wants You, So Get Organized and Be Nice
To some attorneys an audit by the IRS means a paycheck; for others, pulse- racing fear. “Attorneys have been shown to be an occupation, among others, where the IRS has had success in assessing unreported income and collecting the applicable taxes, penalties and interest,” says Eva Rosenberg, an enrolled agent (able to represent taxpayers before the Internal Revenue Service) who has consulted on attorney audits. “If you’re an attorney who is not taking payroll in a C or S corporation situation, you have a 90 percent chance of audit.”
But IRS audits need not be scary.
“Educating yourself as to what to expect should you receive an IRS audit notice helps to make the process less stressful as well as less costly,” says Mitchell R. Miller, a State Bar of California-certified tax specialist in Beverly Hills who has represented attorneys subject to audits.
GOOD RECORDS KEY
The IRS published a revised attorney audit techniques guide setting forth the documentation that an IRS revenue agent may seek from attorneys under audit.
“The No. 1 way to keep your costs low is organizing your paperwork,” advises Miller. “Computer programs today make it relatively easy to keep records.”
Miller’s advice to time-starved or procrastination-prone attorneys: “Either you make the time now to prepare and maintain income and expense records or risk paying for it later. I can assure you that the IRS will verify that the deductions, exemptions and cred its reported on your returns are correct.
“If the IRS suspects unreported income, data will be reconstructed to determine whether the income you are reporting is accurate. That includes checking directly with your banks and clients. When that happens, not just your taxes but your reputation and even your license are on the line.”
Forgot to file? “Get compliant,” says Rosenberg. “Fundamentally, as an attorney you’re expected to know the law or at least hire someone who does. Nonfilers and worker misclassifications make easy targets.”
Miller concurs: “Failing to follow the tax laws has financial consequences, but may also bring disciplinary action. Bar associations can and have suspended or disbarred nonfilers.”
TEMPER’S TOLL
Audits can explode in proportion to an attorney’s explosive behavior. Rosenberg offers a mantra for attorneys who use rudeness as a strategy when dealing with IRS personnel: “Don’t be mean if you’re not clean. [Otherwise] be prepared for the IRS to turn up the heat. If your conduct is abusive, an IRS employee can report you to the IRS Office of Professional Responsibility.”
The OPR interprets and applies the ethical standards for professionals who practice before the IRS. As with bar associations, its caseload arises from complaints.
“We’ve received referrals from IRS field personnel when attorney behavior rises to the level of excessively unprofessional conduct,” says Karen L. Hawkins, OPR director.
Charged with ensuring that tax practitioners follow the standards of conduct found in IRS Circular 230, the OPR’s jurisdiction can extend to lawyers with other specialties, too.
“New section 10.8(c) of Circular 230 is of importance to any lawyer who for compensation prepares all or a substantial portion of a document pertaining to a taxpayer’s tax liability for submission to the IRS,” Hawkins explains. “For example, when a business lawyer drafts an agreement to support the treatment of a worker as an independent contractor, … that could be a document created for the purpose of being submitted to the IRS if an audit occurs. By drafting that document, the lawyer becomes subject to the OPR’s jurisdiction.”
Impermissible attorney conduct includes submitting false information to the IRS or assisting a client to violate federal tax laws.
“When IRS field personnel handling an audit or collection case, for example, verify through independent sources such as bank records that an attorney may be engaging in a practice that the IRS views as ‘gaming the system,’ ” according to Hawkins, “the attorney may be referred to the OPR, particularly if there are multiple years of noncompliance with the Internal Revenue laws involved.”
Possible sanctions can range from censure to disbarment to monetary penalties.
Susan A. Berson is a partner with the Banking & Tax Law Group of Leawood, Kan. An author of several finance books for lawyers, she may be reached at [email protected].
