Tax Accounting vs Tax Law Picking the Right One for You. CPA has more expertise on tax prep, while an attorney can provide legal advice in adversity.

NO BRIGHT RED BETWEEN Tax Accounting vs Tax Law LAW LINE BUT GREAT RISK

For the CPA CROSSING (And for the unsuspecting client)

A. Purpose of Discussion: Map the sea in which the tax CPA practices that one will avoid sailing into a perfect storm.

B.   Introduction: Interrelationship of Tax Accounting vs Tax Law – Some history:

1. Visionary Legend:  Jacob Kay Lasser (deceased 1957)[i], prolific writer of tax books including “Your Income Tax,” also headed J.K. Lasser & Co. a now defunct CPA firm in NYC that had listed as partners some of the most brilliant tax minds of the 1950s and 1960s, including: Berle Abbin (estate & gift),  David B. Chase and Jacquin Bierman (said to have coined term estate planning and helped found the NYU Tax Institute) who passed away at 95 on Miami Beach in 2010..

1. Chase & Bierman: law firm including named members of the CPA firm located down the hall from the CPA firm offices.  They’d walk clients up and down the hall.
2. Led to conflicts with several state bars but inherent in JK Lasser/ Chase & Beirman is recognition that tax accounting cannot easily be separated from tax law.
3. Firm expanded nationally in 1970s and eventually grew itself out of competency and out of business.
4. Today dual practice permitted and FL BOA has indicated it will follow the guidelines contained in Florida Bar Ethics Department Information Packet “Ancillary and Other Business Arrangements” regarding an Tax Accounting vs Tax Law when attorney-CPA dual non-audit practice conducted in the same office building and that a dual practitioner may use the attorney-CPA designation in advertising.

2. Author’s initial exposure to overlap – 5^th Amendment Returns: In 1980s tax lawyers working with criminal defense attorneys with clients who wanted to report illegal income to be protected from criminal tax prosecution without admitting illegal activities or waiving privileges.

1.  Solution: 5^th Amendment Tax Return. Process developed to preserve attorney client privilege and client 5^th Amendment privilege as to occupation and source of income and have return accepted by IRS as return for purposes of running of statute of limitations.

2.  Lesson learned: not every task involving Tax Accounting vs Tax Law or IRS practice in general should be undertaken by the CPA alone without the involvement of a tax lawyer. Often tax lawyer and CPA must work as a team on a particular matter.

3.  Tax Accounting vs Tax Law: Erases distinction between tax accounting and tax law.  Tax advice involves interpreting tax statutes and reading and understanding court decisions on tax controversies.  Tax advice involves applying tax law to a client’s particular situation.  The practice of law has been defined to include, “The giving of advice and performance of services (that) affect important rights of a person under the law.”[ii]

4. Tax accounting: Some courts have referred to Tax accounting or  tax preparation as a “scrivener’s function” (a ludicrous statement as many tax returns are book-length and touch on numerous interconnected sections of a labyrinth tax code) in holding that communication to a tax preparer, whether CPA or lawyer, of information to be disclosed in a tax return is not protected by the attorney-client privilege. These courts were focused on preserving to the legal profession a privilege dating to Roman times and were not focused on the unauthorized practice of law and other consequences of that act.  The more meritorious position adopted by many courts is that for tax return information the privilege is waived because the information is imparted with disclosure not privacy in mind. Still, putting privilege aside, every entry on tax return represents an interpretation and/ or opinion about the applicability of one or more IRC Sections.  These determinations including elections necessarily involve taxpayer rights and are integrated into a document, sometimes exceeding 100 pages, signed under express penalties of perjury that creates a federal tax lien four unpaid taxes on all of the filer’s assets. Certainly, preparing such a document is more than a ministerial function and includes tax advice normally associated with the practice of law because giving such advice will “affect important rights of a person under the law.”[iii]

5. Tax Accounting vs Tax Law: On the other hand Tax accounting has been defined as: “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character, and interpreting the results thereof;”[iv] also, as “a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions—in making reasoned choices among alternative courses of action.” [v]

C. The Playing field

1. Circular 230:   CPAs, lawyers and others are authorized to practice before IRS.[vi]

“all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing documents; filing documents; corresponding and communicating with the Internal Revenue Service; rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and representing a client at conferences, hearings, and meetings.”

2. Federal Preemption: Some CPAs have said to me, “in the tax area we can practice law.”  This is a dangerously incorrect belief.  State courts cannot restrict a CPA’s right practice before IRS to the extent that the CPA’s activities “are necessary for the accomplishment of the federal objectives (emphasis added).”[vii]  The U.S. Supreme court acknowledged that similar activities before the U.S. Patent Office constituted the practice of law (i.e., giving advice, rendering opinions on patentability or infringement of patents and preparing legal documents for applicants). The court noted, however, that state courts maintain control over the practice of law outside of those boundaries.  Similarly, Circular 230 issues this caveat:  “Nothing in the regulations in this part may be construed as authorizing persons not members of the bar to practice law.”[viii]  CPAs, lawyers and others are thus authorized to practice before IRS and it is the IRS and not the State and Federal Bars that authorizes most aspects of tax practice, i.e., representative dealings with the agency.  So authorized, a CPA may represent a taxpayer in any matter before the IRS, including appeals but excluding Court representation unless admitted to the Tax Court[ix], a particular District Court, Court of Appeals, Court of Claims or U.S. Supreme Court. Although the AICPA does not license tax practitioners, it has issued standards for tax practice applying to its members.

Tax Accounting vs Tax Law

1. Role of practical necessity:  That tax advice and Tax accounting involve aspects of tax law becomes secondary to the practical reality that lawyers could not possibly handle the millions of annual tax return filings.  Moreover, many aspects of tax law are intermingled with computational and accounting concepts (e.g. methods of accounting) more in line with an accountant’s training and skill-set than with a lawyer’s. Thus, law firms would have had to hire accountants to deal with the accounting side of tax law; instead, accounting firms have hired lawyers to deal with the legal side.
2. Peat Marwick Mitchell & Co (NYC) in 1970: Tax department of over 100 of which about ½ were attorney-CPAs.  My partner was a former justice department special tax litigator.
3. Peat Marwick Mitchell in Miami (1972) About 12 in tax department of which all but 2 were attorney-CPAs.
4. Today: Big Four employ thousands of attorney-CPAs and attorneys who are not CPAs.[xi]

Gray zone in Tax Accounting vs Tax Law

Notwithstanding this broad panorama of tax practice terrain, a large portion of the tax arena fails within a broad gray zone covering both tax accounting and tax law.  There is no bright red line demarking where one profession bleeds into the other.  Thus, tax is practiced in a gray zone.  Some gray areas for the CPA fall into a more hazardous danger zone, involving matters more closely aligned with law practice than tax accounting and potentially posing serious problems for both CPA and client, if traversed unwittingly.

The question for every practitioner, lawyer or CPA, is not only “what tax engagements or aspects of a tax engagement I may legally undertake; but which engagements or aspects I should professionally and ethically undertake.” Be mindful of Aristotle’s admonition: “What lies in our power to do, lies in our power not to do.”  On a somewhat less elevated level a recent Pickles:

Opal: Earl, today would be a good day for you to clean up the garage.

Earl: That’s a lot of work.

Opal: Whether a job is big or small, do it right or not at all.

Earl: I love that quote.

Opal: I hope it helps

Earl: Oh, it does.

Scene Earl relaxing on the sofa with dog “I never realized I had a choice.”

Similarly, Circular 230 empowers you to do certain acts that are normally associated with the practice of law; you have to make the professional choice about how far to go with that power.  I do not presume to tell CPAs how to conduct tax practice or where to draw the line between tax accounting and tax law; that is for each practitioner to decide; and, involves, not only questions of ethics and competency, but also of risk management.  My objective is to raise awareness about the ambiguous nature of tax practice and of those areas I believe to fall in the danger zone that the CPA can make informed decisions about how far to carry the ball in client representation.  Some matters in the danger zone are:

1. When client may later want communication to be privileged and not available to IRS or others.
2. The CPA’s tax advice privilege under Section 7525 evanesces if a matter turns criminal.[xii] Thus, so called “eggshell audits” should never be handled by a CPA alone.
3. Client confidentiality: Remember: Only client can waive the 7525 privilege and CPA-client confidentiality privilege under Florida law.[xiii] Thus, the CPA should, when presented with request for documents or to answer questions, should always contact the client to request permission to discuss or disclose confidential matters. Otherwise, CPA should not disclose anything absent a valid court order or subpoena.
4. When client has personal papers that should remain private and not subject to discovery by IRS or, if not themselves privileged, when the “act of production” itself would be incriminating.  Giving papers to a CPA may waive whatever Fifth Amendment Privilege might exist.
5. When work product of the CPA should remain private and not be discoverable.

i.     Forensic expert accountant problem: as expert CPA is hired to give testimony in open court; and, all that goes into opinions is fair game for ultimate revelation during discovery, at trial or in criminal legal proceedings. This danger is not altered by changes in Amended Rule 26, Federal Rules of Civil Procedure in federal courts making drafts of expert reports, communications with counsel and information not considered by expert, non-discoverable in civil litigation. This is a discovery rule, not a privilege and will not prevent introduction of such material into evidence at trial or revelation in a criminal case. Moreover, it can be near impossible to separate what an expert used in his opinion from what he did not use. Subjectively, doesn’t everything an expert hears and sees go into the brain to form part of the decision making process?[xiv] The wise course is to use a separate consultant from the expert.

ii.     What should the expert / consultant do to try to protect his client?

1. When federal law depends in part on an interpretation of state law, giving advice on the state law aspect of the problem is practicing law that may not be covered by the federal preemption.  For example:
2. CDP hearing on whether levy attaches to:
   1. Alleged nominee interest[xv]
   2. Alleged fraudulent transfer
   3. Alleged resultant trust
   4. Determining if a stream of payments to a former spouse will end on the death of the payee spouse, a requirement for the payment to be treated as alimony.[xvi]  Often this is a non-issue because the agreement so states or states the payment is spousal support which ends at death under Florida law.  But, other payments such as mortgage payments of principal, interest, taxes and insurance require state law analysis.[xvii]
   5. Determining income versus principal under state law.[xviii]  Many items are straightforward but some receipts such as partial liquidating distributions[xix] may require a broader state law analysis. Thus, UPIA is a landmine for an accountant who wings it without seeking legal guidance on application of Florida UPIA.
   6. Applicability and priority of the federal tax lien regarding property interests.[xx]
      1. When tax advice depends in part on interpretation of foreign law, for example:
      2. Determining characteristics of foreign entity so as to characterize under U.S. law as trust or association etc.[xxi]
      3. Determination whether foreign entity is a corporation entitled to treaty benefits for purposes of definition of applying tax rate on qualified dividends.[xxii]
         1. Choice of Forum: when action by CPA will lock client into one forum and rule out others (US District Court, Court of Claims and Bankruptcy Court). For example,
         2. Bankruptcy court can be forum for determination of the debtor’s tax liabilities.[xxiii]
         3. Form 8857 Request for Innocent Spouse Relief – denial of status – appeal is to Tax Court. Decision is and adjudication of issue (Res judicata). You only get one bite at apple. A spouse who is jury-sympathetic and can pay the tax up-front may prefer U.S. District Court to trial before a savvy Tax Court judge.
         4. OIC denial due to doubt as to liability: Again, Tax Court decision rules out paying tax, filing refund claim and going into District Court.
            1. Docketed cases in Tax Court:  Filing Small Case Tax Court Petition in hope of settling / Appeals in general:
            2.  Problem with Small Claims is that there is no appeal and small case process may not always serve client’s best interest.
            3. Appeals:  Despite IRM statement that there is no difference in how docketed and non-docketed cases are handled, Appeals Officer knows taxpayer must first retain admitted counsel to proceed with case.

i.     Further Caveat: Once case goes into trial preparation CPA may become involved in impermissible Tax Court representation rather than permissible representation of client before administrative agency.  E.g., the Stipulation process is conducted under Tax Court Rule 91, not IRS administrative regulations and is mandated in the Tax court’s Standing Pretrial Order which also requires filing of a Pre-trial Memorandum.

ii.     Further Caveat: Possible conflict in that client may later claim CPA accepted less than optimum settlement knowing he or she could not represent client in court.

iii.     Further Caveat: Hazards of litigation include not only case law but such procedural case strengths or weaknesses as burden of proof, admissibility of evidence, availability of witnesses (how do you depose witness) and strength of witnesses, all matters not necessarily in skill set of CPA. Most appeals officers prefer a “facts and law” analysis but that approach may or may not favor taxpayer.

iv.     Settlement analysis: In either case, settlement analysis involves legal assessment of best you could do in court, worst you could do in court and costs to get to end of legal process.

1. Tax Court Jurisdictional Issues: E.g. Filing of Motion to Dismiss on grounds that IRS did not mail Notice of Deficiency to “last known address” of taxpayer.
   1. Impact of suspension of Statute of Limitations on Collection.
   2. Bankruptcy Code tolls running of 240 day period during pendency of OIC and when pendency of CDP Hearing overlaps the 240 time period.[xxiv]
      1. Tax advice on mixed law and fact questions: Lawyers spend three years learning how to read court decisions that often are decided on procedural matters such as evidence admissibility, burden of proof, jurisdiction, etc. Thus, beyond a court’s ultimate holding there are meanings to be gleaned about the meaning and weight to be accorded the court’s ruling.  Some mixed law and fact questions:
      2. Intentional disregard of rules and regulations.
      3. Form over substance issues
      4. Innocent spouse issues of actual knowledge and reason to know.

1. Amended returns and delinquent returns both are an admission and may mitigate but do not erase tax crime of filing a false return or failure to file.
2.  AICPA Statements on Standards for Tax Services No. 6, paragraph 11, states: “If a member believes that a taxpayer may face possible exposure to allegations of fraud or other criminal misconduct, the member should advise the taxpayer to consult with an attorney before the taxpayer takes any actions.”[xxv]

i.     The problem with this guidance is that the CPA is not qualified to determine if conduct is criminal or merely negligent.

ii.      Willful standard is same for intentional disregard and criminal non-filing but burden of proof is greater for criminal conviction. That determination is clearly a legal matter.[xxvi]

iii.       Moreover, in attempting to decipher the difference, the CPA will inevitably obtain non-privileged communications or documents.

iv.     The safer course: Have a tax lawyer vet the client as to reasons for delinquency or amendment, especially, with possible amendments or delinquent filings involving large amounts, numerous years, foreign elements or factors that make your back twitch uncomfortably.

v.     Kovel[xxvii]accountant can assist lawyer in determining if crime committed but should never be preparer.

vi.     Before filing vet reasons for delinquency and be certain accurate, conservative return is filed.

vii.     Keep in mind the words of detective Arkady Renko of Martin Cruz Smith’s sardonic, dark tale, “Stalin’s Ghost.” When asked by a construction engineer about the discovery of a mass grave at a government building site: What if the grave runs the entire court?” he replies: “That’s always the problem, isn’t it? Once you start digging, when to stop?” My Solution: Don’t start digging where you should not be digging.

1. FBARS – Required by Bank Secrecy Act, not IRC. Although IRS delegated certain administrative functions by FinCEN, FBAR is not a tax form and may not be covered by Federal Preemption in tax area.  Filing FBARs involves many legal issues such as what is a financial interest in a foreign account, who is a U.S. person, who is trust beneficiary and whether conduct is wilful[xxviii]? Also, may involve foreign law legal issues such as determining whether a foreign entity is a corporation or a trust.
2. Risk to CPA and client: Especially high because civil and criminal sanctions are unforgiving and exceedingly harsh.

10. Tax Accounting vs Tax Law Clearly legal:

1. Drafting legal documents for others, but apparently OK, although perhaps unwise, to sell forms needed to form a corporation and complete the forms with information supplied by clients.[xxix]

i.     QDRO is legal document, specifically, an order prepared for the judge to sign. If drafted by CPA at request of lawyer who submits to judge and files with court, lawyer becomes responsible for non-lawyer’s work but CPA not necessarily off hook to client.

1. Filing pleadings in court.[xxx]
2. Giving advice regarding need for drafting of living trust.[xxxi]
3. Accepting or soliciting attorneys’ fees.[xxxii]
4. Giving advice regarding another’s rights, duties or obligations or the consequences of certain actions or inaction under Florida law.[xxxiii]

Possible Consequences of Crossing Line:

1. Competency issue for non accounting matters under AICPA ethical rules and Florida Board of Accountancy Rules:

1. FL BOA Rule 61H1-22.001 Competence (General Standards)  “ (1) Professional competence. A certified public accountant shall undertake only those engagements which he or his firm can reasonably expect to complete with professional competence.

2. No privilege –

a. CPA called as witness against client

2. Sued by client for not advising of lack of privilege
3. Personal papers of client lose Fifth Amendment protection.
4. No work product protection for tax work-papers used in return
5. Client turns on CPA who becomes potential scapegoat and target as aider and abettor.

3. UPL: Effective October 1, 2004, practicing law without a license in Florida (including “holding out” oneself as a lawyer) is a third degree felony punishable by up to 5 years imprisonment and a fine of up to $5,000.[xxxiv] The Florida Supreme Court supervises the practice of law in Florida through its official arm, The Florida Bar.  Other sanctions include injunctive actions and indirect criminal contempt carrying a fine of up to $500 and imprisonment up to 5 months.[xxxv]
   1. Florida Bar UPL Committees are complaint driven and action unlikely under normal circumstances.
4. Unable to collect fees: UPL is absolute bar to collecting fee for services. This is often defense in CPA suit to collect fees.
5. Suit for Malpractice: If CPA practicing out of license, hard to defend.
6. Denial of Coverage by Malpractice Insurance Carrier: Eg. St. Paul Travelers Accountant’s Professional Liability Coverage Form insures “any accountant or accounting firm under contract with respect to ‘professional accounting services.’ [xxxvi] ‘Professional Accounting Services’ means services performed or advice given by you or on your behalf for others in the conduct of your practice as an accountant.”  This definition would clearly include typical tax preparation and tax advice but the language is open to limitation.

WHAT TO DO TO PROTECT YOURSELF

Forrest Gump in movie of same name, “stupid is as stupid does.”

People get into trouble by doing dumb things which often comes from not pausing to think carefully about what it is that they are actually doing.

From “Apocalypse Now”, Captain Willard says after he and crew member Chef go ashore into the jungle and are attacked by a tiger: “Never get out of the boat. Absolutely goddamn right! Unless you were going all the way.”

Follow the football option quarterback rule: Know when to keep and when to pitch the ball.  Don’t get gang-tackled. A team approach between tax lawyer and tax CPA is often appropriate yet overlooked because as Erica Jong said,

“Advice is what we ask for when we already know the answer but wish we didn’t.”  Don’t wish, act on your gut feeling that will alert you to team up.

Follow my 10 Common Sense Rules for CPA Tax Practice

1. Stick to what you’ve been trained to do and to what experience has taught you how to do well.  Distinguish services you legally may perform from services you prudently should consider not performing.
2. Don’t dupe yourself into believing that what has never happened to you or your clients will never happen.  Outliers happen regularly in a much broader non-discernable pattern. The size of the federal tax system can be quite forgiving and errors go unnoticed. But, the famous last words “I never had a problem” can quite suddenly become “Huston, we have a problem.”
3. Don’t assume the world can be laid out in a template. Treat each case as unique.  Every levy does not require a Request for CDP Hearing.  Look at the big picture and distinguish the symptoms from the disease.
4. Think about what you are doing and the possible consequences of your actions.
5. Remember that journal entries record reality; they do not create reality.
6. Research using primary sources.  Read the IRC not the CCH Master Tax Guide.
7. Be alert to veiled as well as clear conflicts of interest
8. Don’t let your client make you a witness
9. Don’t assume that a prospective client is whom he or she claims to be.
10. Never say or write anything to anyone you would not want repeated in court.

And lastly, a word in rhyme about:

A Tax Man’s Day

Your nerves must be strong as a vice

To roll the dice and give advice

On tax law problems for a price

To stand on ground as thin as ice

While laws enacted by the slice

Your heart can burn like Spanish rice.

A tax man’s day is never nice

It’s bold and brash and full of spice

You give an answer, best think thrice

You’ll never get to give it twice

Wrong answers will return to splice

Your innards like a sharp device

So cross your tees and be precise

A single caution should suffice

All CPA and lawyer mice

A throng more common than wild rice

You’d be disposable as lice

One day if tax law they excise

Author: Robert S. Steinberg is admitted to the bars of New York, Florida, the U.S. Tax Court and various U.S. District Courts and Circuit Courts of Appeal as well as the U.S. Supreme Court.  He is a licensed CPA in New York and Florida and holds the CVA designation. He practices as an attorney and limits his practice to taxation, primarily representing individuals and companies with civil or criminal tax problems or having special compliance issues.  He is AV rated by Martindale Hubbell and rated as excellent by AVVO and has served on many FICPA, ABA and Florida Bar Committees and is a former chairman of the FICPA Committee on Federal Taxation.  His articles have appeared in numerous national and state professional journals including The Florida Bar Journal, Journal of American Academy of Matrimonial Lawyers, Taxation for Accountants, Practical Tax Strategies, Taxation for Lawyers, ABA Family Law Section Family Advocate. He is author of Mathew Bender Florida Family Law, Chapter 59, Analyzing Economic and Valuation Issues (2000) and co-author with Melvyn Frumkes, esquire, of Florida Divorce Taxation Made Easy (PESI, 1993). He publishes a newsletter Steinberg Talks Tax™ and The Tax Wars Blog which can be found at steinbergtaxlaw.wordpress.com.

By © Robert S. Steinberg, Attorney, CPA, CVA (all rights reserved)

www.steinbergtaxlaw.com