Attorneys and CPAs go through extensive education and state licensing requirements. Both attorneys and CPAs study the tax code (Internal Revenue Code). CPAs are licensed and regulated by their state boards of accountancy and provide many valuable services such as preparing returns, tax planning, business consultation, financial analysis, and bookkeeping. CPAs who work in a business can engage in financial accounting and reporting, management accounting, financial analysis and treasury and cash management.
Tax attorneys interpret the tax code and resolve legal questions. An important benefit of hiring a tax attorney early on is to preserve the attorney-client privilege. This privilege protects communication between the company (including employees) and the attorney for purposes of obtaining legal representation. Essentially, the attorney must keep private and protect information the client communicated in confidence. This protection allows the client to freely speak with the attorney about the legality of their tax issues.
Examples of legal tax questions that arise in a business are whether a worker should be classified as an “independent contractor” or “employee” or if a business owner can write off business losses to offset other income.
Recently, Uber is facing an inquiry if their workers (drivers) are independent contractors or employees. Whether a worker is truly an “independent contractor” is a legal question involving an analysis of 20 factors (under Federal law) and 13 factors (under California state law). In many cases, the answer is not clear. The attorney’s role is to analyze the facts and relationship between the company and its workers and to persuasively defend the company during the government inquiry. If Uber’s drivers are classified as employees, the company will owe payroll taxes for several years back calculated on payments Uber made to its drivers. Federal Express had the same issue in the mid 2000’s resulting in a $1 billion tax liability.
In interpreting federal tax laws, tax attorneys rely on a large body of legal authority: U.S. Tax Court cases, Treasury Regulations, Revenue Procedures, Revenue Rulings, IRS Chief Counsel Opinions (opinions from IRS attorneys on a specific legal issue and fact pattern), and various other legal authority.
Having an experienced CPA and a tax attorney from the start is critical. When an IRS or State of California audit notice is sent to a company, the first decision should be to bring in the CPA and attorney to review the notice and tax return and devise a strategy before any communication is made to the government. Understanding the transaction and legal issues from the start may minimize the possibility the government will assess additional taxes, penalties, and interest.