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It’s relatively common to witness clients trying to decide whether they want to hire a Certified Public Accountant (CPA) or a tax attorney. Oftentimes, people are considering the two as if the two professionals are interchangeable.
The truth is, CPAs and tax attorneys serve significantly different roles that set their services apart from one another. There’s one key difference that defines a client’s relationship with each professional partner, and for this reason, both CPAs and tax attorneys should (and often do) feel confident recommending that their client connects with the other.
As a CPA, one of the most valuable tools to have in your back pocket is a trusted relationship with a reputable tax attorney. This partnership enables you to better serve your clients, retain profitable clients long term, and ensure that you’re legally protected. The partnership may create a reliable relationship to refer their clients for services outside of legal tax support, resulting in new clients for you.
Referring your client to a tax attorney is a good way to protect yourself from a client’s potential legal conundrum without ruining your existing relationship. A trusted tax attorney can also be a great source of referrals for you when their clients need tax assistance outside of their direct services.
What’s the difference between a CPA and a tax attorney?
A Certified Public Accountant (CPA) has a significant educational background under their belt. They are required to have completed 150 hours or more of undergraduate educational studies before passing the CPA examination. Additionally, they have to commit to 120 hours of continued education every 3 years. As such, they considered some of the highest level experts when it comes to handling tax preparation.
Their services are not often utilized by an average taxpayer, but instead are usually brought in for more complex cases. CPAs know how to abide by federal laws while still minimizing your tax liability and maximizing benefits. Developing a strong ongoing relationship with a CPA may suit your needs if you are looking to build a long term tax plan and need support sticking to it.
While a tax attorney is still an excellent resource to taxpayers, they serve a different set of needs than CPAs. While CPAs are technically qualified to represent you before a court in the event of an audit, a tax attorney is likely a better choice in situations where you may be involved with trouble with tax authorities.
Tax attorneys specialize in the legalities of tax payment and their services are most often called upon in defense cases when taxpayers are faced with audits from IRS, EDD, or other federal tax authorities. While tax attorneys may have slightly varying specialties, one thing most tax attorneys have in common is expertise in tax controversy and dispute resolution.
Why is a tax attorney a CPAs secret weapon?
Your clients may understand that in their simplest roles, CPAs provide accounting advice while tax attorneys provide legal advice. That being said, they may be missing the crucial distinction: only tax attorneys can defend clients in the U.S. District Courts and provide a legal opinion justifying the client’s position on a return.
Additionally, only tax attorneys have an attorney-client privilege that protects communication between a client and an attorney, which can restrict IRS and California State tax agencies from discovering information provided to attorneys in confidence. If a tax attorney takes on an accounting role and signs on as a client’s tax-preparer, they actually waive that privilege.
It is beneficial for your clients to have separate professional support for tax preparation and legal tax matters, rather than attempting to have their CPA or their tax attorney satisfy both roles.
As a CPA, you are likely your client’s first point of contact for tax planning. It’s in both involved parties’ best interests for you to direct them to a capable tax attorney to answer any legal questions they have. Likewise, it is in the tax attorney’s best interest to work with a CPA to ensure that they can protect their client-attorney privilege and that their client is getting all of the advice, planning, and protection available to them.
Building Mutually Beneficial Relationship with Tax Attorneys
Now that we’ve established the key differentiators between the two roles, how can you build a mutually beneficial partnership with a tax attorney? With all the benefits that come with a partnership, you’re probably jumping at the opportunity to find a partner to join to see these benefits take action before you. We’re sharing a few tips to start building the right partnership for your business:
Network With Like-Minded Tax Attorneys
Reach out to tax attorneys in your area to get to know them better. You may have access to attend and participate in networking events in your area or you can utilize your personal agenda to solicit tax advice for your own needs. Share your thoughts and values to see if you think someone will make a strong partner.
It’s easier to work with people you know, so it’s worth your while to invest time into building a relationship. If you’re willing to put in the effort to find the right partner, you may end up finding a tax attorney whose perspective and working style fits with yours.
Be Transparent
Honesty is one of the most important building blocks when forming a mutually beneficial partnership. No partner wants to be left in the dark, and neither do you. You should ensure that you are as transparent as possible and practice clear communication from the start. Doing so will ensure you both have a clear understanding of the partnership at any given point.
Be honest with the boundaries you’d like to set for the professional relationship, what you expect from them, and what they can expect from you.
Share Your Expertise
CPAs may have a broader understanding of tax filings specifically, but tax attorneys have a stronger background in legal matters and how to support their clients in the event of an audit of the tax filings their CPA prepared. Be generous with your expertise and share your knowledge with the partners you engage with. It will help them understand your role more clearly, and better identify whether or not to refer a potential client to you.
Explain the characteristics and needs of your ideal client to help them find referrals, and ask them for the same so you can identify when to refer a client to them. When you have a good understanding of a tax attorney’s expertise, and they have a good understanding of yours, your clients will get better service on both ends.
Refer Clients to Your Network
Once you’ve started building a network of tax attorneys that you know and trust, start referring clients to the ones that are best suited to their needs. This might involve a little professional matchmaking, and your recommendations should be based on the clients’ best interests. Don’t be afraid to give the tax attorney a heads up that you’re sending someone their way. Before you know it, they’ll likely be doing the same for you.
Stay On The Same Page
Whenever you’re working with another professional, it’s important that everyone is on the same page. Ensure that you secure your clients’ consent to release their information, to ensure that any requests for records and paperwork are processed quickly and smoothly.
Whether you want your clients to experience more robust service, or you have specific legal concerns about a client and want to make sure you’re protected, partnering with a tax attorney is one of the best ways CPAs can serve their clients. It’s the kind of partnership that’s greater than the sum of its parts and has long-lasting benefits for everyone involved.
Up to 70% of small businesses outsource their tax preparation as well as other accounting functions.
Preparing tax forms and tax returns are as confusing as they are time-consuming. Most small businesses would rather rely on an expert to do things correctly rather than waste their own resources to do it incorrectly. Considering what can happen if small business taxes aren’t accurate, it makes sense to have a tax preparer.
But even when you have help, you still need to get organized to file your tax return on time and with accurate information.
With tax season upon us, the sooner you get started, the easier the process will be for you and your tax preparer. March 15, 2019 is the deadline for S corporations and partnerships to file, followed by a deadline of April 15, 2019 for all small businesses.
Use our handy checklist below to make sure you’re ready to file before these dates.
- Schedule a Meeting With Your Bookkeeper – Schedule a meeting with your in-house bookkeeper or outside accountant to review your accounting records and confirm items have been correctly entered. Scheduling a meeting early will allow you and your accountant to review and resolve potential discrepancies. Bookkeepers typically don’t handle tax preparation themselves, but they have lots of important information you will need to complete your financial records, which you will give to your tax preparer. Your tax preparer will analyze your financials (i.e. Profit & Loss Statement, Balance Sheet, and General Ledger) to prepare your tax return.
- Figure Out Your Yearly Mileage – Many small businesses rely on work vehicles. Even if you don’t, the miles you drive for work can still be deducted from your taxes. Mileage tracking apps make it easier than ever to figure out exactly how many miles you drive for business purposes. This is ideal because the IRS requires you to have a log rather than rely on an estimation. But, remember that miles logged to and from your office generally are not deductible as a business expense.
- Collect Your Bank Statements for All Bank Accounts – Tax preparers need to verify that all expenses and revenue have been recognized in your accounting records. To do that, they will reconcile your bank statements and the total income deposited must match the revenue you report on your tax return. Gather bank statements up as soon as possible so you have plenty of time to get any missing documentation from your bank. You may also consider getting images of your canceled checks and large deposits, especially deposits that may not be income (i.e. loans).
- Add Up Out-of-Pocket Business Expenses – If you’re like most small business owners, you end up using your personal funds for business expenses. Those business purchases can be deducted from your taxes, but if these purchases were not entered in the business’ bookkeeping, they could easily be overlooked. Review your personal bank account and credit card statements from the last year to identify any deductible business expenses. If there is any doubt about what qualifies, consult your tax preparer.
- Save All 1099s You Receive – Any small business that is service-based should receive 1099 forms from their clients. Starting in 2011, the law now requires merchant processors (like PayPal, Stripe, or merchant credit card processors) to issue a form 1099-K. Your tax preparer may not technically need these documents, but they are still helpful for confirming your actual business income.
- Issue Your 1099s Appropriately – You are required to issue 1099s to any non-corporate service provider who you pay more than $600 to in one year. The only exception is attorneys who must always be issued a 1099. Work with your bookkeeper to determine who you need to send 1099s to. Ideally, send them out before you meet with your tax preparer.
- Gather Up Your Receipts – What kinds of assets did your business acquire in 2018 – computers, machinery, work vehicles, furniture, equipment? Assets can be defined differently, but typically they cost more than $500 and will be in use for more than one year. You may be able to deduct these expenses from your taxes, just keep in mind that you must deduct the depreciated price, not the purchase price. Giving your tax preparer receipts makes it easier to calculate depreciation and report the correct amount on your tax return.
- Check Your Loan Balances – When you meet with your bookkeeper, confirm that the balances on the books (i.e. your balance sheet) match the balances on your loan statement(s). Then, provide your tax preparer with these statements so that they can correctly record your liability. Keep track of your loan balance and the amount of interest you paid each year.
- Itemize Meal Expenses Carefully – You can deduct 50% of the cost of meals you buy for clients, and 100% of the meals you buy while traveling or for your employees. Take some time to figure out when and why you bought meals so that you can deduct as much as possible. Remember, the business owner (or an employee) must be present and the food or beverages are not considered lavish or extravagant.
With just a few weeks left to file, you and your tax preparer may be looking for answers, assistance, and guidance. If you’ve met with your CPA or bookkeeper, tracked your expenses all year, and are prepared to file on time, congratulations — you’re in great shape. But if your business’ tax situation isn’t all smooth sailing, don’t worry. We understand the challenges of running a small business and we’re here to help.
If your business owes back taxes, you cannot pay your current tax bill on time, or you are facing other legal matters with the IRS or State of California (i.e. audit or investigation), contact Milikowsky Tax Law today to get support from a team of experts in small business and tax law.
When it comes to financial matters, certified public accountants (CPAs) cannot use ignorance as a defense if their clients’ tax returns are later investigated.
This is especially true if those financial matters involve legal issues — as they do if your client happens to engage in fraudulent or criminal activity. While you may wish ignorance were an option, it’s always better to prepare for these circumstances by doing proper due diligence when the return is prepared and understanding how to respond if a criminal investigation is opened after the return is filed.
It’s important to understand that, unlike the attorney-client privilege, there is no accountant-client privilege. That means if your client is under investigation for tax fraud or other criminal activity, then as their CPA, you could be subpoenaed as a witness and forced to share evidence or testify about matters discussed with your client.
Balancing your obligations to your client with legal responsibilities can result in complicated scenarios, but that doesn’t mean you’re out of options. Here are a few ways to mitigate and prepare for dealing with clients under criminal investigation.
What Should You Do?
When faced with the news that your client is undergoing a criminal investigation, don’t panic. There a few things you can and should do, and some things you definitely shouldn’t do.
Dos
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Establish Strong Record Keeping
The best way to minimize these legal issues before they start is by keeping detailed records. Ask your clients for hard copies, receipts, or third party verification of the items they’re claiming and reporting on their tax return. Make sure there’s a clear paper trail to support the details of transactions and questionable items (that are not ordinary items, such as large net operating losses and other items that offset income) that you are aware of as their CPA.
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Explain the Tax Laws and Rules to Your Client
As a CPA, it’s your responsibility to inform your client of relevant tax laws and rules when reviewing your client’s accounting records and reporting transactions. Make sure you update them frequently and thoroughly, especially if you’re worried they may be veering into areas not clearly defined by tax laws and regulations. It’s better to give too much information than too little. If your client’s situation involves legal issues that are not clearly defined by tax law, consult with a tax attorney before the return is prepared or when you discover that a criminal investigation may have commenced.
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Cease Representation During an Investigation
Most CPAs aren’t qualified to represent their clients during a criminal investigation. Often, the best solution is to stop representing them to avoid becoming further embroiled in the case yourself.
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Refer Your Client to a Tax Attorney
Protecting yourself and your business doesn’t mean you have to leave your client out in the cold — familiarize yourself with legal tax experts in your area, so you can refer your clients to them for help if they are being investigated. Maintaining a good relationship with a trusted tax attorney allows you to smoothly extricate yourself from a client’s legal situation when necessary, while putting your client in the hands of someone who can provide legal guidance where communication is protected by the attorney-client relationship.
Don’ts
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Don’t Put Your Client Above the Law and Public Good
Don’t forget your legal responsibilities are both to your client and the government (to accurately and fairly report items on a tax return) (See Circular 230). While it is important to offer clients qualified and accurate tax advice, your advice does not extend to assisting clients with questionable items that may later be deemed fraudulent or illegal. If you are concerned about a client’s request to report items on their tax return, consult a tax attorney who may be able to provide legal guidance to clarify the risks and benefits of reporting a transaction on a return.
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Don’t Trust Clients Implicitly
While you may trust clients you’ve been serving for several years, don’t assume all clients will be straightforward and provide all relevant information. Maintain a healthy level of suspicion. If your client has jumped from accountant to accountant, has unexplained sources of income, or other suspicious transactions, trust your gut.
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Don’t Practice — or Appear to Practice — Law
It is your duty to inform your client of relevant rules or laws during your professional relationship with them, but once they’re under investigation, it’s critical not to provide any advice that could be construed as practicing law. The distinction between an accountant and an attorney must be maintained.
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Don’t Keep Information from Investigators
Finally, if you or your client is subpoenaed to be a witness or summoned to give up evidence, cooperate with investigators. Withholding evidence in this context is usually against the law. A tax attorney can review the subpoena or summons and determine if a privilege can be raised regarding the information or testimony demanded. If you want to learn more about the details related to this process, reach out to a tax attorney for professional guidance.
What Could Happen If My Client is Under Criminal Investigation?
Sometimes it’s impossible to catch everything and mistakes happen. If one of your clients goes to court relating to transactions characterized as tax fraud or other criminal activity, know that you may be called on as a witness and compelled to share evidence you have.
If one of your clients is under criminal investigation and you want to be certain you’re protecting yourself, don’t wait until it’s too late. Reach out to an experienced tax attorney who can help you navigate through these legal tax matters. At Milikowsky Tax Law, we have more than a decade of business, legal, and tax experience. Our experienced tax lawyers can help with everything from IRS and State of California civil audits to criminal investigations. Our strong relationships with reliable CPAs in California allow us to better serve our clients and support our fellow tax professionals to minimize civil and criminal tax risks.
Contact Milikowsky Tax Law today and speak to our experts about how you can protect yourself and your business if you suspect or discover that your client is under criminal investigation.
It can be complicated to know when to contact a tax attorney versus when to reach out to a CPA, especially when you need help with your taxes.
Both professionals can help you with tax-related issues, but despite their similarities, a tax attorney and a CPA are used for very different and specific purposes.The main difference between a CPA and a tax attorney is that a CPA helps prepare your tax return while a tax attorney helps you navigate the details of the tax code and tax-related legal issues.
Read below to find out some specific instances where you may need the help of a tax attorney, a CPA, or both.
When Do I Need a CPA?
CPAs are experts in helping you prepare business and personal taxes, identifying what can be expensed or deducted. Many CPAs are trained in tax preparation and to help you maximize your deductions. Unlike an accountant, CPAs do not specialize in helping file taxes — even though they are often hired to do so.
CPAs also assist when your business needs an internal audit or help determining which company structure — a C-Corp, an LLC, etc. — is right for your business. The advice offered by a CPA could help you pick the right structure for your company upfront, because changing it later on is often difficult to do.
Also, if you’re trying to choose health insurance options for your company’s employees, a CPA can determine one that fits your budget while still adhering to the proper state and federal regulations. Picking the wrong health insurance and not adhering to regulations could result in a penalty that may be costly for your business.
If you are applying for a loan, preparing financial statements, or analyzing the financial health of your company, a CPA can also lend you a hand.
When Do I Need a Tax Attorney?
While CPAs help with certain financial matters, tax attorneys are more suited to help with problems on your tax returns — especially when legal ramifications are concerned.
For example, a CPA might find an error on an old tax return and may think your best course of action is to amend the tax return immediately. Instead, a tax attorney might recommend you consider all the consequences and potential outcomes that come with submitting an amended return. While the CPA’s advice is not necessarily wrong, you may be more inclined to follow the tax attorney’s advice to help avoid or prevent any legal trouble.
Tax attorneys are also helpful when you need expert knowledge and advice on matters such as tax disputes with the IRS. A tax attorney is a legal representative skilled in understanding, communicating, and working with the IRS. If you owe a large amount of money to the IRS, a tax attorney could help you negotiate a deal with the IRS to lower your payment. Or if you need to address an error on a previously filed tax return, a tax attorney could offer advice on the safest course of action to minimize your risk and money owed.
On a more personal level, tax attorneys are also trained in help you establish a trust or understanding investments.
And if you own or are setting up a business, a tax attorney can help you understand the tax regulations that govern your business structure. They can also help you communicate with the IRS if your business is audited.
When Would I Need Both a CPA and Tax Attorney?
In some situations, it might be advantageous to hire both a CPA and tax attorney. These situations typically involve financial or tax issues in addition to potential legal action.
For example, if your CPA is considering a tax position that the IRS may likely oppose, consulting a tax attorney can help add clarity. Obtaining the tax attorney’s opinion on the situation (and in writing) may also help your case with the IRS.
If you need a CPA or tax attorney, or have questions about whether your tax situation requires either, contact the law offices of Milikowsky Tax Law today.
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.
Generally, CPAs and tax attorneys work together to resolve a tax issue before an IRS audit arises or to defend a position taken by the business on a tax return.
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.
Contact our San Diego tax lawyer today for more information!