Lots of people have problems with the Internal Revenue Service. Although the tax season runs through April 15, the audit season runs throughout the year. I have had a number of people come to see me over the past few weeks who had their taxes prepared somewhere else, and they are now having problems with the Internal Revenue Service or the Department of Revenue. In some cases, the tax preparer’s whereabouts are unknown. Many tax preparers close after April 15, and we have seen at least one tax office simply vanish. Their clients are coming to inquire about the status of their refunds, and what we are finding is that their tax returns were never filed. In other cases, the tax return preparer is the problem, and cannot be part of the solution unless that preparer wants to admit that either they messed up, or, as in at least one of the cases I am now involved in, that the tax preparer has affirmatively committed fraud. In fact, we have a number of cases in which the tax preparer has misbehaved and now the clients are left holding the bag. It is because there are so many issues that can come up with an incompetent or unethical tax preparer that I have written a number of blogs in which I describe anecdotes involving people who have come into my office or general patterns that I have seen. Links to the blogs are:
Do Not Trust the Tax Preparer Who Does Not Put His Name On the Return
Confidential, Professional, Integrity
The Advantages of Hiring a Tax Preparer Who is Also a Lawyer
In addition, I have a whole page where I have written extensively on my website on how to choose a tax preparer where I discuss some of the things to look out for at some length. I have had other cases come in which the tax preparer is not competent or qualified in assisting in the audit, or has otherwise chosen not to help. Finally, sometimes the returns people file just are not accurate.
These are examples of the sorts of issues that people may have that would cause them to come in and see me, an attorney who prepares taxes, even though I did not prepare their taxes. Because tax audit defense is becoming an important part of my law practice, I have applied and have been accepted to practice before the Tax Court. I will explain the significance of this in a little bit, but first some background is in order.
Starting with the 2015 tax filing season, which will be 2016, many tax preparers will have no representation rights whatsoever. What this means is that if one of their clients should get audited, they will not even be allowed to help them. Other tax preparers will have limited representation rights. What that will mean is that these tax preparers will be allowed to assist their own clients in the first round of an audit. They cannot defend tax returns that they did not prepare, and more importantly, they cannot take an adverse decision to a higher level of administrative review. Depending on the nature of the case, both the Internal Revenue Service and the Department of Revenue have multiple layers of audits, administrative reviews, and even administrative appeals. If a tax preparer with limited representation rights cannot get the resolution he or she wants at the first level of review, that preparer cannot represent the taxpayer at the next level. They must either accept what the Internal Revenue Service is offering, or the taxpayer has to go out and hire someone with full representation rights. A person with full representation rights can represent a taxpayer at any level within the Internal Revenue Service, right up to the highest levels of administrative appeal. The only people with full representation rights are certified public accounts, enrolled agents, and, of course, attorneys such as myself.
People with “full representation rights” still only have the right to represent the taxpayer before the Internal Revenue Service. Ultimately, the Internal Revenue Service gets to make the final determination on how much the taxpayer owes. If the taxpayer is not happy with the determination made by the Internal Revenue Service, then there is a special court set up within the Federal Court System called the Tax Court. Only attorneys who have been admitted to practice before the Tax Court can practice before the Tax Court. Certified public agents and enrolled accountants cannot practice before the Tax Court.
Obviously, the object of the game is to avoid the Tax Court. It is always preferable to get a resolution at the first round of any audit. The best that anybody engaged in audit defense can do for their client is to convince the front line auditor either to back off, or, where appropriate, to accept a reasonable figure for tax liability. The best way to do that is to try to work with the original auditor to come to a fair and proper resolution of the case. However, auditors like all other adversaries are aware of what kind of a club you are holding behind your back.
In addition to doing taxes and audit defense, I do personal injury and bankruptcy. On the accident side of my practice, I have an associate whose only job is to do personal injury litigation. She sues insurance companies all day, every day. As a result, it makes it much easier for us to settle a case when the insurance companies know full well that if they do not make me a reasonable offer, I already have somebody on my payroll whose only job is to sue them. Sometimes an insurance adjuster will say to me ‘if you do not accept my offer, I will just turn this file over to my legal counsel’. I reply by saying “if you do not accept my demand, I will turn this file over to my associate”. After a few more minutes of chest thumping and mutual recrimination, we get down to the business of settling the case for what it is actually worth. Similarly, when people come to me to resolve creditor issues, the fact that the creditors all know that I am a bankruptcy attorney who has represented thousands of people in the Bankruptcy Court, encourages them to back down where appropriate or to accept deals where I offer them. Even if I never make a single threatening statement to an insurance adjuster or to a creditor’s attorney, they know that I am holding a club behind my back. They know that if they cannot resolve the case with me amicably, that I am fully armed and prepared to engage.
I believe that Internal Revenue Service auditors function in much the same way. Certainly they too would rather resolve their cases in an amicable manner if they can. However, on the margins, they do have to consider what are the ramifications of not doing what the taxpayer’s representative wants. For example, if the auditor is sitting across the table from a tax preparer with limited representation rights, all that tax preparer can do is beg. That preparer has no club. As I discussed in a previous blog, there is a serious issue to whether or not the tax preparer has the skills to make a cogent argument to why the auditor should accept their position. There is no express or implied threat. The auditor has nothing to fear.
When the person sitting across the table from the auditor has full representation rights, then that threat to go to the next level is always there. Even if the representative never utters the threat, the auditor knows that could happen. Nobody likes to have their work criticized to the people above them, so on a close call, that call is more likely to go to a taxpayer with a representative with full representation rights than to a taxpayer with a representative with limited rights. Remember, auditors are humans too. They respond to the same pressure, wants, and needs as everybody else. The fact that someone is an attorney who has bothered to get licensed before the Tax Court has two additional advantages. One is that the attorney has affirmatively stated that they are someone who is prepared to go all the way to court. From the point of view of a front line auditor, that certainly means that this is someone who is prepared to appeal their decision to the higher authorities at the Internal Revenue Service. It even says to the appellant bodies within the Internal Revenue Service that this is someone prepared to go even above their heads and they have to be aware that this person has a club. The better armed you are, the less likely that you will have to fight.