Most of the time, taxpayers can handle personal income taxes without too much trouble but there are times when a tax attorney can be either a handy resource or a required partner. Both the IRS and the California Franchise Tax Board (FTB) can get quite aggressive when the rules are not followed, even when taxpayers are doing their best.
Sometimes, taxpayers make a mistake and have difficulty making it right on their own. Sometimes they make the mistake worse by ignoring it. Then there are those who rely on a CPA or tax preparer to help them out of trouble, which is not the best idea when one is dealing with the IRS or FTB in a case that may wind up in litigation.
We will take a look at some differences between the IRS and FTB, why you might need a tax attorney, and when to hire one.
The IRS vs. The FTB
Both government organizations administer the income tax code; the IRS handles federal taxes and the Franchise Tax Board handles California state taxes. Because it has fewer resources, the FTB will piggyback off results of an IRS audit but focus on areas where the margin of taxpayer error is higher:
- Transactions including capital gains and losses
- 1031 exchanges
Beyond that, the FTB has a tendency to be more aggressive in its collection habits. It will use information from local records unavailable to the IRS such as:
- Department of Motor Vehicles
- Property tax records
- Other state specific disclosures
In fact, the FTB typically requires greater disclosures of sensitive financial information on its financial statements than the IRS. The deadlines are more demanding and the FTB is slower to resolve issues due to more levels of administration (Who would have thought a state agency could outdo the federal government for bureaucracy?) and more hurdles to hop.
It can take over a year to get a California state tax settlement approved.
Two Big Reasons to Hire a Tax Attorney
One of the most helpful advantages to hiring a tax attorney instead of a CPA is the attorney-client privilege inherent in the relationship. Your tax attorney cannot be asked to testify against you in legal proceedings.
Neither a CPA nor a tax preparer can provide that exemption.
The other reason to hire a tax attorney is to have the best guidance in making the right decisions. A tax attorney has the experience to achieve a tax settlement, not something the person on the street does every day. Only a knowledgeable tax lawyer knows about all the programs you qualify for and can help you determine which the best is for you.
A CPA may be familiar with a few programs and, even then, will not necessarily know all the provisions of each program. Tax code and tax laws are complex and often change annually. If you are in the IRS or FTB collections process, the wrong advice can cost you dearly.
When to Hire an Attorney
Starting where the need is less acute, the following circumstances would be a nice time to have a tax attorney helping you out.
- Figuring out your business and self-employment taxes
- If you have a high tax liability or assets in need of special protection
- When the IRS is ignoring your attempts to correct a mistake
Business and self-employment taxes add layers of complexity to your typical income tax process. A tax attorney can guide you through confusing IRS documents; there are almost 2000 different IRS forms and publications to wade through, many of them not written in simple language.
Businesses and people are taxed differently, which is how many taxpayers get into trouble. A tax attorney can also help you find ways to lower your tax bill in the future.
If you owe over $100,000 to the IRS, your case can be placed in the Large Dollar Unit for collection. This unit has the most experienced agents working for it; they are aggressive and they close cases fast. A tax attorney can keep up with them and protect any businesses you have going. If you have potential criminal issues coming into the investigation, you definitely want a lawyer.
The IRS is not known for being overly responsive to taxpayers unless those taxpayers have money to hand over. If the IRS or FTB are ignoring your letters, a tax attorney can draft a letter that will get their attention. Also, most tax lawyers have direct contact information within the agencies and can settle things over the phone.
Now to look into times when hiring an experienced tax attorney is essential to your financial health.
If you are notified of an audit you should hire an attorney immediately. Most disputes are about one or more tax returns but there is a chance you could say or do something that causes the investigation to go sour.
An attorney can:
- Communicate with the tax agency on your behalf
- Be present during an audit
- Help negotiate a settlement
- Make sure you do not overpay
If you ignore notifications from the tax agencies, you could be charged with tax evasion or other criminal charges. A lawyer can help you either avoid being charged or defend you if charges are leveled against you.
Offers in Compromise
Having an attorney help you with an Offer in Compromise increases the chances the tax agency will accept it. There are many hoops to jump through to meet the stringent requirements for acceptance:
- You are unable to pay the full amount either at once or in installments
- There is doubt about the amount of liability
- Exceptional circumstances show payment in full would cause extreme financial hardship, would be unfair, or would be inequitable
The IRS can take up to two years to accept or reject your Offer in Compromise. You want it to be as convincing as possible.
Tax Evasion or Tax Fraud Charges
Now we move into criminal territory. A lawyer is essential in these situations. These charges are leveled at those who:
- Refuse to file tax returns
- Pay their taxes
- Reveal all their sources of income
The penalties for tax fraud and evasion include:
- Interest on taxes owed
- Prosecution fees
- Public humiliation
If tax agents show up at your door with questions, an investigation is open and anything you say can be used against you.
Removing Tax Liens and Levies
The IRS and FTB can issue liens against your personal or real property as collateral against your tax debt payments. An experienced tax attorney can help you negotiate installment payment plans, Offers in Compromise, and other remedies for your tax liability.
The IRS and FTB can make mistakes, so if you think you have had a lien placed in error, a tax attorney can help you prove it.
There are many situations where a tax lawyer is a genuine requirement. Tax laws and codes, whether at the state or federal level, are too complicated for most laypeople and they change too often for many tax professionals to keep up with.
Whether you just need someone to help you with your business income taxes or you have been charged with tax fraud, hire a tax attorney to help you out.