Why You Need a Tax Attorney

When Do You Need a Tax Attorney?

Tax issues can be daunting, especially when they involve agencies like the Internal Revenue Service (IRS), the California Department of Tax and Fee Administration (CDTFA), the California Employment Development Department (EDD), or the California Franchise Tax Board (FTB). Whether you’re facing a tax audit, a large tax debt, or allegations of tax fraud, a tax attorney can provide critical expertise to protect your rights and resolve your issues.

Why Hire a Tax Attorney?

A tax attorney is a legal professional with specialized knowledge in tax law, including federal and state tax codes, regulations, and procedures. Unlike CPAs or enrolled agents, tax attorneys are licensed to represent clients in court, provide legal advice, and handle sensitive matters involving potential criminal liability, such as tax evasion. Their expertise is invaluable in the following scenarios:

1. You are under Tax Investigation or have Committed Tax Fraud (Tax Evasion)

What It Means: Tax fraud, also known as tax evasion, involves intentionally misreporting or omitting income, inflating deductions, or hiding assets to reduce tax liability. This is a serious offense that can result in civil penalties, criminal charges, fines, or imprisonment.

Why You Need a Tax Attorney:

• Legal Defense: A tax attorney can assess whether your actions constitute tax evasion or a less severe error, such as negligence. They can build a defense strategy to minimize penalties or avoid criminal prosecution.
• Negotiating with the IRS: If the IRS is investigating, a tax attorney can represent you during audits, appeals, or criminal investigations, ensuring your rights are protected.
• Voluntary Disclosure: If you’ve committed tax fraud but haven’t been caught, a tax attorney can guide you through voluntary disclosure programs to report unreported income or assets, potentially avoiding criminal charges.
• Attorney Client Privilege: All communications with your tax lawyer has to remain confidential at all times.

Examples:

• The IRS suspects you of intentionally underreporting income.
• The FTB investigates you for filing fraudulent state tax returns.
• The EDD accuses you of willfully misclassifying workers to avoid payroll taxes.

2. IRS or State Tax Agency has sent out Summons on Your Bank or Subpoena to Your Business Associates.

What It Means: An IRS summons is a legal demand for documents, such as bank records, to investigate your tax compliance. This often signals a serious inquiry, such as suspected underreporting or unreported offshore accounts.

Why You Need a Tax Attorney:

• Challenging the Summons: A tax attorney can evaluate the summons’ legality and challenge it if it’s overly broad or violates your rights.
• Protecting Privilege: They ensure that privileged communications (e.g., with your attorney) are not disclosed.
• Strategic Response: A tax attorney can negotiate with the IRS to limit the scope of the investigation and represent you during any resulting audits or disputes.

3. You Face a Tax Audit by the IRS, FTB, EDD, or CDTFA

What It Means: A tax audit is an examination of your tax returns to verify accuracy. Audits can be conducted by the IRS (federal taxes), FTB (California income taxes), EDD (payroll taxes), or CDTFA (sales and use taxes).

Role of a Tax Attorney: Audits from the IRS, CDTFA, EDD, or FTB can be invasive and complex. A tax attorney can:

• Review your financial records to identify potential issues before the audit.
• Represent you during audit proceedings to ensure your rights are protected.
• Challenge improper audit findings or excessive assessments.

• Examples:
  • The IRS audits your business for unreported income or questionable deductions.
  • The CDTFA audits your sales tax records and disputes exempt transactions.
  • The EDD audits your payroll practices and claims you misclassified workers as independent contractors.
  • The FTB audits your state tax return, alleging you underreported income from out-of-state sources.
• Why Not a CPA?: While CPAs are excellent for preparing tax returns and providing accounting advice, tax attorneys are better equipped to handle legal disputes, interpret tax laws, and negotiate with auditors.

Why You Need a Tax Attorney:

• Representation: A tax attorney can represent you during the audit, ensuring you don’t provide unnecessary information that could trigger further scrutiny.
• Dispute Resolution: If the audit results in additional taxes or penalties, a tax attorney can appeal the findings or negotiate a settlement.
• Complex Issues: Audits involving business taxes, high-income earners, or multi-state operations often require legal expertise to navigate intricate tax laws.

4. To Settle Large Tax Debt and Tax Bankruptcy

What It Means: Owing a significant tax debt to the IRS or state agencies can lead to wage garnishments, bank levies, or liens. Options like an Offer in Compromise (OIC) or installment agreement can provide relief.

Why You Need a Tax Attorney:

• Offer in Compromise (OIC): An OIC allows you to settle your tax debt for less than the full amount. A tax attorney can prepare a compelling application, as the IRS accepts only a small percentage of OIC requests.
• Installment Agreements: A tax attorney can negotiate affordable payment plans tailored to your financial situation.
• Lien and Levy Defense: If the IRS or FTB has placed a lien or levy, a tax attorney can work to release or subordinate it.
• Tax Bankruptcy: Filing tax bankruptcy may eliminate all your tax debt. Only an attorney can file and represent you in court.

5. Do You Have Unreported Offshore Bank Accounts?

What It Means: U.S. taxpayers must report foreign financial accounts exceeding $10,000 under the Bank Secrecy Act and Foreign Account Tax Compliance Act (FATCA). Failure to disclose can result in severe penalties.

Why You Need a Tax Attorney:

• Compliance Programs: A tax attorney can guide you through IRS programs like the Offshore Voluntary Disclosure Program (OVDP) or Streamlined Filing Compliance Procedures to report accounts and minimize penalties.
• Penalty Mitigation: They can negotiate to reduce or waive penalties for non-willful violations.
• Criminal Defense: If the IRS suspects willful nondisclosure, a tax attorney can defend you against criminal charges.

6. You Found Out that You or Loved Ones Haven’t Filed Foreign Bank Account Reports (FBARs)

What It Means: FBARs must be filed annually with the IRS for foreign accounts exceeding $10,000. Non-compliance can lead to civil penalties ($10,000+ per violation) or criminal charges for willful failure.

Why You Need a Tax Attorney:

• Retroactive Filing: A tax attorney can file delinquent FBARs through IRS amnesty programs, reducing or eliminating penalties.
• Legal Advice: They can determine whether your failure was willful or non-willful, affecting penalty severity.
• Negotiation: A tax attorney can advocate for penalty abatement if you have reasonable cause (e.g., ignorance of the law).

7. Major Business Transactions

What It Means: Transactions like buying or selling a business, merging companies, or transferring assets can have significant tax implications, including capital gains, corporate taxes, or estate taxes.

Why You Need a Tax Attorney:

• Tax Planning: A tax attorney can structure the transaction to minimize tax liability, such as using tax-deferred exchanges or entity reorganizations.
• Compliance: They ensure compliance with IRS, FTB, and CDTFA regulations, avoiding future audits or disputes.
• Contract Review: A tax attorney can review agreements to identify tax risks and negotiate favorable terms.

Example: If you’re selling a business for $5 million, a tax attorney can structure the sale to defer capital gains taxes, saving you hundreds of thousands.

8. The IRS or EDD Audits You to Classify Your Workers as Employees Not Independent Contractors

What It Means: Misclassifying workers as independent contractors instead of employees can lead to back taxes, penalties, and interest for unpaid payroll taxes, Social Security, and Medicare contributions.

Why You Need a Tax Attorney:

• Reclassification Defense: A tax attorney can argue that your workers meet IRS or EDD criteria for independent contractors, potentially avoiding reclassification.
• Negotiation: They can negotiate settlements for reduced penalties or taxes if reclassification is unavoidable.
• Compliance Guidance: A tax attorney can help you restructure worker agreements to comply with tax laws moving forward.

Example: If the EDD claims your gig workers are employees, a tax attorney can present evidence of their independence, such as contracts and work autonomy, to avoid penalties.

9. You Have Any Major Tax Problem & Dealing with Tax Debt or Collections

Why You Need a Tax Attorney: Unpaid taxes can lead to aggressive collection actions, such as liens, levies, or wage garnishments. A tax attorney can:

• Negotiate an Offer in Compromise (OIC) to settle tax debt for less than the full amount.
• Secure an installment agreement or temporary hardship status.
• Stop or release liens and levies to protect your assets.

• Examples:
  • The IRS places a lien on your property for unpaid federal taxes.
  • The FTB garnishes your wages for delinquent state income taxes.
  • The CDTFA threatens to revoke your seller’s permit due to unpaid sales taxes.
  • The EDD levies your bank account for unpaid payroll taxes.
• Why Act Quickly: Collection actions can escalate rapidly, damaging your credit and finances. A tax attorney can intervene to minimize the impact.

Why You Need a Tax Attorney:

• Comprehensive Representation: A tax attorney can handle multi-agency disputes, ensuring consistent representation across federal and state matters.
• Strategic Solutions: They can develop tailored solutions, such as penalty abatement, appeals, or litigation, to resolve your issue.
• Peace of Mind: Tax attorneys alleviate the stress of dealing with aggressive tax authorities, allowing you to focus on your business or personal life.

10. Disputing Tax Assessments or Penalties

• Why You Need a Tax Attorney: If an agency issues a tax assessment or penalties you believe are incorrect, a tax attorney can:
  • File appeals or petitions to challenge the assessment.
  • Present evidence and legal arguments to reduce or eliminate the liability.
  • Negotiate settlements or payment plans.
• Examples:
  • The IRS assesses a large penalty for underpayment of taxes due to a misunderstanding of tax credits.
  • The CDTFA claims you owe back taxes for sales you believe were exempt.
  • The EDD imposes penalties for late payroll tax filings.
  • The FTB demands additional taxes based on a disputed residency status.
• Why It Matters: Tax agencies often issue assessments based on incomplete information. A tax attorney can ensure your case is fairly evaluated.

11. Tax Appeals or Litigation

• Why You Need a Tax Attorney: If a tax dispute escalates to an appeal or litigation, a tax attorney is essential to:
  • Represent you in administrative hearings or tax court.
  • Prepare legal briefs and arguments to support your case.
  • Challenge unfavorable agency decisions.
• Examples:
  • You file an appeal with the IRS Office of Appeals to contest an audit outcome.
  • You challenge a CDTFA assessment in an administrative hearing.
  • You litigate an EDD worker classification dispute in court.
  • You appeal an FTB decision to California’s Office of Tax Appeals.
• Why It’s Complex: Tax appeals and litigation involve strict deadlines and procedural rules that require legal expertise.

Benefits of Hiring a Tax Attorney

A tax attorney brings unique advantages to tax matters involving the IRS, CDTFA, EDD, or FTB:

1. Legal Expertise: Tax attorneys are trained in tax law and understand the nuances of federal and state tax codes.
2. Representation: They can act as your advocate, communicating with agencies on your behalf and shielding you from direct contact.
3. Negotiation Skills: Attorneys are skilled at negotiating settlements, payment plans, or penalty abatements.
4. Confidentiality: Communications with a tax attorney are protected by attorney-client privilege, unlike those with a CPA.
5. Litigation Experience: If a case goes to court, a tax attorney can represent you effectively.