The world of tax is a mixture of accounting and law. Tax law sets out a scheme where a taxpayer’s income and expenses are used to determine the amount of tax owed. Generally, the amount of income and expenses is an accounting question. A taxpayer will have multiple sources of income and expenses that are recorded in general ledgers, profit/loss statements, etc. Those are all accounting documents. The tax law will state what types of income are taxable (business income, wages, etc.) and what types of expenses are deductible (business expenses, mortgage interest, etc.). The law will also say what types of income are not taxable (gifts, inheritance, etc.) and what types of expenses are not deductible (credit card interest, personal car expenses, etc.). Tax accountants and tax lawyers overlap in the same world, but they have very different roles in helping taxpayers with their taxes.
An accountant’s role is mainly that of tax compliance and preparing the tax return to meet filing requirements. The preparation of a tax return will inherently result in an accountant advising about tax laws. This would technically be considered the illegal practice of law without the proper license. However, congress realized there was a need for tax advisers, who were not lawyers, to help people with their tax filing requirements. Accordingly, Congress allows accountants to advise about how the law applies to tax returns. Accountants are also cheaper than lawyers, so that helps reduce the fees for getting a tax return prepared. In addition to advising about tax law, accountants may also interact with the IRS administratively, but they cannot file any court actions against the IRS.
Generally, accountants are great at preparing tax returns and advising taxpayers about well known areas of tax law. However, they are not as good with tax controversies (audits, tax court, etc.) or the grey areas of the law, simply because they do not have the legal training that lawyers do. Lawyers on the other hand do not prepare tax returns and do not prepare accounting statements. However, what lawyers are good at are tax controversies and rendering legal advice about the grey areas of the law.
One big problem with accountants giving legal advice about taxes is that they can only interact with the IRS administratively and cannot go to court. This means they can only give taxpayers half of the answer. Unfortunately, in many instances the only way to solve a problem with the IRS is to sue them in court. This means accountants will often give improper advice during audits, because they have no experience in resolving a tax problem in court.
One of the mistakes inexperienced accountants often make is missing the deadline to petition in Tax Court for the appeal of an audit. This is because they may not know the legal ramifications of certain IRS notices. Once a taxpayer misses that deadline, a taxpayer’s only option is to pay the tax up front and sue for a refund in District Court. There are two problems with District Court lawsuits. First, the tax owed by a taxpayer after audit can be fairly large and the taxpayer may not be able to pay it. Second, District Court is far more expensive to litigate in than Tax Court. Therefore, if you are under audit it is important to ask your accountant what tax lawyer they use, just in case the “law” part of taxes becomes a larger issue than the “accounting” part, and a lawyer needs to be consulted.
Darren Pluth, Esq.
Calone and Harrel Law Group, LLP (Northern California)
Phone: 209-952-4545
Email: djp@caloneandharrel.com
