ABCast Episode 22
Episode 23 - What Can A Tax Attorney Do For You?
In Episode 23 – What Can A Tax Attorney Do For You Janathan Allen discusses what a tax attorney brings to the table that many other don’t. Janathan notes that many attorneys don’t like numbers and yet there is so much in the business world that focuses upon the numbers associated with measuring business success and reporting the information driving every aspect of that business. A tax attorney can provide so much more than a CPA and some other type of lawyer.
Jan
Welcome to AB Cast, integrating Legal Tax Accounting and Business Solutions. I’m Janathan Allen. This podcast is about What can a tax attorney actually do for you?
Neil
Jan, In this episode we’re talking about what a tax attorney can do for a business and an individual client. Not all attorneys are obviously tax attorneys. What in your mind, from a broad perspective, does a tax attorney bring to the table that many others don’t?
Jan
Well, I think you’re right. I think that not all attorneys are tax attorneys, and interestingly enough, most attorneys don’t even like numbers, which is sort of a paradox because there’s so much that we do and deal with in the legal world that is really associative and determinative of some of the numbers that are derived from accounting or say tax returns, that it’s the juxtaposition really of the accounting and the tax and the legal that a tax attorney brings to the table. And it’s the synergies of those substantive areas that allows them to overlap and actually do planning not only for an entity but for individuals in a far more comprehensive way than say just an attorney or perhaps just a CPA.
Neil
So on that subject of “just a CPA,” there’s also a huge advantage for clients dealing with a tax attorney versus dealing with a CPA or a financial planner. Can you explain the benefits of the attorney-client protections?
Jan
Well, there is this doctrine known as the attorney-client privilege, and so what occurs is that when you interact or you hire an attorney, the information that you disclose to your attorney is privileged. That means that in most instances, unless there’s a crime being perpetrated, that the information that you tell an attorney is protected from discovery that is the attorney’s not allowed even under the discovery rules in a litigation matter to divulge what it is the client has said to the attorney again, unless there has been some sort of crime that’s currently being committed.
Neil
So how does that affect your work notes as you talk with them and the financial work that, the calculations that you’ve done versus a CPA or a financial planner?
Jan
Well, oftentimes what we do is because we do a lot of litigation support for attorneys and what occurs is because there’s that double layer of attorney-client privilege, there’s the attorney-client privilege for the defense or plaintiff’s counsel. And when the defense or plaintiff’s counsel hires our firm, it’s with the law firm, the A PC portion of our firm that gives them double protection because now I’m not allowed to disclose or I’m not under the threat of discovery because I’m an attorney as well.
Neil
And so if the IRS goes to A CPA and says, “we want all your notes and all your conversations and all your emails and all your work product,” the CPA has to submit them.
Jan
That’s correct.
Neil
Whereas a tax attorney, you’ve got some additional protections that might apply
Jan
Absolutely.
Neil
One of the advantages of having a tax attorney is tax planning. In your mind, can you give me just a broad perspective, what is in your mind the concept of tax planning?
Jan
Well, tax planning for us is really the amalgamation of information regarding either a business or an individual and combining everything it is that we know about a client, the type of real estate they own, the type of business they have, the profit and loss, the tax brackets that they may be in, how it is that they own, whether it’s property or businesses. And we really take a hard look at it as to how it is that we can create from a transactional perspective, more efficiencies in terms of transactions or entities that can essentially change the characterization of the type of income that is earned or received. And so it’s really a multi-layered review of a person’s life and then reordering it so that it makes transactional sense
Neil
Basically. Jan, you’re talking about how when and where income and losses are realized.
Jan
Absolutely. It makes a critical difference. For example, if you have property, say in another state, people presume that it won’t be necessarily taxed in the state of California and that may or may not be true. So how is it that you order what it is that you have and how it is that the transactions are created that an attorney can assist with in the ordering and the revision and the changing of the entities? Again, to put it in a hierarchical order that makes sense both from a tax perspective and from a transactional perspective.
Neil
And so in essence, we’re talking about transactional planning as opposed to structuring taxes or planning for taxes.
Jan
I would say that the planning for taxes is an element of the transactional planning. Yes. So transactional planning, if you think of sort of a broad umbrella as to what an individual or business actually has in its totality, and then there are a number of things. There can be entity changes that can be transactional overplays between and buy and between entities. Then there’s the individual components that are associated with the various assets that can all be reviewed, revised, and potentially changed in order to create the overall transactional plan.
Neil
You briefly mentioned California takes a different approach to how it views who owes them taxes. So does the United States. So let’s talk about that for a second before we get any further. What is the United States the IRS’s perspective on what income is taxed for a US taxpayer?
Jan
For as many times as we’ve had a podcast or as many times as I’ve spoken to professionals and clients, I think it’s still surprises me that most people don’t understand that the US’ view of taxes for individuals or companies is that if you are a US citizen, then you are taxed on your income worldwide. It doesn’t matter where you live, it doesn’t matter what you do it, you are a US citizen living outside of the United States. You have to file a tax return with the US government because it’s your duty to do so.
Neil
Or if you’re a US citizen who has interests and money outside of the United States
Jan
Well, and I think the issue arises is there are individuals that will have dual citizenship. And so while they’re living in another country and they have US citizenship and they’re paying taxes in that foreign country, then they presume they don’t have a duty or a requirement to file taxes in the US and that’s absolutely false.
Neil
So they have to file the return. The good news is there may be some offsetting tax exemptions based on treaties between countries, but the fact is the tax return still has to be filed.
Jan
For as many times as I’ve heard from clients that have called the office and have relayed to me that they’ve been told that they don’t have to file a tax return. My response is always this, if you don’t file a tax return, then essentially the statute of limitations never begins to toll. And the reason that the statute of limitations is important is because it limits the amount of time that the government can go back and potentially audit you for any sort of reason.
If you haven’t filed a tax return, then the statute never begins to run. That means the IRS can go back for as long as you haven’t filed a tax return, which could be 10, 15, 20 years, go back and assess particular tax. And if you can’t prove or disprove what it is that they’ve laid out and what they feel an appropriate assessment is, you owe that. You owe that tax. Yeah. So I’m always concerned when I hear people say, well, I’ve had someone tell me I don’t have to file a tax return. And technically while there may not be enough income to tax or have a tax obligation, the tax return is necessary in order to begin the tolling of the statute of limitations.
Neil
Very good. And California takes kind of the same arrogance of approach if, forgive me for that. California takes an approach that if you live in California, I don’t care where you’re earn the money, we want a piece of it.
Jan
Well, California does have a fairly aggressive tax regime. That’s true. And I think what ends up occurring is it’s taken, and it’s not really a novel concept, but for example, I’ve had clients that have earned options working in the state of California. So those options had value while they were living in California. Those options appreciated while they lived in California.
Why would California then go back and allow somebody to move out of state, state of Texas to a non-tax state, take all of the benefit and the time over of the appreciation of those options, and then have some sort of transactional transition, sell the options or convert the options and then sell them and the taxable event occurs outside of the state of California and then California says, well, we’re going to take the stance that we believe that a portion of that appreciation was earned here in California, therefore it’s taxed here in California. And when you think of it from a logical perspective, from a government’s governing perspective in terms of raising revenue, it makes sense. And interestingly enough, there are other states that are beginning to take that stance as well.
Neil
That’s interesting. How does that apply to someone who may have contributed to a 401k over their entire work life and then they decide to retire to another state?
Jan
Well, that’s what happens all the time. And if that retirement account was essentially if the funds were put aside in a retirement account, then California gets its piece.
Neil
One of the services we provide is domestic tax planning. In your mind, what are some of the essentials of domestic tax planning?
Jan
I think domestic tax planning really at its fundamental core is just that planning. I can’t tell you how many times people will come into the office, we prepare the taxes, they don’t like the outcome because they didn’t know what was happening to them. They didn’t take the time to understand the tax implications of what happened during a year. They wait too long, they wait till the end of the year, and then tax planning is impossible.
So once somebody gets a fairly large tax bill and they’re not happy with the result, then they want to do tax planning. But the fact of the matter is planning is something that we should do every day of our life. There’s nothing that ever stays the same. I plan to go to the grocery store or I plan to go to a restaurant, I plan to go home. Why don’t I tax plan at the same time? And for us, the tax planning, understanding what’s happening to an individual over a period of time prior to the end of the year, assists us in making suggestions to minimize the tax implication of things that may be happening
Neil
Or to defer income from this year to the next. Jan: Absolutely.
Neil: And how is that different from international tax planning?
Jan
International tax planning is tax planning, but it’s just far more complex because now you’re not only dealing with the vagaries of both federal and state tax here in the us, but now you’ve added in the tax regime of another foreign country. So the complication arises in that the code, of course, has its regulations for how it is income’s going to be taxed and whether or not it’s foreign income. But there are a number of mitigating circumstances that can be utilized by an individual in order to put together the international tax plan.
And one of them is a bilateral tax treaties that the US has with a number of countries around the world. And those bilateral tax treaties can treat different types of income differently than the code does. And what ends up occurring is the treaties generally prevail. So when you’re doing tax planning, it’s one thing to understand the tax implications here in the us but you also have to understand what tax is taxable or non-taxable under the treaty, which is going to impact how it is that the code treats it as well. So it’s sort of a multi-level type of planning, beginning with the tax treaties going to the foreign country where the other taxes may be withheld and then coming into the United States utilizing the US IRS regime.
Neil
So another advantage I think a tax attorney brings to the table, Jan, is when we’re talking especially about things like substantial portfolios, rental income here domestically and internationally, is the ability to create and structure entities and the relationships between them. And I’m thinking of PIGs and PALs, that’s something that A CPA or financial planner can’t do. We can finish the job of structuring their entities and managing the interactions to protect the assets and minimize the tax.
Jan
Yeah, pigs and pals are an interesting phenomenon because real estate, back in 1986, when the tax code was last majorly revised, what Congress did was it began to phase out the losses that people might have during a year, let’s say if they had rental income. And what they did was they put limits on the amount that could be taken over a period of time.
So currently under the code, if you have rental losses and you’re an individual, you are only allowed to take $25,000 of that loss even though your economic actual cash out of pocket loss maybe higher. And there was, because there were so many abuses, there were real estate deals and schemes that were going on.
So when they revised the tax code, what they did was they begin to limit these losses. But often what that does is it can limit real economic losses as well. For example, a true life example, I had a piece of property that my parents had left me, and the property was located in Montana, and it was an old home. It was built in the 1880s, and it was as I was getting ready to sell it, of course, about 10 days before closing, what occurred was a pipe, one of the water pipes to the home burst.
Well, that little sojourn for this little tiny piece of property in Montana was about a $50,000 outlay. It wasn’t something that you could put on extended credit wasn’t something you could get a loan for because of the leak. You had to go in and you had to fix it. That’s $50,000 that you have to come up with. And then because of the limitations, it doesn’t allow me to take that whole loss, the 50,000, it would limit me to the $25,000. So there’s some things that you want to be able to plan for and be able to reconfigure so that that loss limitation doesn’t really come back and harm you economically.
Neil
So Jan, does a tax attorney prepare tax returns?
Jan
Of course. Our firm, because we’re actually two firms, I have an accounting firm and I have a law firm, but as an attorney, I can prepare a tax return. That’s not an issue. As long as you have the appropriate software and you’re up to date on the tax laws, an attorney can certainly prepare a tax return.
And we do here in this office, we prepare federal, state, local tax returns, whether they’re federal or whether they’re CDTFA, the EDD, the FTB or any of the 50 states including Puerto Rico. So yeah, we do tax compliance. We call it tax compliance as a differentiation from tax controversy, which is where we would go back and we would defend whatever it was that we did on a tax return before the IRS or whatever taxing authority was questioning what occurred.
Neil
Let’s take this from a business’s point of view. So it’s not just the fact that you have somebody preparing your taxes, it’s someone who’s ready to defend you and will defend you before the EDD, before the C-D-T-F-A for any of these FTB or the IRS.
Jan
Absolutely. And the fact is, when you, for whatever reason a client were to be pulled for audit, at least you know that you have someone that’s gone back who’s prepared the return that understands return, understands why the return was prepared the way it was, and can argue with the Internal Revenue Service or whatever, taxing authority as to the veracity and the accuracy of the tax return.
Neil
Jan, as a tax attorney, does it surprise you to know that most IRS auditors are not certified tax professionals?
Jan
No, that doesn’t surprise me at all. I think being an auditor in any taxing authority is probably a very difficult job. You have a 50,000 foot view of what’s going on. You really have to get to issues. And quite frankly, I think some of the auditors that I’ve dealt with are really unsung heroes. They’re really trying to do their job. There are others that really just don’t care. It’s like any profession. I’m just here to pick up a paycheck and off I go. There are some auditors that I love dealing with simply because they’re reasonable. They understand that we’re not coming from a place of hiding things or being subversive, and those are the individuals I enjoy dealing with. There are some that I must, that I just dread walking into a room with.
Neil
Part of the surprise is you’re educating them on GAAP principles and the law.
Jan
I think one of the most interesting audits that we ever went through was it was a case about 15 years ago, and it was a startup company, and the startup company had gone out and it was creating deflectors for the war in Iraq. And so they were building these life jackets that were supposed to be bulletproof. And because it was a startup company, what was occurring was they were factoring the receivables, and so they didn’t really have inventory and inventory on a cost of goods sold basis is different than on an accrual basis. And the whole distinction in this audit came down to how this particular auditor decided that they were going to calculate cost of goods sold, which didn’t meet any gap standard. It didn’t even meet the tax standard. And we spent quite a bit of time trying to educate that particular auditor as to what was going on and how it should be calculated. It was the case that got us closest to tax court.
Neil
Wow. Jan, you often say it’s not in the best interest of a US taxpayer or a California taxpayer to speak directly with a tax agency. Why is that?
Jan
Because people want to give information, and what they don’t realize is that sometimes the information they give them is not helping them. It may help the auditor, but it’s not necessarily helping them. And one of the things that we want to do is we want to limit the scope of an audit. So when an auditor contacts an individual or a company, it’s generally for a specific timeframe, something a taxpayer can say can suddenly expand that audit from the original timeframe substantially. So it’s critically important that if somebody is under audit, that if you’ve not been under audit before, if you don’t understand the process, the best thing to do is find an accountant or an attorney, sign a power of attorney, and then let the attorney or the CPA speak for you.
Neil
Even though their intentions are good and they’re just trying to come across as good people, they’re betraying their own interests,
Jan
Learn more about our integrated legal tax, accounting, and business solutions and visit https://allenbarron.com or call (866) 631-3470 to schedule a free consultation.
Practices Areas
tax resources
legal resources
estate planning & trusts resources
accounting resources
business consulting & planning resources
Downloads
Neil
Even though their intentions are good and they’re just trying to come across as good people, they’re betraying their own interests.
Jan
They can. That’s happened several times.
Neil
So Jan, another important topic we’ve talked about in the past is when you sign a tax return, any tax return, most of them at the bottom say, under penalty of perjury, I certify that the above information is true and accurate, or something to that effect. How does that come back to bite us and how does that bite spouses?
Jan
Oftentimes when people file tax returns and they’re asked to sign them, most people don’t physically sign a return anymore. What they do is they file or they sign the e-file authorization, which has the same disclaimer on it that says that you’ve seen them return what’s in it, and you are verifying the veracity and the accuracy of that return. Most individuals, most couples that we deal with, there’s generally one person, whether it’s the husband or the wife that’s responsible for the tax return.
And what ends up occurring is oftentimes the spouse that’s not responsible for the return just presumes that what it is that’s being reported on their behalf is accurate. So they’ll sign the e-file authorization thinking no moment of whatever it is that’s occurring. Then a year or two could be six months. They find themselves in the middle of, let’s say, a separation and divorce.
And all of a sudden the relevancy of these tax returns are being called into question because there could be some element of fraud that’s being alleged by the family law attorney because we want to know where the assets are, where the assets went. So too many times, and I must admit that most of the times that I hear this, it’s coming from the wife who says, well, my husband’s handled all of this, and so my admonition is, if you have a husband or a spouse that’s doing your tax returns, you need to understand what’s happening in them because you’re equally responsible for what’s going into that tax return as a person that prepares it or has it prepared.
When you file or sign that e-file authorization, make sure you understand what’s in the return. Because if there’s something, let’s say there’s an audit three, six years later, you are still responsible, even though you may not be married at the time, subsequent divorce could occur, it goes back and if you filed a married filing joint return, you are responsible for the tax liability and the accuracy of that return.
Neil
So what is the concept of the innocent spouse?
Jan
Well, oftentimes what ends up happening is there is the assertion by the spouse that doesn’t do the tax returns, that they didn’t know what was going on. And I’ll be honest with you, there is a concept under the law that says ignorance is no excuse. Right?
But there are times, there’ve been some egregious cases that have come up where the husband was doing something generally illegal that the wife was totally unaware of, and so to make them responsible for illegal acts of another person that they didn’t know of and they weren’t aware of seemed to be fairly harsh. So what the IRS did was it promulgated the innocent spouse defense? And what that says is if the spouse didn’t know what was occurring and couldn’t know what was occurring, then the IRS can go and make a determination that the spouse was innocent of the whatever tax allegations or tax fraud that are being assumed or alleged against the other spouse, and they won’t hold them accountable for any resulting tax liability.
Those are very, very difficult cases to go back and prove because what the innocent spouse cases that we’ve seen, the IRS is beginning to evolve its position. In saying that you may not have known about the fraud, you may not have known about the illegal activity, but you lived a lifestyle that was paid for by that illegal activity.
So there’s an evolution in thinking in auditors about how far they will extend this innocent spouse protection. So it behooves anyone, whoever it is. When you sign e-file authorization or you sign a tax return, you need to understand what’s in that tax return
Neil
And you need a tax attorney, not a CPA,
Jan
Preferably
Neil
Jan, Another part of what a tax attorney can do is to negotiate and resolve penalties, liens, levies, garnishments, those types of controversies.
Jan
Absolutely. Once a tax return’s been filed, and if there is a resulting tax liability, the IRS will assess penalties and they will assess interest because taxes need to be paid in a periodic timeframe. So if you’re filing your taxes or you’re earning income in 2023, if you don’t have a W2 wage, then you’re required to file quarterly estimated taxes to the extent that those aren’t filed and they aren’t filed timely.
Then at the end of the year, when you go to pay your tax, the IRS will send you this wonderful statement after you’ve paid your tax liability in full, perhaps as of April 15th, and say, well, yes, thank you for the taxes, but you owe penalties and interest clients. I can’t tell you how many come back and say, well, I paid my taxes on time. Well, no you didn’t because we didn’t do any tax planning. You didn’t estimate your quarterly estimated tax payments, so they weren’t paid on time, even though you may have paid your taxes in full for the previous year on April 15th. So for us, it’s really, this goes back and ties into the tax planning.
It’s critically important for people to understand that when they file for a tax return, the taxes to be paid are to be paid timely, and those generally mean estimated tax payments.
Neil
Jan, finally, one of the advantages that our clients receive is most tax attorneys don’t have the Allen Baron component, which fills out the rest of the suite of services. How does the integration of being a tax attorney with other legal services, accounting and business advisory services help our clients?
Jan
Well, I think the key there is the integration of the services. It’s always difficult when you’re coming to or trying to get to a solution, relating to an issue. If you don’t take a look at all of the potential elements that should go into a solution. And what ends up occurring is when you have the substantive issues of tax accounting and law all in one place, and they’re integrated in one firm, or they’re integrated in one project essentially, then you have far greater vision in terms of the complexities of what’s happening that can be addressed at the time as opposed to being mere afterthoughts. So when I think of the integration, the most important component of that is understanding the individual and everything that’s happening to them in order to suss out issues that in the accounting or the tax or the legal area, that may not come to the fore if you’re only looking at an issue through one vertical, say the tax lens. So the integration becomes a very important component of what it is we do here.
Neil
My final question today is, do you think most businesses have a tax attorney?
Jan
I think that’s an interesting question. I think most businesses have perhaps a controller and an accountant or a CPA that’s doing taxes. My guess is not a lot of them have tax attorneys. I think that there’s a lot of misperception relating to the overlap of what CPAs and attorneys do, and I think there’s always that fear that attorneys cost more than CPAs. Yes, but the fact of the matter is, when you’re dealing with a tax attorney, you’re broadening your scope in terms of potential solutions for issues that you may be facing that A CPA may not have at their disposal.
Neil
And if you’re serving a client as just a tax attorney, you’re still able to integrate those other disciplines in your recommendations and your perceptions and conclusions.
Jan
Well, that’s the beauty of a firm like this, and that’s really the reason we do what we do. It provides a far better, more comprehensive service to the client at a far more effective fee than just doing or looking through one particular lens.
Neil
Thank you, Jan.
Jan
Learn more about our integrated legal tax, accounting, and business solutions and visit https://allenbarron.com or call (866) 631-3470 to schedule a free consultation.
Contact Us To Learn More About Allen Barron's Services
For more information or to discuss your tax, legal and accounting needs contact Allen Barron or call 866-631-3470 for a free and confidential initial consultation. Learn about the importance of integrated business strategy and coordination across legal, tax and accounting systems.
Offices of Allen Barron, Inc.
Main Office
16745 West Bernardo Drive, Suite 260
San Diego, CA 92127
Phone: 858-304-0947
Phone: 866-631-3470
Fax: 858-376-1410
San Diego Office
5720 Oberlin Drive
San Diego, CA 92121
Phone: 866-631-3470
Fax: 760-741-1410
Las Vegas Office
333 South Sixth Street, Suite 230
Las Vegas, NV 89101
Phone: 702-749-4430
Fax: 702-933-1748
San Diego Office
750 B Street, Suite 2610
San Diego, CA 92101
Phone: 619-702-8356
Fax: 619-923-8356
San Francisco Office
300 Montgomery Street, Suite 410
San Francisco, CA 94101
Phone: 415-481-0475
Fax: 415-762-1539
Phoenix Office
40 North Central Avenue
Phoenix, AZ 85004
Phone: 602-903-7018
Fax: 602-357-1655