Now that the season to file tax returns has ended, many people may become concerned about whether some aspect of their return might draw the attention of the Internal Revenue Service (IRS) and lead to an audit.
This leads to the question: Should you hire an attorney if you are being audited by the IRS?
Let’s take a quick look at whether or not you should obtain the services of a lawyer when being audited by the IRS, as well as a somewhat related topic for professionals: Should you hire an attorney if you are starting a new business?
We discussed these topics during a recent edition of our weekly radio and web broadcast on KDOW 1220 AM, Wealth Management and You with Connie Yi.
First, let’s get the issue of taxes out of the way. If the IRS determines it wants to audit your return, you will receive an “examination” letter from the agency.
The IRS can exam your returns for fraud for any or all of the past six years. There are two types of basic audits:
- Field Audit: a comprehensive examination of all of your tax return records for a specific year (or years). An IRS agent will perform the exam where you keep your records, either at your home or office.
- Office Audit: an review of your tax return that takes place at a local branch of the IRS, in which the agency is focused on a specific aspect of your declarations, such as a discrepancy on Schedule C.
In many cases, the first time the IRS audits your tax return, the agency is trying to teach you a lesson and it may be fairly lenient if you have made an honest mistake.
If you hired an IRS-certified professional to prepare your tax return and you are certain you made every attempt to declare all of your income and/or business revenue, and only took allowable deductions, you may just need to have the person who prepared your tax return accompany you to the examination.
If you prepared your tax return by yourself, perhaps by using TurboTax or other software program to guide you through the process, you may want to consider having an experienced tax attorney present at your audit, to help you fully understand and properly respond during the examination process.
Obviously, if you know you tried to “push the envelope” when declaring your income and/or deductions on your tax return, you probably already know you need to hire a very good lawyer, perhaps one with criminal trial experience, to assist you during the audit.
If you suspect or know your problems with IRS stem from having received bad advice from the person who prepared your tax return, you should hire a tax attorney. If you can prove your tax preparer is at fault, the IRS may waive its penalty and merely collect back taxes owed.
The second “hire an attorney or not” circumstance we discussed during our broadcast was for starting a new business.
Our basic rule of thumb is that you should consider retaining a business lawyer as the risks and liabilities associated with your products or services increase. More risk needs more protection.
Consultants who provide advice or services without great risk associated, probably do not need an attorney to help them set up a new business. If you conduct research to determine the proper way to establish your consulting business, you may feel confident you have covered all of your bases.
If you can afford to have an attorney manage or assist with the process of legally establishing your business, the additional confidence of knowing the process was performed properly, by someone with experience, may help you sleep better at night.
Medical and other health care professionals or licensed services professionals, such as an engineer or an architect, would certainly want to consult with an attorney, because those professions deal with high risk and potentially severe liabilities for mistakes.
If you are starting a partnership, you should seek the advice of a non-partisan business attorney, to ensure your partnership agreement has sufficient terms to cover the partners’ working relationships and the possible dissolution of the company.
If you are starting a company with one or more members of your family, we highly recommend you hire a non-partisan attorney to create a written agreement that covers the many complex issues of a family business. An attorney will guide you through the exercise of addressing the potential legal issues and their impact on family dynamics and personal relationships.
If your business generates a large amount of revenue, your company will probably need the services of an attorney, as well as an accountant.
If you are planning for significant growth of your new business, consulting with experienced legal and tax professionals will help you perform the necessary cost/benefit analysis of running your business, to determine the proper corporate structure that will provide the most profit and protection.
If you missed the original broadcast of this show, you can listen to a podcast by directly streaming or downloading the MP3 file in our Radio Show Archive.
If you have questions or concerns about any of the topics mentioned above and would like a free consultation with Connie Yi, a California estate planning attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.