During its previous term, in a case that definitely took a back seat to the Affordable Care Act, same-sex-marriage, and the other high-profile disputes that the Supremes attempted to resolve, the High Court might have changed the way that doctors, dentists, accountants, lawyers, and other professionals have done business for decades. In North Carolina State Board of Dental Examiners vs. Federal Trade Commission, the Court may have ended a para-state professional organization’s ability to regulate nonmembers.

It seems that an inordinate number of beige-toothed Tarheels were flocking to their local teeth-whitening clinics to get a bleach job. The state dental board decided to fly to the rescue and put an end to this nefarious practice, ostensibly because these country-fried rubes couldn’t possibly do the job right and thus put innocent Polly Pureheart consumers at risk, but really because they wanted to charge $1,000 for teeth whitening and put the usurpers out of business. In a 6-3 decision – the four progressives and two moderates against the three conservatives – the Court ruled that the Board’s prohibition violated antitrust laws, and as the Board is not technically a state agency, no immunity applies.

Some observers predict that barratry statutes may be next. State bar organizations from sea to shining sea have long maintained that there is a special corner of Hell reserved for those who dare to practice law without a license. But, in the Legal Zoom era and in the light of this case, the bar might soon lose its monopoly on legal services.

Legal Limitations on Non-Attorney Tax Preparers

As expats start to take a look at those bank statements which had been relegated to an obscure subfolder in their inboxes, this same question comes up in the context of foreign tax advisors. Under Section 7525 of the Internal Revenue Code, federally-authorized tax preparers have a duty to protect the confidential information that comes from their clients. However, there is a huge caveat: the taxpayer may only invoke the privilege provided by IRC § 7525 in noncriminal tax matters before the IRS and in federal courts. D’oh.

The line between civil and criminal tax law is somewhat murky. As a rule of thumb, if a return preparer’s limited inquiry suggests a good faith error, the return preparer may ask the taxpayer to provide the information necessary to amend the return. The filing of an amended return is the appropriate way to correct isolated, inadvertent, immaterial, and ministerial errors. In contrast, if the return preparer’s internal investigation suggests that the taxpayer has a pattern of similar errors across multiple years’ returns or otherwise suggests willful noncompliance, it may be time for the client to lawyer up.

Making matters worse, certain advisory actions only muddy up the waters for return preparers. These actions prohibit providing advice in any one of the following areas: conflicts of interest, privileges, and the likelihood of criminal tax prosecution. With respect to the latter, most states prohibit non-lawyer return preparers from advising the taxpayer on his or her potential for criminal prosecution.

One can see how this becomes relevant when a taxpayer makes a streamlined submission due to the fact that the taxpayer must certify that his or her tax noncompliance was due to conduct that was deemed nonwillful. One false step could result in the rejection of the taxpayer’s nonwillful certification along with an examination and in extreme cases, a referral to CI.

Understanding The Role of the Attorney

The American Institute of CPA’s (“AICPA”) Statement on Standards for Tax Services (“SSTS”), no. 6, states, in relevant part, that if it appears the taxpayer could be charged with fraud or other criminal misconduct, the taxpayer should be advised to consult legal counsel. Very simply, referral to an attorney should occur at the first indication of fraud.

Gathering facts and assessing the risk of criminal prosecution are the primary roles of the tax controversy attorney. If there is little or no risk of criminal prosecution, the role of the attorney is limited. The attorney will explain to the taxpayer the impact of Circular 230 and the rules of ethics. Nothing short of providing the client with a “crash course” in Circular 230 and the ethical rules of the AICPA will suffice.

Specifically, Circular 230 states that if a practitioner:

“knows that the client has . . . made an error in or omission from any return, . . .[he] must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.”

AICPA ethical expands on this point. “If the taxpayer does not correct an error, a member should consider whether to withdraw from the engagement and whether to continue a professional or employment relationship with the taxpayer.” Although AICPA recognizes that the Code does not require the taxpayer to correct an error by filing an amended return, it explicitly states that, “a member should consider whether a taxpayer’s decision not to file an amended return or otherwise correct an error may predict future behavior that might require termination of the relationship.”

If there is no risk of criminal prosecution and the taxpayer is willing to correct the error, most tax attorneys will advise the taxpayer to continue working with his or her existing tax preparer. On the other hand, if the attorney concludes that there is a risk of criminal prosecution, his role becomes even more vital.

In such cases, the attorney must advise the taxpayer on whether the continuation of the existing relationship with the return preparer is both (a) in the taxpayer’s best interest and (b) ethical. In both criminal cases and in cases that have the potential to turn criminal (e.g., “eggshell audits”), the government will go to great lengths to speak with the return preparer. Thus, removing the return preparer from the equation altogether by terminating the engagement agreement might be the safest thing to do.

At that point, the attorney will explain the options available to the taxpayer, including correcting the incorrect return by (a) filing an amended return (i.e., “quiet disclosure”), or (b) applying to the voluntary disclosure program (i.e., “noisy disclosure”).

To sum up, this area is essentially like the difference between a bleach job and a root canal. If your teeth are really messed up and it looks like the IRS may put you in the dental chair in Marathon Man fashion, reach out to a tax lawyer straightaway.