Tag Archives: income tax

IRS Audit Guide Targets Attorneys

IRS has released its Attorneys Audit Technique Guide (ATG) to help auditors sniff out what are perceived potential problems with the way attorneys complete their income tax returns.

Some of the highlights:

1. Unreported income – Generally an attorney will deposit a litigation award into his trust account, later disbursing the client’s share and paying the attorney his fees. Sometimes, he may simply cash the award check, or deposit the check directly into a personal or investment account, which could lead to omission (intentionally or by mistake) of the income from the eventual tax return.

2. Deferral of income – After resolution of a case, an attorney may attempt to defer income truly earned by allowing the legal fees to remain in the trust account until the next year. To do so would clearly be a tax avoidance move under the “constructive receipt” doctrine.

3. Noncash payments instead of fees for services rendered – The ATG suggests, for example, that an attorney might borrow a large sum of money from a client, and then pay it off by performing legal services. While the loan may be shown on the attorney’s books, the income resulting from the obvious relief of debt may somehow escape the bookkeeper’s attention! Also, bartering may find its way into the relationship between the attorney and the client. Auditors are told by the ATG to be on the lookout for situations in which the attorney’s workload has not decreased from one year to the next, but reported fees has declined — a possible indication that the attorney is rendering services in exchange for noncash payments.

4. Advanced client costs – Often, attorneys who take cases on a contingency basis may pay litigation costs on behalf of clients, only to later recover those costs when the eventual award comes in the door. Attorneys on the cash basis of accounting may be inclined to deduct these advanced costs when paid. ATG concludes, however, that courts have determined that costs paid on behalf of a client are more properly treated as loans for tax purposes, thus not deductible as a current year cost of doing business. The expectation of reimbursement is the issue here.

Our “Voluntary” Tax System: Dispelling the Myth

Every once in a while, some uninformed bloke or other will pontificate about how income taxes in this country are all “voluntary,” and therefore those who don’t pay aren’t really violating the law.

But the IRS points out that the requirement to pay taxes is NOT voluntary and is clearly set forth in Section 1 of the Internal Revenue Code, which imposes a tax on the taxable income of individuals, estates, and trusts, not to mention Section 11 which similarly imposes income tax on corporations. And beyond all of that, Section 6151 requires taxpayers to submit payment with their tax returns. Failure to pay taxes could subject the malingerer to criminal penalties, including fines and imprisonment!

And in discussing Section 6151, the Eighth Circuit Court of Appeals noted, “when a tax return is required to be filed, the person so required ‘shall’ pay such taxes to the internal revenue officer with whom the return is filed at the fixed time and place. The sections of the Internal Revenue Code imposed a duty on Drefke to file tax returns and pay the ….. tax, a duty which he chose to ignore.” (United States v. Drefke, 707 F2d 978, 981, 8th Cir. 1983)

And the same goes for the actual filing of returns — not “voluntary” either, according to IRC Sections 6011(a), 6012(a) et seq, and 6072(a). And as the IRS will tell you, the word “voluntary,” as used in IRS publications, refers simply to our system of allowing taxpayers to determine the correct amount of tax and complete the appropriate returns themselves, as opposed to having the government determine the tax for them.