As your business grows in revenue and complexity, your tax situation becomes more complicated as well. You may have an employee dedicated to AR, AP and bookkeeping, and you may have a tax professional handle your taxes. At some point during growth, you’ll come up against the question: Do I need a tax attorney or a CPA?

In many cases, you’ll need access to both professionals, because they serve different tax needs. Here’s a breakdown.

TAX ATTORNEY

Tax attorneys are specialists in that hefty document, the IRS tax code, and all its minutiae. They’ve earned a graduate degree from law school and they’re qualified to provide advice on complex legal issues. Business tax law, tax disputes, trusts and estate planning are their area of expertise. Additionally, they’ve been educated in the art of negotiation and the case history which has established current tax law.

Some tax attorneys are also CPAs, but they are otherwise typically not expert in maximizing negotiations and planning tax strategy into the future.

A pivotal distinction to remember is that your relationship with a tax attorney enjoys attorney-client privilege. That’s a basic legal principle which means your attorney cannot be compelled to share information you supplied with third parties like the IRS. Further, when the attorney engages a CPA (employed by the attorney, NOT the client), information shared with that CPA also is protected. However, if your tax attorney prepares your taxes, signing your return as your tax preparer equals waiving the attorney-client privilege.

A tax attorney can provide a written legal opinion on a potentially gray area in respect to taxes. If the attorney judges that the strategy is legally dubious and shouldn’t be pursued, that advice is confidential and protected. However, if the attorney supports the strategy, the written opinion will provide a measure of protection for the client and their CPA.

Some business people may view the services of a tax attorney as confined to litigation only, thinking that tax attorneys are necessary only when suing or being sued. In fact, their expertise is crucial to avoid litigation with strategic legal and financial planning. Consider these situations when utilizing a tax attorney is recommended:

  • Business start-ups need legal advice about the tax implications and structure of the company
  • Your business is growing and requires new legal structure(s) and new tax planning
  • Your business is making more money than previously. In this case, typical CPA advice may be to buy more equipment, vehicles, etc. A tax attorney may suggest different strategies that can actually retain more money while achieving other tax benefits
  • When you consider selling the business, a tax attorney can advise on the tax consequences and assist with a contractual agreement that may reduce tax liability for both parties
  • International business transactions
  • You committed a tax crime
  • You’re under criminal investigation from the IRS
  • You plan to sue the IRS
  • Other litigation and liability issues

CERTIFIED PUBLIC ACCOUNTANT

CPAs earn a license from a state board. Their primary training is in maintaining business and financial records. They have experience in financial planning and crafting general financial and tax strategy for professional and personal purposes. They have the knowledge to assess compliance with the tax code, prepare taxes, and file taxes. A CPA may represent you to the IRS under some conditions.

Ultimately, most businesses require the ongoing services of a CPA, while not all will require a relationship with a tax attorney. A CPA is crucial to the day-to-day running of a business and crafting financial strategies, while a tax attorney is essential if litigation is on the horizon.

CONCLUSION

Every business needs a both tax attorney and a CPA for the life of the entity. Which professional is required depends on the specific issue in play. Most successful businesses use accountants to properly record all transactions, and a tax attorney to develop tax strategies and advise how to classify transactions to minimize tax burden and liability exposure. Ideally, their advice will prevent expensive litigation.

It’s true that attorneys are expensive, and mistrusting and maligning them is a cultural norm. However, their knowledge is essential in the extremely complex arena of tax liability, and it’s far more cost effective to engage them to prevent litigation, rather than involve them after litigation has begun.