Ethical Problems for Tax Lawyers

AuthorMichael Hatfield
3. Ethical Problems for Tax
While tax lawyers face many of the professional responsibility
problems other lawyers do, such as conflicts of interest and handling
confidential information, there are several d istinctive situations that
pose ethica l problems for tax lawyers. First are those situat ions in
which a tax la wyer provides a dvice to a cli ent in a manner expect ed
to protect the client from certa in pena lties, even if the advice turns
out to be wrong. Second are situations involving mistakes, such a s
discovering that a prior year’s ta x return is incorrect or catching the
IRS making a mistake in the clie nt’s favor. Finally are situations that
involve how private ta x lawyers interact with lawyers and other
employees at the IRS.
3.1. Tax Opinions and Tax Shelters
A ta xpayer who makes an “honest mist ake” still owes the taxes due
(and i nterest on the amount due), an audit may reveal this . Yet, the
taxpayer must pa y additional penalties only in certain situations . For
example, IRC § 6662 imposes a 20% pena lty, if the taxpayer
underpaid tax due to “negligence or disregard of the rules or
regulations, or, regardless of negligence or disregard, if the
underpayment was “substantial ” (i.e., more than the greater of $5,000
or 1 0% of the tax owed). IRC § 666 2(b)(1 ), (b)(2) , ( d)(1).
It i s in
seeking protection from penalties that many cli ents turn to tax
lawyers. Thus, clients w ill often seek assurances from a tax lawyer as
to a favorable position on the return since such assurances may
protect them from the penaltie s, even if the position fails to be
sustained on audit or in litigation. Tax lawyers earn significant fees in
providing such assurances (i.e., providing opinions as t o the proper
tax treatment).
In general , a t axpayer will not be subject to a § 6662 penalty if she
acted reasonably and in good faith with respect to the return position
that resulted in the underpayment of ta x. IRC § 6664(c)(1). A
taxpayer who relies on a tax la wyer’s professional advic e may cite
doing so as evidence of acting reasonably and in good faith. Treasury
Regulations § 1.6664-4(b)(1). However, the taxpayer must have
disclosed all releva nt facts to the lawye r, and the lawyer must base the
advice on all relev ant law taki ng the facts into consideration, making
no unreasonable assumptions. Treasury Regulati ons § 1.66 64 -4(b)(1).
In short, the tax lawyer’s advice must be reasonable and in good faith
and the taxpayer’s reliance itself must be reasonable and in good
While t he taxpayer penalty regime is complex, it is important to note
that there are specific protections provided for different levels of
confidence in tax adv ice. Similar to the requirements on a tax return
preparer under § 6694, there will be no penalty premised on a tax
position for which there is “substantial authority” or a tax position
that is disclosed on Form 82 75 and for which there is a “reasonable
basis.IRC § 666 2(d)(2 )(B). Re-read the considerati ons described
above with respect to § 6694 and the meaning of “substant ial
authority” and “reasonable basis.Remember that a position with
substantia l authority is one for which there is about a 4 0% chance of
success, if litigated, and a position for which there is a reasonable
basis is one for which there is about a 1 02 0% chance of success if
The substantial authority and reasonable basis standards are objective
standards. However, in some instances, in order to avoid a penalty,
the taxpayer must also reasonably believe that the position is “more
likely than not” to be sustained on its merits in litigation.
The “more
likely than not” standard is greater than 50%. A taxpayer is
considered to “reasonably believe ” if the taxpayer reasonably relies in
good faith on the opinion of a professional tax advisor, if the op inion
is based on the tax advisor’s a nalysis of the pertinent facts and
authorities and unambiguously states that the tax advisor
concludes that there is a greater than 50-percent likelihood that the
tax treatment of the item wil l be upheld if cha llenged by the Internal
Revenue Service. Treasury Regula tions §§ 1.6662-4 (g)(4)(i)(B) [non-
corporate taxpayer]; 1.6664-4(f)(2)(B)(2) [corporate taxpayer].
This special requirement applies to “tax shelters.” In common usage,
a “tax shelter” is a complicated tax scheme intended to generate

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