Regulating Tax Lawyering

AuthorMichael Hatfield
2. Regulating Tax Lawyering
Lawyers often think of the legal profession’s uniqueness a s inhering
inor reflecting—the profession’s self-regulated nature and its
monopoly on certain servi ces, such as representing clients in courts.
Yet, for tax lawyers, matters are quite different. Whereas most
lawyers are subject to regulation only by the state aut horities where
they are admitted and the federal courts in which they practice,
Congress has enacted parts of the Internal Revenue Code to
prescribe tax lawyering standards. Tax lawyers may be subject to both
civil and criminal penalties as a result of their tax advice. The
Treasury Secretary exercises authority over ta x lawyers through
Director of the Office of Professional Responsibility (the “OPR”)
and Circular 230. CPAs who “practice tax” are also subject to the
OPR a nd Circular 230. Unlike most other lawyers, tax lawyers share
their profession with non-lawyers and are regulated by non-lawyers.
2.1. Regulating Tax Lawyering through the IRC
A ta xpayer has the right to structure his affairs so as to minimize his
tax liabilities. This is the right to avoid unnecessary taxation, that is,
taxes he is not obligated to pay. However, a taxpayer commits a
felony if he willfully attempts to evade or defeat taxes he is obli gated
to pay. Under I.R.C. § 7201, such a taxpayer may be fined $100, 000
and imprisoned for up to five years. Of course, lawyers may not
engage in assisting clients in any criminal behavior, including tax
evasion. Model Rule 1. 2(d). But where i s the line between legal tax
avoidance (for which tax lawyers are well-paid) and criminal tax
evasion (which can la nd both client and tax lawyer in prison)?
Generally, criminal tax eva sion requires that the taxpayer k new her
obligations under the tax law but intentionally did not fulfil l those
obligations. In other words, ignorance of the t ax law is a defense to
criminal conviction. See, e.g., United States v. Harris, 94 2 F.2d. 1 125
(7th Cir. 199 1) (mistresses who received payments but argued
exclusion as “gifts” were not criminally liable for tax evasion as the
prevailing legal standard was too unclear to establi sh willful evasion).
A civil fraud penalty may a lso apply. I.R.C. § 6663 .
Willfully filing a return that the ta xpayer does not believe is true and
correct as to every material matter is a felony punishable by up to
$100,000 and imprisonment for up to three years. I.R.C. § 7206(a) (1).
So is aiding or assisting anyone in doing so:
IRC § 7206. Fraud and false statements
Any person who--
* * *
(2) Aid or assistance.--Willfully aids or assists
in, or procures, counsels, or a dvises the
preparation or presenta tion under, or in
connection with any matter arising under, the
internal revenue laws, of a return, affidavit,
claim, or other document, which is fraudulent
or is false as to any material matter, whether
or not such falsity or fraud is with the
knowledge or consent of the person
authorized or required to present suc h return,
affidavit, claim, or document; […]
* * *
shall be guilty of a felony and, upon
conviction thereof, shall be fined not more
than $100,000 ($500,000 in the case of a
corporation), or imprisoned not more than 3
years, or both, together wit h the costs of
Notes and Questions
11. Note that § 6701 provides a civil penalty for aiding and abetting a
tax liability understatement that is very similar to the § 7206(a)(2)
criminal penalty.
12. A lawyer who prepares tax-relat ed documents that are
“fraudulent” or “false as to any material matter” may be
committing a felony under § 7206(a)(2). The false statement nee d
not be material to calcula ting the tax liability. U. S. v. Abbas, 504
F.2d 123 (9th Cir. 1974), certiorari denied 95 S. Ct. 1990, 421 U.S.
988, 44 L. E d.2d 4 77 (1975). Of course, if the return is audited

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