Regulating Tax Lawyering

• Author: Michael Hatfield
• Pages: 11-38

2. Regulating Tax Lawyering

Lawyers often think of the legal profession’s uniqueness a s inhering

in—or 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 .

12

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

prosecution.

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