Why Talking to a Tax Attorney may be Better Than an Accountant: Your Tax Planning may not be Confidential without the Attorney-Client Privilege
When it comes to tax planning, many individuals and businesses rely on the advice of accountants to help them navigate the complex world of taxes. However, it is important to note that the communications between a taxpayer and an accountant regarding tax planning may not be privileged, which would be the case if the same conversation was had with an attorney. This is due to the broad definition of the term "tax shelter" under IRC section 7525.
A tax shelter is defined as any plan or arrangement that is intended to reduce or eliminate a taxpayer's liability for federal income taxes. This definition is extensive and includes all forms of tax planning, including retirement plans and business restructures. This means that any communication between a taxpayer and an accountant regarding tax planning could potentially be subject to disclosure if the IRS were to investigate said taxpayer's tax return.
It is important to note that the attorney-client privilege applies to communications between a taxpayer and a tax attorney. This means that any communication between a taxpayer and a tax attorney regarding tax planning would be protected from disclosure to the IRS. This is a crucial consideration when it comes to tax planning, as the attorney-client privilege can provide a greater level of protection for taxpayers.
An example of a tax shelter that may be subject to scrutiny by the IRS is a retirement plan. The IRS has been known to challenge the tax benefits of certain retirement plans, such as 401(k)s and IRAs, if they believe that the plan was established primarily for tax avoidance purposes. Similarly, a business restructure may also be subject to scrutiny if the IRS believes that the primary purpose of the restructure was to reduce or eliminate the business's liability for federal income taxes.
In conclusion, it is important for taxpayers to be aware of the broad definition of "tax shelter" and the potential for IRS scrutiny when it comes to tax planning. The attorney-client privilege provides a greater level of protection for taxpayers and a tax attorney at Safeguard Law, PLLC can help taxpayers navigate the complex world of taxation and provide greater protection for their communications regarding tax planning.
Footnotes:
IRC § 7525.
See, e.g., United States v. Zolin, 491 U.S. 554 (1989) (holding that the attorney-client privilege applies to tax advice).
See, e.g., United States v. Daugerdas, 951 F. Supp. 2d 589 (S.D.N.Y. 2013) (noting that the IRS has challenged the tax benefits of certain retirement plans).
See, e.g., United States v. Textron Inc., 577 F.3d 21 (1st Cir. 2009) (noting that the IRS has scrutinized business restructures for tax avoidance purposes).