The IRS trains its agents in detail in how to conduct attorney audits. If you are an attorney facing a tax audit, take nothing for granted. The IRS won’t. Some years ago, they even had a program called Project Esquire to prosecute members of the bar. Here is a brief snapshot of what to expect.
The Usual Structure of an Attorney Tax Audit
- Pre-contact analysis
- Initial interview
- In-depth inspection of the taxpayer’s income records
- Use of third-party contacts to verify or refute the taxpayer’s assertions
Third Party and Government Sources
- Online databases
- Other Internet sources
- Court records
- The Web-based Currency & Banking Retrieval System
- Tax returns
- IRP transcripts
Information Your Provide
- Document requests including bank and trust account information
Fee Arrangements and Areas of Practice
The IRS is aware that different areas of practice tend to have specific types of fee arrangements. For example, personal injury attorneys often work on a contingency basis and corporate attorneys often work on retainer.
How the IRS Uses Your Information
The IRS will look at your spending patterns in an effort to determine if you have additional sources of income and if you have reported your taxes in the appropriate year. Examiners will test the validity of reported income by comparing and reconciling the data provided with the attorney’s records and reports.
Another area of concern for the IRS is costs and other expenses you may advance to your clients, particularly if you are working on a contingency basis.
Attorney-Client Privilege Is Rarely a Defense
Generally speaking, attorney/client privilege will not protect client documents and bank account examinations by the IRS. However, there are some narrow exceptions that can be spotted by an experienced tax attorney.
The IRS will leave no stone unturned in auditing your taxes. They will search through both business and personal accounts, and claiming attorney/client privilege is not likely to be a protection. This report is just an overview. There are four more reports in the series that will get into more depth about how the IRS audits attorneys.
Subscribe to Our Five Report Series: How the IRS Audits Attorneys
Want to know more? Ayar Law has written a five part series or reports about How the IRS Audits Attorneys. If you are an attorney who would like to subscribe to this series and other tax information of interest, please visit https://ayarlaw.com/attorney-audit-report.