Business and Personal Tax Returns: Why Work With a Tax Attorney

Who May Prepare a Tax Return

According to the IRS, anyone who prepares or assists in preparing federal tax returns for compensation must have a valid preparer tax identification number (PTIN). Attorneys and certified public accountants need one when they prepare, for compensation, all or substantially all of a federal return or claim for refund.

California adds its own requirement. Paid preparers in California must register with the California Tax Education Council (CTEC) unless they are exempt. According to CTEC, California certified public accountants, enrolled agents and attorneys with the State Bar of California are generally exempt; the attorney exemption in Business and Professions Code §22258 applies to active members of the State Bar.

Representation After the Return Is Filed

The differences among preparers matter most after a return is filed. According to the IRS, attorneys, certified public accountants and enrolled agents have unlimited representation rights before the IRS and may represent clients on any matter, including audits, payment and collection issues, and appeals. Preparers who hold only a PTIN may prepare returns but have no authority to represent clients before the IRS, other than for returns they prepared and filed on or before December 31, 2015. Participants in the IRS’s voluntary Annual Filing Season Program may represent clients whose returns they prepared and signed, but only before revenue agents, customer service representatives and similar IRS employees, and not in appeals or collection matters.

An attorney who prepares a return can therefore remain the client’s representative if the return is examined, appealed or referred to collection. An attorney admitted to practice before the U.S. Tax Court can also represent the client there if the case is litigated.

Legal Analysis Before a Position Is Taken

Every return reflects legal conclusions: whether an item is income, whether a payment is deductible, whether a worker is an employee, whether income is taxable in California. The law also sets standards for the person who prepares the return. Under IRC §6694(a), a preparer can be penalized for an understatement caused by an unreasonable position. A position is unreasonable unless there is or was substantial authority for it. A position that is properly disclosed needs a reasonable basis, and a position involving a tax shelter or reportable transaction requires a reasonable belief that it would more likely than not be sustained on its merits. The penalty is the greater of $1,000 or 50 percent of the preparer’s income from the return, and the greater of $5,000 or 75 percent for willful or reckless conduct.

Measuring a position against these standards, by reading the statute, regulations, rulings and cases and deciding whether disclosure is appropriate, is legal analysis. It is most useful before the return is filed, not after the IRS raises a question.

California returns raise their own issues. California does not follow federal bonus depreciation, limits Section 179 expensing to $25,000, and applies its own rules to residency and the source of income, so the state return often requires separate calculations rather than a copy of the federal figures.

Attorney-Client Privilege: What It Covers

The attorney-client privilege protects confidential communications between a client and a lawyer made to obtain legal advice. In United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), the Second Circuit explained that “what is vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer.” The court also held that the privilege can extend to an accountant who helps the lawyer understand a client’s financial information so that the lawyer can give legal advice. It does not apply where what is sought is only accounting service, or where the advice sought is the accountant’s rather than the lawyer’s.

In practice, conversations in which a client describes a transaction, a past problem or a planned course of action and asks how the law applies can be privileged when they take place with a lawyer acting as a lawyer.

What the Privilege Does Not Cover

Courts have drawn a clear line around return preparation itself:

• In United States v. Lawless, 709 F.2d 485 (7th Cir. 1983), the court held that information transmitted to an attorney for the purpose of preparing a tax return is not privileged, because information given with the intent that it be disclosed to a third party, here on a return, is not confidential. A claim of privilege must be made question by question or document by document.
• In United States v. Frederick, 182 F.3d 496 (7th Cir. 1999), the court held that there is no common law accountant’s or tax preparer’s privilege, that preparing a return is accountants’ work even when a lawyer does it, and that a document prepared both for use in preparing a return and for use in litigation is not privileged.
• In United States v. Cote, 456 F.2d 142 (8th Cir. 1972), taxpayers who filed amended returns based on work an accountant did for their lawyer were held to have waived the privilege as to the information reported and the details underlying it. The court left room for protection of unpublished material that was not part of the data revealed on the returns.

The result is that the legal analysis and advice a lawyer gives about how the law applies can be privileged, while the figures and information intended for the return generally are not. Once a return is filed, the information it reports, and the details behind that information, generally are not protected.

Accountants and enrolled agents have a narrower protection. IRC §7525 extends the confidentiality protections of the attorney-client privilege to tax advice from federally authorized tax practitioners, but only in noncriminal tax matters before the IRS and noncriminal tax proceedings in federal court, and never to written communications promoting participation in a tax shelter. In Frederick, the court added that nothing in §7525 suggests these practitioners are entitled to privilege when they are doing other than lawyers’ work.

The Crime-Fraud Exception

The privilege has a firm limit. In United States v. Zolin, 491 U.S. 554 (1989), the Supreme Court explained that the crime-fraud exception keeps the privilege from extending to communications made for the purpose of getting advice for the commission of a fraud or crime. The line is between past and future conduct: a client may speak candidly with a lawyer about what has already happened, but advice sought to carry out a future crime or fraud is not protected.

Unfiled Returns and Past Errors

Unfiled years and inaccurate returns are where legal analysis matters most. According to the IRS, the failure-to-file penalty is 5 percent of the unpaid tax for each month or part of a month a return is late, up to 25 percent, and the failure-to-pay penalty is 0.5 percent per month, also up to 25 percent. For returns due after December 31, 2025, that are more than 60 days late, the minimum failure-to-file penalty is the lesser of $525 or 100 percent of the tax due. When a required return is not filed, the IRS can prepare a substitute return from the information returns it has received; its Automated Substitute for Return program closed 592,773 cases in fiscal year 2025.

Before late or amended returns are filed, a lawyer can evaluate the exposure, including whether there is any criminal risk and whether a voluntary disclosure through IRS Criminal Investigation’s Voluntary Disclosure Practice should be considered. Because filing generally ends protection for the information a return reports, that analysis belongs before anything is filed.

When an Accountant or Enrolled Agent May Be the Right Choice

Many returns raise no significant legal questions, and a qualified CPA or enrolled agent may be the right preparer. Lawyers and accountants also often work together, with the accountant keeping the books and the lawyer handling the legal questions. The case for an attorney is strongest when a return involves an uncertain or disputed position, a transaction with significant tax consequences, unfiled or inaccurate prior years, or a client who is already in contact with the IRS or the Franchise Tax Board.

Key Deadlines

For calendar-year taxpayers, individual returns (Form 1040) and C corporation returns (Form 1120) are due on the 15th day of the 4th month after the end of the year, and partnership (Form 1065) and S corporation (Form 1120-S) returns are due on the 15th day of the 3rd month. Federal extensions are generally available for six months, but an extension of time to file is not an extension of time to pay. California automatically allows six more months to file for individuals and seven more months for C corporations filing Form 100, with the tax still due by the original due date.

The Bottom Line

Having a tax attorney prepare a return does not shield the return’s contents from the IRS, and it is not necessary for every taxpayer. What it adds is legal analysis of the positions the return takes, privileged advice about how the law applies, and continuity of representation if the return is examined, appealed or litigated. For returns that raise real legal questions, those advantages can matter. More about our business and personal tax return services.