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24 January 2020 / Accounting Professionals

Tax Attorney vs CPA: Understanding the Difference

24 January 2020 > Accounting Professionals

When it’s time to file taxes, many small businesses have specific tax preparation needs they didn’t encounter the preceding year and may not know whom to call for expert guidance. If you’re in that position, you might be wondering whether to hire a certified public accountant or a tax attorney. 

The answer depends on the specifics of your tax situation. CPAs and tax attorneys are both professional tax preparers, but they perform different tasks. This article should help you understand the differences.

What is a certified public accountant?

In accounting, a CPA license is a highly sought-after credential due to the level of knowledge and expertise a CPA must possess. Becoming a licensed CPA expands career opportunities and can lead to more income for a professional who pursues accounting.

Certified public accountants have passed the CPA exam and fulfilled all state-required training and work experience necessary to obtain their license. Each state has its own set of requirements that must be met before one may obtain a license; there is no national CPA license.

Since CPAs are licensed through the state, they’re certified to practice only in the state that has granted their license. It is possible for CPAs to become licensed in other states under certain circumstances, however.

CPAs perform many services, including:

  • Preparing taxes and providing tax advice. CPAs prepare income tax returns for individuals and businesses, as well as forms for various other financial obligations such as property taxes. CPAs also provide advice to clients regarding their tax situation and how to save money through that minimize one’s tax liability burden.

  • Financial statement audits. CPAs are known for making a career out of preparing taxes, but that’s not the full range of their potential services. CPAs routinely audit client financial statements and provide expert advice on what they find. For example, CPAs will alert the client if they discover any apparent material misstatements.

  • Consulting services. CPAs routinely help clients smooth out problems in their business, not limited to financial issues. They also provide financial planning services.

  • Forensic accounting services. When a business suspects embezzlement, a CPA can dig through the firm’s financial records as far back as possible to uncover fraudulent activity.

  • Provide expert testimony in court. CPAs are regularly called to testify in cases that require a CPA’s expert opinion.

What is a tax attorney?

Like CPAs, tax attorneys are tax professionals who are fully trained in accounting and finance, but the latter specialize in tax-related federal, state, and municipal rules and policies. They know tax law more intimately than a CPA normally does.

They’re also licensed to practice law and may be hired on retainer by law firms that provide tax services. Tax attorneys usually specialize in areas of estate planning and transfers, property acquisitions, and business transactions that result in complex tax liability.

Tax attorneys are mostly consultants, but will represent clients in court if a dispute can’t be resolved out of court. 

Tax attorneys provide the following services:

  • Client representation in court. Tax attorneys represent clients during administrative appeals, and in Tax Court, the Court of Appeals, and even the U.S. Supreme Court.

  • Client representation during an IRS audit. Tax attorneys routinely represent clients under audit by the IRS.

  • Work with CPAs to prepare tax documents. Although preparation of tax documents is mostly a CPA’s focus, tax lawyers often work side-by-side with CPAs to prepare tax documents.

  • Provide legal advice. Since tax lawyers have law degrees, they’re the best source for legal advice pertaining to tax liability. A tax attorney is in a better position to help when your tax situation might involve potential court-based matters like wage garnishment, account levies, and property liens.

Tax attorneys provide attorney-client privilege

With a tax attorney, you enjoy the protection of attorney-client privilege. You don’t have that legal shield with a CPA.

Anything you tell your CPA could be divulged to the IRS or in court; for example, if you’re hiding money in an offshore account. You can share such secrets with your tax attorney and rest assured the information will be kept confidential.

However, if you share the same secret with your CPA, whether verbally or in documents, that person can be legally compelled to divulge the information.

When is a tax attorney the best option?

  • When you are certain you’ll have a taxable estate when you die. If you expect the total value of your estate to exceed $5.6 million ($11.2 million if married), then it will be taxable. The threshold for estate tax liability tends to rise each year. According to The Balance, if the value of your estate reaches the threshold, your heirs will have to.

  • A tax attorney can help you plan your estate so you stay below the exemption threshold and your heirs won’t have to pay so much in taxes.

  • When forming a legal entity for your business. Before forming an LLC, Sole-Proprietorship, S-Corporation, or C-Corporation, it’s a good idea to consult a tax lawyer. The type of entity you form dictates the business taxes you’ll pay.

    A tax lawyer can identify potential tax liabilities and useful protections for each type of entity. The lawyer’s license empowers him or her to complete the legal documents necessary to create your entity.

  • You’re doing international business. Tax laws that govern international business are complex. A tax lawyer will help you with this situation.

  • You are going to Tax Court. Whether you’re under criminal investigation or suing the IRS, a tax lawyer is necessary to represent you in U.S. Tax Court.

    CPAs and other tax professionals can represent clients in U.S. Tax Court if they become an Enrolled Agent. However, any time you’re facing tax controversy, a tax lawyer is going to be a better option.

When is a CPA the best option?

  • You need financial planning. CPAs are the best choice for financial planning services. It’s their area of expertise. They’ll help you figure out when to sell your business, how to transfer it to a new owner, and advise you on the tax liabilities during the process.

  • You have a simple tax problem. You might think your tax problem is complicated, but if you ask a CPA, you might be surprised to learn it’s not as bad as it appears. CPAs can help with a variety of that don’t require legal advice or action.

  • You need a tax plan as “the analysis of a financial situation or plan from a tax perspective.” Tax planning is part of financial planning and aims to reduce tax liability as well as maximize contributions to retirement plans.

  • You need an audit. Whether you’ve been forced to obtain an audit or need forensic auditing to uncover financial fraud, a CPA is the best choice.

  • You need to file a tax return. If your tax situation doesn’t involve back taxes and liens, a CPA is the simpler, more affordable choice for the preparation of a tax return.

Confused? Overwhelmed? Taxfyle can help

Running a small business and meeting your tax obligations can be challenging, especially for startups that have little experience. It helps to have tax professionals on your side to support and advocate on your behalf.

If you’re facing a tax situation you don’t understand, or are overwhelmed by a fast-approaching deadline, contact us to see how we can help.

Ralph Carnicer

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