Tax Help – What do you really need? (Part 5 of at least 5) When Should One Choose Enrolled Agents or Tax Attorneys?

• IRON100
• November 6th, 2009

As one can see, I have suddenly rediscovered my ability to count, which infers correctly that I will end this series at Part 5. I would, however, after I have given my perspective on this issue, like some input and even guest commentary on this subject from the StockTwits community. What I am about to discuss comes from someone who runs very small basically "one-person" enterprises. The answer to the question posed in the title will immediately be impacted by at least one of the following items:

1) The business owner hires employees.

2) The situation I faced at one time, when one partner or a group of employees cross state lines.

3) When there are succession and inheritance issues involved in the business.

4) There is a direct violation of tax code that lands a business owner or even individual tax payer in tax court.

Here's my opinion (and it is truly an opinion based on my experience and my knowledge of tax laws):

Usually, the use of an enrolled agent or a tax attorney generally boils down to cost and the individual businessperson's knowledge of tax laws. That leads to a couple of basic paths:

1) If there is an audit or a violation of tax code that leads to back payment of taxes and there is room to negotiate with the IRS out of court, then it is LIKELY cheaper to consult an enrolled agent. One much check the costs of services for either enrolled agent or tax attorney, but if the violation and the fines and back taxes are pretty clear cut, then odds are, it will be cheaper (and perhaps as effective) to use an enrolled agent to interface with the IRS to settle tax issues. The cost of tax attorneys and enrolled agents vary by state and community, so above all, DO YOUR HOMEWORK. Remember, the enrolled agent is only tasked to be a negotiating interface on U.S. Federal Tax issues and not on state tax issues!

2) If any of the four items comes into the picture, then I think (again, MY opinion) you should hire the services of a tax attorney. If one remembers from earlier in the series, a tax attorney is the only individual who can maintain a tax professional-client privilege relationship inside a court of law. In my view, with the four stipulations presented at the beginning of this post, makes hiring a tax attorney over an enrolled agent a "slam dunk".

I promise that no one in my immediate family is an attorney. Regardless of that fact, when it comes to determining the structure of a business, given the unique laws of the 50 states of the U.S.A., your first stop should be with a tax attorney. If there are issues that apply to compensation laws and how they fit into the rubric of your business tax structure, the best place to start if one is to construct it is through a tax attorney. 

For example, the decision my brother (my partner) made in starting an LLC in South Carolina as opposed to North Carolina was aided by an attorney who understood the different forms an LLC could take in both states. That one decision saved me thousands of dollars, because had the LLC we shared been based in North Carolina, I would have had to create another on in South Carolina which would have cost me quite a bit, even if I had used one of many web based legal services vendors. I also might not have known about the dissolution fine that I was able to avoid, and would have been nicked by a couple thousand there also.

If there are family issues (inheritance or succession issues), the way to resolve those issues is to consult with an attorney and competent insurance professional as well. One must be thinking about those issues before one starts a business, or as soon after a partner is brought on. The only way to really resolve those issues is to use an attorney to set up the proper structures that minimize taxation and eliminate family or partner disputes on the death of a business partner or owner. One attorney I know told me once that lawyers "love family disputes" particularly when there was no legal structure to minimize the damage of them. CPAs can help decide structures and help build cash flow monitoring mechanisms in a business, but a competent tax attorney is the only one that can structure a business entity to avoid conflicts that might occur caused by death or retirement of a partner from a business. One does not want to see an attorney with a smile on his or her face when that attorney discovers there is a legal dispute for which there is no pre-defined legal remedy. By using a tax attorney one avoid such things through wills, buy-sell agreements, and other cost and tax-saving legal structures.

If there has been a violation of the tax code that drags one into court, once again, the tax attorney is really the only way to go. What one must realize is that an attorney can be both a tax attorney and be an enrolled agent for purposes of negotiating the payment of back taxes and penalties. The tax law firm you use can provide, in many cases, all of those services and can provide you with an action plan and legal defense if laws have been violated, either willfully or negligently.

If the issue with tax laws is a state issue (either with one or multiple states), the tax attorney again wins out, because the enrolled agent can basically only deal with FEDERAL TAX issues. If the business becomes so huge that one has multiple employees in multiple states, one will likely have to hire some kind of accounting or accounting and tax law practice to manage such things. Once you begin to dive into the realm of worker compensation, employee retirement planning, and legal liability issues, one cannot play around and not be prepared for a lawsuit or some other legal entanglement. One must, if one has any measure of sanity in one's body, get the proper legal help to protect one's business and one's livelihood. This is one area in which I confess I have no expertise, but for which I could pick up because I have relationships with competent attorneys.

Summary and Conclusion:

Here is the upshot of this series:

1) At least in the beginning, do YOUR OWN TAXES. Learn a little about capital gains (long-term and short-term), dividends, depreciation, amortization, and learn how it affects your tax return. If you ever run your own business, you will need to understand how these concepts can affect your taxes. Later, bring on the software if you need it. The more you know about taxation, the better you will be able to manage your business for maximum profit.

2) For business process issues and complex tax return issues, hire a CPA. They have specific expertise in how to operate businesses in a cash flow efficient and tax efficient manner. They can help in ways you might not imagine to save your business in the long run. Individuals and small businesses can benefit from their expertise. Very few tax software programs or tax preparation services can provide such help.  They might be awfully good, but I seriously doubt any of them can match the skill of a competent CPA.

3) (And I know this is putting the cart before the horse, but hear me out). Before you hire that CPA, I still strongly suggest that you hire a tax attorney if you are going to run a serious business as a going concern. The same will apply if you have a complex estate that may have to be divided upon your death.  Competent tax attorneys understand the complexities of business entities in one's state (and they should have great knowledge of U.S. Federal Tax Code as well). As long as one fully understands where one's business will be located and what the business will be doing, a competent tax attorney can guide you to the most tax efficient business form and help the business owner stay out of trouble with municipal and state tax authorities, as well as the IRS.

3) If you are an individual or a one-person business entity located in a single state and you are in arrears on taxes or have a serious issue with regard to an audit, then you could hire an enrolled agent for Federal Tax issues. For state tax issues, you are highly likely to need a tax attorney also. It might be possible for a tax attorney to BE an enrolled agent also, which would cover you on all of the local, state, and Federal Tax bases.

 I would like others in the StockTwits community to add comments regarding these subjects particularly with regard to multi-state, multi-employee business tax issues. This venue is for your education and for an open forum for personal finance issues. All contributors within our community are welcome to express their views.

Tickers: enrolled agent, estate planning, Federal tax, IRS audit, municipal tax, state tax, tax attorney, tax court

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