How Attorneys Should Handle Tax Issues With Their Clients

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How Attorneys Should Handle Tax Issues With Their Clients

How attorneys should handle tax issues with their clients

Attorneys provide advice on a variety of topics, helping their clients work through any number of legal circumstances. This advice is invaluable, giving clients the ability to remain in compliance with a multitude of laws.

The majority of attorneys are focused on the areas of the law in which they have expertise and understandably so. Often times, though, this advice results in changes to the tax status for the clients. Maybe the attorney knows there will be tax ramifications, but those seem less important in the current situation than dealing with the legal issue. Perhaps the attorney doesn’t fully understand the tax situations the legal advice is creating.

In fact, attorneys will often disclaim responsibility for any tax traps associated with the legal services they provide.

If you believe this is happening in your legal case, consider adding an attorney who specializes in tax law to your team. It is important to consider both the legal and tax consequences of any step you take during any type of legal matter.

General Legal Matters

As you move through the legal process, regardless of the type of legal situation you’re facing, you will want to ask your attorney about the tax implications related to the decisions you’re making. The majority of attorneys will recommend that you consult an expert.

Brian A. Morris

Attorney Brian Morris, from the Morris Law Center recommends speaking to a tax specialist.

“All our tax work gets referred out,” says David Reischer, Esq., Attorney and CEO of LegalAdvice.com. “It’s too specialized to handle.”

Some attorneys will suggest that seeking the advice of a CPA as the proper course of action. That’s where a tax attorney who also is a CPA is often the best solution, providing clients with advice related to tax laws and delivering the financial knowledge required to meet any situation often with overlapping knowledge as to the underlying legal issue.

“Tax advice is a slippery slope,” says Brian Morris, Attorney at the Morris Law Center. “I tend to limit my discussion of taxes to examples of what most people do. And I then insist that the client check with their CPA for advice that is specific to the client’s situation.”

Divorce Settlements

A divorce judgment involves division of property and other assets the couple owned together. As these settlements occur, they can create significant tax consequences the following year and for years into the future.

While focusing on helping you receive the best possible settlement now, your divorce lawyer probably will not pay a lot of attention to how that settlement may affect your tax situation years down the road.

As Elaine T. Silver, Esq., explains, the tax implications for those going through a divorce are extensive. The timing of the finalization of the divorce, the division of retirement account funds, how division of property affects deductions, and how alimony payments affect income all have an effect on the client’s tax calculations over the next few years.

“If they are salaried employees, their elected withholding may or may not accurately reflect their after-tax income,” says Silver, a Collaborative Attorney and President of the Florida Academy of Collaborative Professionals. “In Collaborative Divorce, we include in our professional team a financial neutral who has the expertise to address this issue.

“I know enough to know what I don’t know, and to know when it’s smart to bring in experts,” Silver says.

Complex Financial Situations Related to Divorce

A divorce settlement could make an already complex financial situation for a family even more difficult to understand, which often necessitates advice from a tax attorney. For example, if the family owns a business, has a high net worth, has foreign investments, or owns rental properties in multiple states, the divorce further complicates these issues related to tax positions and future tax ramifications.

Tax attorney and author Gabrielle Hartley

When dealing with complex tax law in divorce cases, attorney and author Gabrielle Hartley often recommends referring the work to a tax attorney.

It is important for an attorney to recognize when he or she does not have the expertise to help a client manage the tax implications of legal matters related to divorce, says Gabrielle Hartley, a Practicing Attorney and Mediator, as well as the author of the book, Better Apart, The Radically Positive Way to Separate.

“There are many complex tax considerations that need expertise that is outside my wheelhouse,” Hartley says. “I am always an advocate of sticking with what you know. I customarily refer my clients to tax experts when complex financial issues with tax consequences are at issue.”

Another issue that creates complexities for families as they go through divorce is how laws change regularly regarding taxes. It can be difficult to keep track of new tax laws for an attorney specializing in divorce who does not regularly deal with taxes, according to Maria M. Barlow, attorney at The Law Offices of Maria M. Barlow, LLC.

“Tax laws are far outside of the scope of divorce law,” Barlow says. “I suggest to my clients, prior to filing taxes, have a pro forma return completed. I always suggest parties consult an independent tax professional for specific laws pertaining to their own individual tax returns.”

Immigration Legal Matters

Immigration is another legal matter some attorneys deal with regularly that can lead to tax changes for clients that the immigration lawyer may not fully be able to manage.

According to Renata Castro, Esq., of the Castro Legal Group, those seeking help with immigration status could have a number of complex tax situations. Even without being American citizens, clients may have American tax obligations based on income earned in the United States or elsewhere in the world.

The assets the client holds also may be subject to certain tax laws and rules that change as the client’s immigration status changes.

“Foreigners may become tax residents of the United States either by becoming green card holders or by meeting the substantial presence test,” Castro says. “In both scenarios, worldwide income is taxed, and many individuals are unaware of that.

“As a result, before we are hired as immigration counsel, we discuss the asset position of the client and the possible tax implications of establishing U.S. residence. We then refer it out to a CPA or tax attorney for tax planning.”

Estate and Business Planning

Attorneys involved in planning for future financial situations, such as regarding estates and privately owned businesses, have certain rules and laws they must follow. How tax liabilities fall into those rules may create some situations that a dedicated tax attorney can best handle, according to Robert Theofanis, Attorney at Law for Theo Estate Planning.

“The purpose of my representation isn’t to ascertain or reduce my clients’ tax liability, whether in the present or in the future,” Theofanis says. “So I do not provide any tax advice. But there are tax considerations that we discuss.

“I provide clients with information about estate and income taxes upon death and how various tax concepts will apply to the choices they make for their plan. If I identify a potential tax issue, I refer that out to a tax attorney or CPA.”

With business planning, Shira Kalfa, Founder & Partner of Kalfa Law, says clients need to begin the process of business planning as early as possible. Starting too late creates major issues that are difficult to overcome down the road.

And even as the business owner plans for the future, seeking advice from a tax attorney for the short-term and long-term ramifications to the tax situation is just as important.

Kalfa says business owners who are planning to sell the organization also often start the process too late, which results in significant potential taxable gains. If the client seeks tax planning advice too close to the actual sale, the actions will not have enough time to affect the overall tax bill.

“Speak to a tax lawyer or planner regarding your business now if you have plans to entertain a sale at any time in the next 10 years,” Kalfa says. “Implementing a structure that could cost $5,000 in legal fees now could save tens of thousands or hundreds of thousands of dollars in tax in a few short years.”

To schedule a 10-minute call with an experienced tax attorney, contact the Tax Law Offices of David W. Klasing. We have dual CPA and tax attorney capabilities, and our team is ready to handle any kind of tax situation you may be facing.