Peter G. Masullo, CPA
Attorney at Law
Specializing in Tax Law
New York, NY
www.cpa-taxlawyer.com

The following is a copy of a recent letter outlining current tax law issues faced by attorneys today.

Dear Fellow Attorneys:

I have enclosed a copy of our year-end newsletter, along with some other promotional material. Perhaps you share my frustration with our current political situation. In any event, I hope you find this material entertaining.

Despite our attempts at humor, we take our tax responsibilities very seriously. Our commitment to provide the highest level of quality in our services is backed by the enclosed "Client Bill of Rights." We believe we are the first tax law/ accounting firm in the nation to announce such a comprehensive level of client rights. We will continue to strive to improve and innovate in order to provide the best services possible.

As a tax attorney practicing in NY since 1980, many of my friends, professional contacts, and clients are also attorneys. Due to my first hand experience, I have become keenly familiar with the tax issues attorneys face today.

It seems that IRS has singled out attorneys for special treatment. In a 74 page "Market Segment Specialization Paper," IRS alludes to a study indicating that attorneys have a higher percentage of noncompliance with the tax laws than the general public. Additional test audits led IRS to conclude "it was more productive, from both a yield and compliance standpoint, to concentrate on smaller firms."

While this may not be cause for immediate alarm, I am suggesting precautionary and preventive measures. Some of the hottest current tax issues for attorneys are as follows:

Advanced Client Costs. In most cases, you are not allowed a current deduction for litigation costs advanced for your clients. According to IRS, these costs are to be treated as loans for tax purposes. Unfortunately, the courts agree.

We recommend that you make adjustments to your accounts at year end to conform to the IRS treatment of advanced costs. It is also advisable to include a statement of how you computed your deduction with your tax return. A large deduction for "Client costs" or "Litigation costs" is an invitation for further scrutiny by the government.

Employment Related Issues. If you hire independent contractors, be sure you file the proper 1099 forms. Written agreements are a good idea, and you should retain any other indicia of "free lance" status, such as invoices, business cards, proposals, etc. Be particularly careful in your classification of persons who provide service on a regular basis. In other words, you can’t avoid withholding and employment taxes on your secretary’s wages by classifying these payments as fees.

Income Reports. While this applies to all professionals, criminal attorneys and others who receive large cash payments must be particularly careful. All attorneys should explain any discrepancies between income reported on tax returns and income according to information reports. For example, you may receive a 1099 form under your ID # for a large fee in connection with a matter involving collaboration with other attorneys. If you report only your share of the fee without further explanation you are asking for a tax audit. The government’s computers will not know that you split the fee unless you tell them so. 

 

We also provide a full range of tax law consulting and income tax preparation services. Our offices are conveniently located in NY City and upstate New York.