When Is an Accountant Not Enough?

Changes to the Illinois tax code, set to be implemented in 2022, could significantly affect businesses. While the extent of the impact will vary on a case-by-case basis, the new legislation highlights the importance of knowing when a certified public accountant (CPA) isn’t enough and when businesses should contact an tax attorney.

“Accountants and tax attorneys could potentially both solve and know your issues, but generally, a tax attorney may be better informed about proposed changes to legislation,” says Adam Ansari, an attorney at Clark Hill in Chicago.

With more small businesses getting involved in legal cannabis and cryptocurrency, there has been an onslaught of new legislation both at the state and federal level. “In those particular situations, tax and business attorneys can potentially be much more well-versed than a CPA because these are such new areas of law,” Ansari adds.

Tax attorneys are good resources, for example, when trying to figure out the taxation and tax preparation needed for cryptocurrency or which expenses can be deducted for legal marijuana businesses. “These are cases that don’t have a lot of legislative history, and the tax code doesn’t explain them very well,” Ansari says. “Everything is really a function of the case law that is out there and when you’re dealing with case law, tax attorneys are better prepared to help.” 

There is a lot of overlap in the accounting services that both an attorney and an accountant can offer, but there are some things only an attorney should handle, says Andrew Gordon, an attorney with Gordon Law Group in Northfield.  An attorney is licensed with a state bar association and can represent taxpayers in disputes with the IRS. CPAs are not authorized to litigate on behalf of a client in these situations. 

The main advantage is attorney-client privilege over accountant-client privilege, which is more limited, Gordon explains. “In many cases, especially regarding tax issues, accountants can be a witness for the government against the taxpayer because there is no privilege.”

He reports his firm has seen a significant rise in audits, and the IRS has said it plans to continue increasing the number of audits it performs. “One of the biggest mistakes a taxpayer can make is having their accountant represent them in an audit.”

There are several other tax accounting scenarios in which a business should seek help from an attorney rather than a CPA, Ansari says, including out-of-state or international taxation, succession planning, tax crimes or structuring a new startup. “One big aspect with both tax controversies and business structuring is that tax attorneys look and analyze case law, whereas typically CPAs do not,” he says.

Attorneys and accountants can both help clients with business formation; however, what may seem like a basic decision during this process can have substantial and costly effects on a business in the long run. Many of the most important documents for creating a business structure, such as an operating agreement for incorporation of bylaws or shareholder agreements, are best left in the hands of an attorney, Gordon says.

“Accountants shouldn’t draft those documents. They are legal agreements, and if there is litigation or a dispute, it’s going to be attorneys interpreting those documents, so they should be drafted by us,” he adds.

This is especially true with startups, where quite often more than one person is involved. “One thing most people don’t think about when they are starting a business is that frequently they break up, end in a dispute or even in divorce,” Gordon says. 

Here, he explains, attorneys can draft documents, such as operating agreements, that anticipate how to resolve potential disputes. “Planning for that, and having attorneys involved in drafting those documents, is very important in the beginning. It saves a lot of time, money and energy in the future if there are any of these issues.”

In particular, Gordon advises startups to consider the significance of how they are documenting relationships and how they staff up, which can often happen rapidly in the tech industry.

“If you’re hiring people to do websites, logos or to create any works for hire, you need all the rights to whatever is being created and you need an attorney in place to draft those documents,” Gordon adds.

As far as finding the right tax attorney, Ansari suggests looking at which bar associations attorneys are involved in, as well as looking up anything they’ve published. “Can you understand their legal writing from a layperson perspective?” he says. “Your attorney should be able to explain a sophisticated tax concept in a way you understand it.”