The IRS has just published new Specialized Guidelines for Attorney Examinations. These guidelines will enhance the attorney audit guidelines already available in the IRS Market Segment Specialization Program, a program which is designed to train IRS examiners as specialists in particular industries.
The purpose of the new guidelines is to help IRS examiners identify non-filing and non-compliant attorneys. A recent test in the San Diego area disclosed that more than 10 percent of attorneys in the area were non-filers.
As part of the new program, the IRS will search for non-filers by using computers to check state and county bar associations as well as the national Martindale Hubble Directory, matching attorney names with those filing tax returns.
The guidelines point out that personal injury attorneys are often an excellent source of tax collection because of the advanced client cost adjustment usually made by the IRS. The advanced client cost adjustment is based on the fact that costs paid by attorneys on behalf of clients are actually loans to clients and do not qualify for a tax deduction.
The guidelines also include essential information about the record keeping systems used by attorneys. A list of questions is included in the guidelines that IRS auditors are to use in their initial interview with an attorney.
Finally, the guidelines offer information about the IRS position concerning attorney-client privilege. Fee arrangements, for example, are considered to be outside the scope of the privilege.