INCOME TAX UPDATES

BY

RICHARD M. COLOMBIK, JD., CPA

RICHARD M. COLOMBIK & ASSOCIATES, P.C. 

NO PRIVILEGE AGAINST IRS FOR ACCOUNTANT, USUALLY

      Many taxpayers are unaware that the state court privilege of the confidentiality of their relations with their accountant are not privileged before the federal government.  This means any conversation with your accountant about how you did something, why you did it, or where you did it, is not privileged.  Therefore, many people resort to utilization of their attorney to discuss these types of issues.  But what happens when the attorney needs complex computations and the attorneys, themselves, are not also dual degreed professionals and CPAs, or have to hire a CPA to help them.  The questions can become quite sticky. 

      In Jack Bell vs. United States, 74 AFTR 2d par. 5705, this issue under IRC §7604 of a government?s enforcement of summons was ruled upon.  In Bell, a  law firm, hired an accounting firm, to prepare some complex foreign transfer pricing issues.  The Internal Revenue Service began an audit of the corporation?s 1987 and 1988 tax returns and issued an informal document request relating to its transfer pricing system.  The client disclosed two reports prepared by a large accounting firm that was prepared almost a year later.  Every page was stamped, ?Privileged Attorney-Client Work Product?.  The dispute with the IRS was settled.   

      Two months later, the IRS began a second audit relating to the corporation?s 1989 and 1990 tax returns.  This time the IRS issued another  IDR, and the taxpayer disclosed certain documents and notified the Internal Revenue Service it was withholding others.  The IRS argued that the documents were prepared by an accountant and, as such, were not covered by the attorney-client privilege.  The court, after reviewing the documents, stated that the doctrine of attorney-client privilege, protects materials prepared by an attorney in anticipation of litigation.  Fed. R. Civ. P. 26(b)(4)(b) extends protection to ?facts known and opinions held by experts retained by the party asserting the privilege are not expected to be called as witnesses at trial?.  Since the accountant was, in fact, hired by he law firm, the court, after review of material, decided that the accountant was engaged primarily to assist the law firm in preparing for its dispute with the Internal Revenue Service.  Since the material underlined the work at issue represented opinion work product, it was subject to a higher level of protection and considered privileged.  Therefore, the attorneys were able to have the attorney-client privilege extended to the accountants, since the attorneys had engaged them, to provide work needed in a dispute with the Internal Revenue Service.

FRAUDULENT TRANSFER SET ASIDE

      What do you do if you owe the federal government $341,000.00 and have a valuable piece of real estate that is subject to a mortgage and you have not paid your current real estate taxes?  Well, the normal presumptions might be:

      1) File an Offer in Compromise.

      2) Negotiate an Installment Payment Agreement.

      3) File for Bankruptcy.

      Those might be logical, but Kim T. Kilgore in United States vs. Kim T. Kilgore, et al. 74 AFTR 2d Par 5711, decided to instead pull the tiger?s tail.  Kilgore deeded real estate to Ms. Shirley Garrity, in spite of pre-existing IRS lien.  The United States took Kilgore and Garrity to court alleging that the transfer amounted to a fraudulent conveyance and, as such, should be set aside.  The government conceded that the real estate was subject to a prior perfected security interest from the bank, which was superior to the federal tax lien, as well as the county?s tax lien on personal assessments that Garrity failed to pay.  The court ruled that the transfer was done with intent to delay, hinder or defraud the United States.  Therefore, the transfer, was set aside and deemed to be void and of no force and effect.  The court further agreed that the United States was entitled to foreclose on its lien on the real estate at issue. 

      The moral of the story,  don?t do it.  If the government?s got a lien, do not try to fraudulently transfer property, instead contact competent counsel to direct you in what you may or may not due.

      Richard M. Colombik, JD, CPA, is the principal in the law firm of Richard M. Colombik & Associates, P.C.,  and serves as chairman of the Federal Taxation Council.  He is an elected representative in the Illinois State Bar Association Assembly, and also serves as liaison to the IRS district director for the Illinois State Bar Association.  He can be reached at 630-250-5700.