Handling your own tax audit or dispute can be tempting, but it is generally not advisable. Direct communication with the IRS or state tax agency can lead to missteps that can be difficult to correct. Many criminal defense lawyers advise clients to avoid direct communication with the police, and a similar reluctance can exist with the IRS regarding tax situations. It is useful to add some distance between yourself and direct communications with the government, especially in more serious tax matters.
For lawyers handling their own tax audit or dispute, advocacy and documentation skills may be beneficial, but dealing with the IRS can still be intimidating. Audits can start innocuously with a simple letter from the IRS, but it is essential to be cautious and reflective, especially in more serious matters. While representing yourself in a tax case can sometimes make sense, it is generally better to have an accountant or tax lawyer handle it. Seeking professional representation may yield better outcomes, even when factoring in the cost of professional fees.
The choice between a tax lawyer or CPA may depend on the case and the procedural setting. It is often advisable to involve a representative early in the process to avoid potential pitfalls. Taxpayers who attempt to handle their cases themselves may end up spending more on professional fees later to correct mistakes. Pro se representation in Tax Court cases, even by lawyers, can result in poor outcomes, as seen in cases like F. Lee Bailey’s $4 million dispute with the IRS, where crucial issues were mishandled, resulting in significant penalties.
Bailey’s case exemplifies the risks of handling a tax dispute without professional help, as he lost on most issues, including the tax treatment of his yacht, “Spellbound.” In another Tax Court case, Hale v. Commissioner, and Pace v. Commissioner, similar fundamental accounting problems led to unfavorable outcomes due to a lack of unbiased and objective evaluation. Having a tax lawyer or CPA handle the case early on can help identify and address these problems more competently, ultimately leading to better results for the taxpayer. The key takeaway is that seeking professional representation in tax audits and disputes is generally the best course of action for taxpayers.
