IRS Tax Exams in the Legal Industry

A Guide for the Legal Industry

Within this past year, the IRS updated the “Attorneys Audit Technique Guide.” Included in this update are key items that the IRS is looking for during the course of an examination. Attorneys can expect to have their appointment books, disbursements, receipts and accounts receivable journals, time summary reports and other client and financial data scrutinized and reconciled to their tax returns to ascertain the validity of both income and expenses. In addition, the auditors will be examining attorney/client trust accounts to determine if there is any unreported income contained within these accounts. Since many attorneys compute gross income based on withdrawals from the client trust account, analysis of these accounts is usually the first step in the audit process. Preparing for and providing all of the above information can be daunting and time-consuming. Attorneys have tried to refuse access to these records by claiming attorney-client privilege, which basically means that any information relating to an attorney's client is privileged and shall remain confidential to any third party. This privilege, however, generally does not apply to the Internal Revenue Service. The ATG states that “As a 'general rule,' where a party demonstrates that there is a legitimate need for a court to require disclosure of such matters, the identity of an attorney's clients and the
nature of his or her fee arrangements with his or her clients are not confidential communications protected by the attorney-client privilege.”