Tax Lawyer’s Dilemma: Recent Developments Heighten Tax Lawyer Responsibilities and Liabilities

Abstract

The efforts to curb the use of tax shelters have had a significant detrimental impact on the vast majority of tax professionals who seek to provide legitimate tax advice. Recent legislative and administrative efforts, based largely on heightened disclosure requirements and increased penalties, are not effective solutions for the tax shelter problem, largely because they are only prospective in nature and taxpayers often move on to new types of shelters. Furthermore, the recent court decisions are unlikely to provide sufficient guidance to tax professionals for them to determine what the proper standards should be. Although tax shelter litigation has been ongoing for nearly two decades, the recent wave of cases stands out due to both the astonishing financial recoveries and the prominent institutions targeted. For example, in United States v. Stein, dubbed the largest tax fraud case in history, the government filed a forty count indictment against seventeen former KPMG accountants, a former partner at Sidley Austin Brown & Wood LLP, and a former financial executive. These cases have contributed to a seismic shift in the nature of tax practice by deterring lawyers and law firms from providing opinions for legitimate tax planning purposes. The codification of the economic substance doctrine as part of President Obama’s Health Care Act inflicts further harm on the nation’s tax system by increasing uncertainty because it is overly broad and fails to specify when the doctrine applies. Furthermore, the Act threatens legitimate business transactions, which if tested for economic substance under the unreasonably broad provision, could fail the statutory test.

This Note argues that the burdens of heightened liability and increasing uncertainty undermine the ability of tax lawyers to add value through viable tax advisory services, and that the rules and standards governing tax opinions should be revised to encourage lawyers to give legitimate tax advice, rather than driving lawyers away from the practice altogether.