The IRS recently signaled an increase in scrutiny of attorneys, releasing a comprehensive Attorneys Audit Technique Guide (ATG) for IRS auditors when reviewing attorneys’ returns. The guide pinpoints potential problem areas, as well as procedures, that IRS agents must focus upon when auditing attorney returns. Key areas include:
- Unreported income. Some attorneys may cash fee payment checks from clients’ trust accounts or deposit them directly into personal or investment accounts, believing that the IRS is only keeping an eye on their general operating account. Attorneys would then determine taxable income by totaling deposits made into the general operating accounts, causing the fees from the trust accounts to go unreported. Auditors are therefore instructed to inspect the endorsement on checks from trust accounts, and to pay special attention to checks that were cashed or deposited into accounts other than the general operating account
- Deferral of income. An attorney may attempt to defer earned income by allowing fees to sit in a trust fund until the following year. The ATG stresses the importance of analyzing the source of funds in the trust account at year-end, especially if there is a large ending balance
- Noncash payments. The ATG instructs auditors to be on the lookout for non-cash income which can result from bartering, the exchange of legal services for other services. An effective audit tool suggested by the ATG is to analyze the attorney’s workload and fees. If the workload remains consistent but fees decrease, this may indicate non-cash payments.
Attorneys should always maintain their clients’ trust accounts properly in case the Office of Attorney Ethics audits them. Now the IRS will also be knocking on your door to inspect the attorney trust accounts!
At Urbach and Avraham CPAs, we have successfully handled many attorney trust cases for the Office of Attorney Ethics. We have reconstructed attorney’s trust accounts from source documents for law firms which failed to maintain proper trust accounts. Contact us to see how we can assist you in this area.