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| July 1, 2005 | The
Newspaper of the NYSSCPA |
Vol.
8, No.12 |
How to Recognize Unauthorized Practice of Law
By Ron Klein
There are several practice areas in which CPAs can find themselves interpreting laws for clients, thereby crossing the boundary between what is allowed and what is not allowed.
The only areas where CPAs are allowed to interpret laws for clients are federal, state and local taxation, as long as the legal principles being interpreted do not extend beyond tax law.
U.S. Treasury Circular 230 allows CPAs to represent tax clients’ interests before the Internal Revenue Service, which means CPAs may need to: 1) analyze and interpret how tax laws apply to particular client fact patterns; and 2) consult with tax clients regarding the resulting analyses and interpretations. Many states have adopted Circular 230 as part of their own state regulations.
Almost all states have statutes or regulations prohibiting the unauthorized practice of law (UPL). Some states, such as New Jersey, have strict interpretations of UPL, even when using incorporation services or prepared forms. Always check your own state laws before using such services and forms.
CPAs should consult an attorney when a tax issue involves legal principles that extend beyond tax law, or when any other type of issue or engagement involves legal principles that need to be interpreted for clients. Clients will sometimes apply pressure on the CPA firm to provide legal services in order to avoid a fee from a law firm, but CPAs who yield to such pressure may find themselves being sued for UPL.
Following are some guidelines for areas where CPAs need to consult an attorney:
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Legal principles extending beyond the practice of federal tax law; e.g., partnership taxation issues when the CPA is analyzing obligations created by the partnership agreement, agreements with creditors, and any side agreements among the parties.
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Issues requiring interpretations of state or local law; e.g., partnership taxation, real estate taxation, estate and gift taxation, and business valuation issues, especially when family limited partnerships (FLPs) or family limited liability companies (FLLCs) are used.
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Issues presenting a mix of legal, tax and accounting questions; e.g., entity choices and classifications, as in limited liability companies (LLCs) and limited liability partnerships (LLPs), and estate and gift taxation.
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Formation or liquidation of legal entities; e.g., corporations, partnerships, estates and trusts or both, or any entity that requires the drafting of organizational documents.
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Agreements and documents for mergers, acquisitions, dissolutions, liquidations, employment, compensation, stock option plans or severance.
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Any consulting services involving a legal component; e.g., compensation and benefits planning, and personal financial planning (PFP) when the formation of trusts or other estate planning or asset protection techniques are involved.
Ron Klein, J.D., CFE, is vice president of claims with Camico. Recipient of the 2002 Award for Outstanding Conference Speaker from the Education Foundation of the California Society of CPAs, Klein co-authored the CPA’s Guide to Loss Prevention Practices and CPA’s Guide to Effective Engagement Letters.
