As tax attorneys, we know there is one question that almost every client asks that we cannot answer. We might have a reasonable estimate of the answer, we may even have statistics to support that estimate, but we cannot provide the answer. Providing the answer is, in fact, illegal. That question is “What are the chances that my return will be audited by the IRS?”

This prohibition traces its history to the Civil War. In the Civil War’s aftermath, certain individuals sought out clients who might have lost a horse or a cabin during the Civil War, and would represent their clients by bringing claims before the Department of the Treasury to recoup the losses. Unfortunately, the claims presented to Treasury were not always the client’s claims – in fact, they were usually for much bigger horses or houses than what the client had lost. In effect, these agents were seeking to defraud the government.

To corral these varmints, Congress passed the Horse Act of 1884, authorizing the Secretary of the Treasury to “regulate the practice of representatives of persons before the Department of the Treasury,” including standards for character and competency, codes of conduct, and sanctions for violating those rules.^[1] Once the United States established the current federal income tax in 1913, Treasury Department Circular No. 230^[2] provided such rules for those representing taxpayers before the Internal Revenue Service.

One of those rules is that “The practitioner must . . . [n]ot, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.”^[3] What does that mean for our representation of you? We can neither advise you as to the probability that a return will be audited nor consider the probability of such an audit in the advice we provide. Beware of any attorney who says they can.

However, as tax attorneys, we can and we will advise you on the likelihood that your tax positions will be upheld in any audit that does occur. Whether you are establishing your business or navigating significant events (including changes in ownership, buying or selling assets, and implementing certain employee compensation benefits), we can offer counsel on the potential tax ramifications of each of your options and the strength of your tax positions.

[1] Section 330(a)(1) of the Internal Revenue Code of 1986, as amended.

[2] Entered into the Code of Federal Regulations as 31 CFR Part 10.

[3] 31 CFR 10.37(a)(2)(vi)

This summary does not include or address every provision of the applicable tax laws discussed above. Any information contained in this communication is not intended as a thorough, in-depth analysis of specific issues. It is also not sufficient to avoid tax-related penalties. This has been prepared for informational purposes and general guidance only, and does not constitute legal advice. You should not act upon the information contained in this publication without obtaining specific legal advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and Hinckley Allen, its members, employees, and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.