Hired a Tax Lawyer on Contingency? An International Cautionary Tale

Hired Tax Lawyer on Contingency? An International Cautionary Tale

Hired a Tax Lawyer on Contingency? 

Hired Tax Lawyer on Contingency? An International Cautionary Tale: The idea of hiring a tax attorney on contingency sounds great, right? You have a potentially major IRS tax liability that may span several years and multiple countries or jurisdictions — and you need help. You reach out to several international tax attorneys and find that most of them do not take cases on contingency, because quite frankly, most international tax cases are not taken on contingency; it’s not usually how the system works. But, let’s say you happen to find some international tax lawyer who is willing to take your tax matter on contingency — you have to be very careful, as can be seen in a recent matter involving an international tax lawyer based in Michigan where Plaintiff filed a lawsuit in 2021.  In that case, which is still pending — it may end up costing Plaintiff Taxpayer $6.5 Million in unaccounted for funds. When it comes to contingency cases and tax law, it is absolutely crucial to make sure taxpayers take all necessary precautions. Let’s take a look at what is alleged in this case, and what steps taxpayers can take to protect themselves.

Taxpayer had a Tax Debt & Hired a Lawyer on Contingency

In this particular case, the taxpayer allegedly owed about $15M to the Internal Revenue Service. She needed help and found the defendant lawyer who offered to represent her for a contingency fee a 5% of the amount of savings of penalties and interest. According to the complaint, the defendant tax attorney represented to the taxpayer that she had more than $19 million due in tax, penalties, and interest, in which about $9 Million were penalties and interest. (This was apparently inaccurate and the total liability for taxes, penalties, and interest was actually closer to $12M.)

• • • Taxpayer Tip: If an attorney represents to the taxpayer that they have a certain amount of tax debt due to the IRS, taxpayer should be diligent in making sure the attorney confirms the amount owed with some written paperwork — especially in a contingency tax matter in which the penalties and interest serves as the basis for any future computation of attorney’s fees.

Attorney Recommended Transferring the Full $19M to Attorney’s Trust Account

The defendant attorney recommended that the taxpayer simply transfer as much of the $19 million as she could to the attorney’s trust account. At the time, the client’s Foreign Financial Institution (FFI) requested that the attorney provide proof of the IRS debt and payment terms to the IRS. Since the IRS would allegedly not provide that type of letter, the tax attorney personally represented to the FFI that he would be receiving the money into his client trust account — which would then be forwarded to the IRS for payment.

The defendant attorney put out a strategy, which was to pay the tax debt now and try to negotiate the penalties and interest after the IRS received full payment for the tax liability — which is normally a fine strategy. (The problem here is, the attorney allegedly misrepresented the actual tax/penalty amount due and thus, he received a higher 5% payday as well as pocketing the $6.5M difference between actual amount due and stated amount owed.)

Defendant Attorney States No Penalty Abatement Issued

With a flair for the dramatic, the defendant attorney allegedly stated the IRS refused the request for penalty payment, so he headed out to Las Vegas to save the day and meet with the IRS Agents in person – which apparently may have never even happened. (The taxpayer later learned that the IRS decided to remove penalties long before this alleged Las Vegas IRS meeting, so there would have been no need for any IRS meeting.)

• • • Taxpayer Tip: While this type of super-heroic dramatic action sounds great in the movies, the taxpayer should confirm the name of the IRS Agent their attorney is meeting with, and possibly obtain a copy of the Notice Letter indicating the purpose of the meeting, the time and location of the meeting, and what documentation the IRS requests, etc.

The Penalties and Interest Were Much More Limited

Here is where it gets infinitely worse for the taxpayer. Remember, the defendant attorney in this case is being paid on a 5% value based on the penalty reduction they are able to accomplish? So, when it turns out that the IRS had already written off much of the penalties (and that any penalties that may have been issued were nowhere close to $10M), the reduction of penalties would have been significantly less of a payday for the attorney.

Did Tax Lawyer on Contingency Exaggerate the Amount Due?

Allegedly, the attorney concocted a plan in which he represented to the taxpayer that there was actually $10.9 million in penalties, which he had reduced to $6.5 million. As a result, the defending attorney received a nice payday at 5% of that difference or about $225,000.

• • • Taxpayer Tip: If a tax attorney is representing to you that they were able to reduce a penalty from $10.9M to $6.5M, there would presumably be some paperwork from the IRS or some documentation on file representing that the penalties had been reduced. In fact, when the penalty is that high — it would almost always require supervisor approval.

Future Inquiry by the Bank Unravels Tax Lawyer’s Scheme

For one reason or another, in 2019, one of plaintiff’s banks followed up with her regarding her prior IRS issues – which served as the catalyst to unwind the alleged scam. The taxpayer finally conducted her due diligence and allegedly learned that the actual amount owed to the IRS was significantly less than the attorney represented — and that the tax attorney allegedly concocted the entire story and fabricated the payments that his firm made to the IRS, which were over-embellished to the tune of $6M.

Where are the $6.5 Million in Missing Funds?

As a result, not only did the defendant attorney allegedly pocket nearly $225,000 for reducing a phantom penalty of $11M down to $7M, but then there is the curious case of the missing $6.5M which was received into the defendant’s account — but allegedly never mailed to the IRS.

Always Be Cautious When Making Payments with a Tax Lawyer on Contingency

In some situations, hiring a tax attorney on contingency may be an effective method for representation. But, based on the inherent concern that the attorney is being paid based on the reduction in penalties — it is absolutely crucial that the taxpayer stay abreast of what’s happening in the case. They should be sure to obtain all necessary paperwork and confirmation to ensure that all payments were actually being made to the IRS and that there was a true reduction of penalties and interest sufficient to justify the amount of attorney’s fees claimed by the tax attorney.

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Golding & Golding specializes exclusively in IRS offshore and domestic voluntary disclosure and tax amnesty.

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