How to Choose a Qualified U.S. Tax Advisor

U.S. tax law is complex and can apply in various scenarios, even when one might think U.S. tax does not have anything to do with a transaction at hand. In addition to the complexity, U.S. tax law is constantly changing. Back in 2011, the IRS Commissioner Douglas Shulman reported that there had been close to 3,500 tax changes in U.S. tax law since 2000[1]. And, with the most recent legislative changes, that number could have doubled by the time of this article. Staying on track and keeping up with the most recent tax developments is no easy feat, and to stay on top of one’s game, it requires both expertise, experience, and resources.

The globalization, tax scandals,[2] G20 / OECD Base Erosion and Profit Shifting (“BEPS”) initiatives, and the Foreign Account Tax Compliance Act (“FATCA”)[3] continue to lead to enormous transparency and expanded information exchange between the Internal Revenue Service (“IRS”) and foreign tax authorities. With continued enforcement and compliance initiatives by the IRS and the U.S. Department of Treasury, and increased coordination and information exchange with Homeland Security, U.S. taxpayers, whether or not they owe tax, find it more and more difficult to hide from an omnipresent IRS’ reach.

Starting from 2009, the IRS established an amnesty program that helped U.S. taxpayers come into compliance. The programs have been evolving, with the most recent changes announced in June 2014. There are two mainstream programs currently in effect – the Offshore Voluntary Disclosure Program (“OVDP”)[4] and Streamlined Filing Compliance Procedures (“SFCP”)[5] (which in turn is divided in two programs: one – for US Taxpayers Residing in the United States (“SDOP”); another – for US Taxpayers Residing Outside the United States (“SFOP”). Although there do not seem to be any indications that the IRS would close the programs any time soon, the IRS can close the amnesty programs any time (although based on recent announcements by IRS and Treasury officials, an advance notice would be provided to taxpayers before the program is closed).[6]

Who is a “qualified” U.S. tax advisor?

Contrary to the popular belief that anyone who does U.S. tax should be treated as a qualified U.S. tax advisor or professional, the reality is quite different.

A qualified U.S. tax professional must have adequate academic background, experience, and expertise in US tax law, or certain areas of the discipline, to be able to provide proper and timely U.S. tax advice. It is especially true in a cross-border context, as the complexity rises dramatically when a foreign country is involved. It takes years of learning and practice in the U.S. tax area to gain a good understanding of how the rules operate, be able to spot issues, and provide meaningful, correct, and practical tax advice.

A qualified U.S. tax advisor would constantly stay up-to-date with recent tax developments, provide thought leadership, have membership with relevant professional tax organizations and associations, attend professional seminars and conferences, and subscribe to U.S. tax research databases that would allow thorough and diligent research on any client matters.

A qualified U.S. tax advisor would also carry adequate professional liability insurance, both to protect herself/himself and her/his clients.

A CPA or a tax attorney clearly fit this description. Both CPAs and U.S. tax attorneys can handle a variety of issues, and can represent a client before the IRS. Lawyers are usually a better choice for dealing with the IRS on examination, Appeals, or controversy.

An IRS enrolled agent can be anyone, with or without US tax experience, who took a U.S. tax course and passed it. It is, no doubt, a challenging course, and the training that is provided as part of that course is likely sufficient to handle simple situations and tax return preparation.

Why do you need to choose a “qualified” U.S. tax advisor?

No one likes paying for something that does not create value or provide immediate cash benefit (such as a tax refund). In some cases, being pro-active with U.S. tax matters serves as an insurance policy for the client, who may not necessarily benefit from U.S. tax advice prior to entering into a transaction. For example, US tax advice may provide an insight on applicable U.S. tax implications and ensure following certain U.S. tax withholding, filing and reporting requirements. Yet the client would most certainly benefit if the IRS were to audit the taxpayer, or to assess tax and penalties where no assessment seemed to be warranted.

As a result, some taxpayers either choose to do nothing, or seek U.S. tax advice from anyone who is willing to do it cheaply. What those taxpayers do not realize is that while they are “saving” on professional fees, in most cases they would not be protected from potential penalties, if assessed. Such penalties can be as high as 20 to 40 percent of the adjustment or taxable income amount, depending on the applicable penalty.

Penalty protection may be available to those taxpayers who can show reasonable cause for non-compliance or failure to follow the applicable U.S. tax rules. That penalty protection is known as reasonable cause defense, and is only available if, as one of the grounds, the taxpayer relied on the advice of a qualified U.S. tax professional. Ignorance of the law, while being one of the grounds that may constitute reasonable cause, is not enough to be exempt from penalties. For instance, a Canadian tax accountant, even with dozens of years of experience, would not be considered a qualified U.S. tax professional for these purposes. As a result, in the event that penalties are assessed, the taxpayer would not have any protection.

To conclude, you should look for a qualified U.S. tax advisor to assist you in your US tax issues. Not only would you get it right the first time, you might also avoid severe and costly penalties in the future. A qualified U.S. tax advisor would also spend less time on complex issues, compared to someone who does not have adequate expertise and experience in U.S. tax law. That said, the assistance of a qualified U.S. tax advisor is still a significant investment.