In a nutshell
“Tax touches virtually every aspect of the economy,” says Leslie Samuels, senior counsel at Cleary Gottlieb. Accordingly, tax law encompasses a variety of activities, from transactional support and structuring to tax planning and tax controversy.
Working alongside corporate lawyers, tax attorneys ensure that transactions are as tax-efficient as possible, whether they're centered on public or private M&A, capital markets, investment funds (private equity, REITs and mutual funds), joint ventures or partnerships. Tax planning advice requires familiarity with all relevant domestic and international laws, and it is essential to have an understanding of clients’ overall objectives and the structuring of their businesses.
Tax controversy is more of an independent category, covering a range of contentious tax issues. These include tax-based litigation, IRS examinations and tax shelter investigations. Disputes are usually resolved at the administrative level. Transfer pricing is also grouped with tax controversy.
What lawyers do
- Advise clients on the tax elements of transactions.
- Analyze cases and regulations to develop a real understanding of the tax implications of transaction structures. Findings are summarized as memoranda or given through direct counseling.
- Negotiate terms dealing with the tax aspects of transactions.
- Draft agreements, especially for M&A and joint ventures, which are particularly tax intensive. An important element is the drafting of tax disclosures.
- Liaise with other non-tax lawyers and clients to ensure the smooth running of transactions.
- If working in tax controversy, negotiate with the IRS, respond to IRS questions, and draft memoranda and briefs.
Realities of the job
- Tax lawyers need to keep up with all new developments in both the law and the economy as a whole. This is especially important for a young lawyer, who needs to build expertise. The law is always changing.
- By keeping up to date, tax lawyers can become real experts and even innovators within the legal landscape. With experience, they may be able to offer a solution to a tax issue that has previously been unsolvable. For example, the tax lawyer will produce a new financial instrument that becomes accepted by the market. This will sometimes prompt the government to review its regulations.
- It’s vital to have an affinity for reading case law and regulations, as this is how juniors will spend some of their time. They must be able to rationalize their findings and summarize them accurately.
- Tax lawyers must have full confidence in their advice. The research must be methodical and complete.
- In order to ensure that commercial transactions are as tax efficient as possible, tax practices work closely with corporate departments and understand the non-tax issues that drive transactions. A successful tax department can be a useful marketing tool for firms looking to attract new clients.
- Tax lawyers need to express themselves clearly and concisely. Solid technical knowledge is essential, as is the ability to explain technical information to non-experts.
- Excellent interpersonal skills are a must. Tax controversy can sometimes involve liaising with the IRS, and it is important that lawyers be upfront and straight-talking. They may also work with international clients, so cultural awareness is important.
- Lawyers have the chance to work on a variety of matters, including charity and pro bono. They are expected to comment on proposed regulations and may also give tutorials to colleagues and clients.
- Tax lawyers sometimes break up their career by spending time working for the government, notably the IRS.
Current issues & advice
President Joe Biden’s tax initiatives aimed at the wealthiest Americans appears to have stalled. At the end of tax year 2021, tax for individuals with an income of $452,700 and over, and for married couples whose joint income was over $509,300, increased from 37% to 39.6%. However, by the end of tax year 2022, the income tax rates had shifted and dropped in favor of higher earners. The top tax bracket had increased from over $452,700 to$539,901or more for single filers and had dropped to 37%. For joint filing married couples (or qualifying widows and widowers)it had also moved upwards from above $509,300 toabove $647,851. This trend is set to continue next year, with the IRS releasing next year’s tax rates for tax year 2023, which will see the top tax bracket shift to $578,126 and over for single filers and $693,751 for joint filers, though the tax rates will remain the same.
Lower taxes, however, do not necessarily mean more cash in hand. Biden’s $1.9 trillion American Rescue Planwas not extended into tax year 2022 and two tax credits – the child tax credit and the child and dependent care tax credit – have reverted to their previous amounts. For the former, in 2021, a tax credit of up to $3,600 per child under age six was available (and up to $3,000 between six and 17). In 2022, the tax break drops to its previous level of up to $2,000 per child under 17. For the child and dependent care tax credit, which increased to up to $8,000 for one and $16,000 for two or more qualifying dependents, these caps have returned to $3,000 for one qualifying dependent and $6,000 for multiple qualifying dependents.
This year people may receive a Form 1099-K if they have used digital payments services such as PayPal or Venmo. Those who have received payments on this type of platform are required to report payments of more than $600 per year to the IRS; a significant drop from the previous cap of $20,000.For those worried that being paid back for dinner could trigger a 1099-K, the IRS says personal transfers are not taxable, but experts warn it may happen.
In October 2022, The Organization for Economic Co-operation and Development (OECD) received agreement from 136 of the 140 member countries to implement widespread reforms to international taxation. (The four countries that have not yet joined the agreement are Kenya, Nigeria, Pakistan and Sri Lanka.)The agreement is a two-pillar system, with Pillar One expected to bring in more than $125 billion in profit, which is expected to be reallocated to the market jurisdictions.
Under Pillar Two, there is to be a global minimum corporate tax of 15%, which will apply to companies with revenue above €750 million. However, as of February 16, 2023, the US, which was instrumental in securing the OECD deal,has not complied with this benchmark.
According to Forbes, things to look out for in 2023 from a tax perspective include “growing interest by states in looking into developing new or more detailed or specific rules for taxing large, complex multistate passthrough entities — things like better definitions and clearer sourcing rules.”Essentially a passthrough entity is a business entity that passes the tax liability to the owners or investors of the business, think partnerships, which means those entities don’t pay corporation tax. According to Forbes, both New York and California are increasingly interested in this type of entity with several multistate tax commissions starting “to poke around investment partnerships.”Changes in legislation here could have significant impact on how business entities set themselves up in the future.
In 2022, the following countries – American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu – were still on the EU’s “list of non-cooperative jurisdictions for tax purposes.” However, Oxfam has criticized the EU for failing to prevent tax havens. A press release by Oxfam in February 2022, makes note of the allegation in the Pandora Papers and leaks about billions of dollars of criminal assets in Swiss banks among others as failing to make “a dent in EU rules on havens. The updated list does not challenge the persistent weaknesses of the process which exempts EU tax havens, and leaves secrecy jurisdictions, like Switzerland and the US, and zero tax rate countries, like the Cayman Islands, off the hook.”
What top tax lawyers advise
Leslie Samuels, senior counsel, Cleary Gottlieb: “It’s important to keep your eyes and ears open to make sure you understand everything about the transaction so your advice is the most effective it can be.”
“You don’t have to be a math genius to be a very successful tax lawyer. You’re dealing more with concepts. We don’t prepare tax returns, and we certainly don’t get busy before the tax filing dates.”
“To the extent that tax lawyers think they’re just servicing the corporate lawyers, it’s a total mistake. The work is so much broader than that.”
“Keeping up with developments is exciting and demanding. There’s so much you have to keep up with every day! But that’s how you become an expert, which is one of the attractive aspects to practicing tax law. You really can become the go-to person who knows everything about topic X.”
Basil Zirinis, partner, Sullivan & Cromwell:
“Because it's such a human area of the law, it can be extremely emotional. Do you leave assets outright? Do you trust your family? There is no right answer. When families are fighting they want you to help them settle it, but given the emotions and family history it can very difficult. It's not about 'right' or 'wrong' family members, it's just that there is often no clear or perfectly right answer.”
“Students should definitely take as many tax courses as they can in law school, including corporate tax. The more of a background they have in tax, the more helpful it will be.”
“The broader the courses you take, the better off you'll be. We do everything from corporate law to litigation in our practice – so the broadest possible academic experience is important.”
“An international perspective on the world in general is helpful, especially because the explosion of wealth is global. It's not just about the US and Europe any more. Wealth is increasingly mobile with China, Latin America, etc. all involved. That's where the most interesting work will ultimately be for young lawyers, so language skills are extremely important.”