Why are tax attorneys so expensive?

Posted on Posted in Accounting, Small Business, Travel

The Wall Street Journal ran an article this week about the number of attorneys billing at $1,000 to $1,500 per hour. It turns out that there were more tax attorneys in the list than any other type. Why?

In my own practice, the primary consideration in setting a fee is an estimate of the likely outcome of the work. If the job is not likely to produce strong positive value, then I won’t offer it.

There is an old joke: “Why is divorce so expensive?” Answer: “Because it’s worth it”. The same principle applies. Tax attorneys are worth their weight in gold because they convert a situation to real cash savings in a relatively short amount of time with a relatively high degree of certainty. If you are a small business owner facing taxes and penalties of $50,000+, for example, there is a good chance a tax lawyer can trim it to $20,000 for a fee of $5,000. That’s a real net savings of $25,000! While each case is different, the numbers in this example are well within the experience range of the types of cases I see most often in the small business environment. You could multiply each of the numbers by 10 and say this was a common overall case scenario for a tax lawyer who handles corporate and estate work.

This logic holds true it you look at the rest of the list of the other types of attorneys billing $1000+ per hour. Bankruptcy and corporate law attorneys are the next most frequently types of specializations included. Again, we see that these are lawyers who can achieve a high dollar value result fairly quickly with a relatively high degree of certainty. In other words, they are a good investment for those clients who hire them.

We could also look at a simple supply and demand explanation: there are relatively few tax lawyers and increasing demand for them. The increased demand comes from changes in IRS and state tax collection policies, wealth redistribution trends and higher overall tax assessment rates. (All topics beyond the scope of this article). However, it is important to note that the common tax planning strategies – the ones I write about in this blog – are not effective with upper income clients. In those cases it takes more work and creativity to develop effective tax strategies. In these cases an attorney is almost always involved in the planning process.

Training as a tax lawyer typically involves a minimum of two years intensive study beyond law school. The most common advanced degree is a Master of Laws (LLM). For non-attorneys the same degree is called a Masters of Taxation (MT) as I use in my professional title, Yet formal training is only the tip of the iceberg. Most tax lawyers I know spend thousands of hours studying case law and other materials to hone their skill.

In my world far away from New York City and  its big law firms, professional fees are much lower than stated in the WSJ article. I typically see JD/LLM tax attorney rates for planning and representation at $350 to $600 and CPA/MT rates often at about half of that.

Finally, we should consider that many tax law professionals have abandoned the hourly billing method as arcane and illogical. We keep it around only as a way to communicate about fees if all else fails. In the large majority of cases, however, it makes more sense to set a fee relative to the value of the work, the expenses incurred and the risks involved. In my own practice, the primary consideration in setting a fee is an estimate of the likely outcome of the work. If the job is not likely to produce strong positive value, then I won’t offer it. There is no reason that value can’t be more appropriately conveyed in some more relevant manner other than an hourly fee.

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