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Q. Following an audit in which we acknowledged $48,000 in excess tax liability, the IRS provided a report which miscalculated my client's income and proposed an adjustment of only $13,000. Must I call this error to the auditor's attention?
A. When we make mistakes, it's our problem. But when the government makes mistakes, it's ... still our problem.
In the scenario you presented, you did not, in any respect, misrepresent any of the facts of the case to the government and cannot be accused of falsifying or concealing evidence.
But do you have the right to remain silent when your adversary errs? What if your client wants to take advantage of the error and leave well enough alone? Would raising the red flag breach your duty to the client in that instance?
The dilemma isn't easy to resolve. Some commentators would leave this choice to the client alone, while others would tell his lawyer to reveal it.
As the drafters of the Rules of Professional Conduct aptly observed, "Virtually all difficult ethical problems arise from conflict between a lawyer's responsibilities to clients, to the legal system and to the lawyer's own interest in remaining an ethical person." These conflicting responsibilities are particularly troublesome when dealing within a legal system that may have erred in your client's favor.
Absent a legal duty to correct errors which may benefit your client, I would abide by the client's decision on whether to call the mistake to the attention of the IRS. When representing clients, "an attorney shall abide by a client's decisions concerning the objectives of the representation." Furthermore, an "attorney shall not reveal information relating to representation of a client unless the client gives informed consent," or "the disclosure is impliedly authorized in order to carry out the representation." (The Regulations Governing Practice before the Internal Revenue Service set forth in Circular No. 230 require that you scrutinize your client's information for accuracy, but do not address a duty to correct agency errors.)
Before revealing this fortunate error to the IRS, you would be wise to obtain your client's informed consent. If your client insists on secrecy, you should advise him of the potential that the IRS may discover its own mistake and come after him for additional taxes, penalties and interest. Regardless of the client's decision, you would be well-advised to review the consequences, memorialize your recommendations, and confirm your client's instructions in detail and in writing.
Naturally, if your client's criminal or fraudulent conduct prompted the miscalculation, you must reveal such secrets to the extent necessary to prevent, mitigate, or rectify substantial injury to the financial interests or property of another. But even without criminal or fraudulent conduct, you may need to resolve the ethical dilemma differently in the following cases:
➤ If you inadvertently contributed to the error by submitting erroneous or confusing information, you probably have a duty to correct any misapprehension which may have resulted;
➤ If a court order or judgment contains a clerical error which would unjustly benefit your client, Bar Counsel may equate your silence with a lack of candor toward the tribunal or a breach of your duties as an officer of the court. So if, for example, the tax court entered a judgment against your client for $13,000 instead of $130,000, you and your client would be hard-pressed to take advantage of an obvious "scrivener's error." Naturally, the larger the mistake, the greater the consequence;
➤ You may have to collect on an erroneous judgment in your client's favor - if a court awarded your client $130,000 against a party that only owed $13,000, efforts to enforce the judgment would amount to an abuse of the court process to unjustly enrich your client at another's expense. Rather than serve as an instrumentality of injustice, you should, at a minimum, withdraw from further representation if your client insists on collecting;
➤ If an adverse party mistakenly overpays your client under circumstances in which it would be manifestly unjust to retain the funds, many would counsel the lawyer to inform opposing counsel. For example, after an insurance company refused to offer more than $1,500 to settle a personal injury case, you threatened to file suit unless the carrier paid $10,000. A few days later, the carrier tendered a $15,000 check to you and your client. As it is apparent that the carrier tendered a check with an extra zero, few would permit you and your client to profit from this scrivener's error. Even though the carrier acted improperly in attempting to snag a settlement for an amount that had already been rejected, two wrongs don't make a right in this scenario.
How you approach these ethical dilemmas will vary with the precise facts before you. Given the lack of consensus in many of these situations, you may wish to consult with legal ethics counsel to review the specifics and to make recommendations on how best to proceed. If nothing else, this will help you to document your efforts to comply with your ethical duties as counsel.