Lawyers, famous for their dedication and zeal on behalf of grateful clients and in the service of many meritorious causes, sometimes neglect their own personal and professional obligations. This is the second article in a two-part series for lawyers who procrastinate. Part One addressed the consequences of failing to keep up with attorney registration requirements-not filing mandatory registration forms, not completing CLE courses or not paying the $375 biennial fee. Part Two explores the potentially serious consequences of failing to file personal income tax returns and other tax-related offenses. Most lawyers were obliged to file their 2018 personal income tax returns in April. With an automatic extension, that deadline is now October 15, 2019. If you have not yet filed your 2018 tax returns, did you request an extension? Do you have all the paperwork you need to file by the October 15th deadline? Are there other tax years involved? Do you know other lawyers who have fallen behind on filing their tax returns? Lawyers who fail to file personal income tax returns risk having their law licenses suspended. If you are a delinquent or late filer or know someone who is, take note.
New York disciplinary courts treat failure to file personal income tax returns as a serious professional violation, even though it is unrelated to the practice of law and does not involve any clients. Lawyers who fail to file their returns for several years (generally three or more) may be prosecuted criminally and, if convicted, are likely to face serious public discipline. The Appellate Divisions routinely censure and suspend lawyers convicted of failing to file income tax returns and, even when there is no criminal conviction, have disciplined lawyers who fail to file returns or pay taxes.
Lawyers can find themselves in difficulties in a variety of ways and with surprising ease. Some non-filers have been partners in large law firms earning substantial income. While it might seem that paying taxes if you have significant revenue is easy, lawyers can quickly get behind and in serious trouble. Many law firms pay their partners a monthly or quarterly "draw" against year-end profits. However, most firms do not withhold taxes from those distributions, but leave it to the individual partners to manage and pay their quarterly estimated taxes. When lawyers fall behind, the struggle to catch up with mounting tax obligations can be daunting. Some lawyers respond by postponing filing their returns, hoping to catch up. The situation can spiral out of control. After several years of not filing returns or not paying taxes (or both), lawyers face possible criminal prosecution and serious professional discipline. That is exactly what occurred in Matter of Eppner. The Appellate Division described Eppner's thinking:
[He] believed that, because he did not have the money to pay the taxes, he could not file his returns. Thus, he failed to file his tax returns for 2001, and finding himself in a similar situation the following year, he again chose to forgo filing his taxes for 2002, 2003 and 2004. Upon turning 65 years old in 2004, respondent was required to retire pursuant to the informal policy of the law firm where he worked. Although he remained as counsel, he suffered an even greater decrease in income, and did not file his taxes for 2005.1
Almost all non-filing lawyers report feeling overwhelmed by their predicaments. They have not been able to pull together their documents or organize their reporting. W-2s, 1099s, bank and brokerage statements, and expense receipts may be sitting in various piles on their desks, while more pressing problems abound. Family obligations, illnesses, trial schedules and financial problems are often cited. The lawyers may begin with the best of intentions, but after the extension deadlines pass, the returns no longer have due dates-they are just late, often very late. It can be a scary and unnerving situation and typically it is one that lawyers do not discuss with their colleagues or their families. What are the potential consequences for lawyers who procrastinate?
The Gory Details
The most serious situations involve criminal prosecutions, usually for failure to file income tax returns or failure to pay income taxes. Setting aside tax evasion and tax fraud cases, which are an entirely different kettle of disciplinary fish, a lawyer convicted of a misdemeanor-level tax offense is likely to be publicly censured or suspended. Here is how it happens.
"Serious Crime" Proceedings
A New York lawyer convicted of the willful failure to file income tax returns is guilty of a "serious crime" under New York law. Judiciary Law § 90(4)(d). The statute applies to federal and state convictions, which must be reported to the Appellate Division and appropriate Grievance Committee within 30 days.2 The Grievance Committee commences a "serious crime" disciplinary proceeding in the Appellate Division, which directs the lawyer to show cause why the lawyer should not be interimly suspended pending the conclusion of the matter.3
Although interim suspensions are the norm in many "serious crime" cases, they are not often imposed in "failure to file" convictions. The Judiciary Law provides that the courts may set aside the statutory interim suspension "when it appears consistent with the maintenance of the integrity and honor of the profession, the protection of the public and the interest of justice."4 Lawyers convicted of failing to file personal income returns are often first-time offenders, without a prior disciplinary history. They tend to be excellent practitioners, otherwise ethical and highly respected, devoted to their clients' matters, honest and trustworthy. Their continuation in practice pending the conclusion of the matter is unlikely to threaten the public. When an interim suspension is imposed, it generally reflects the Court's conclusion that the lawyer's actual conduct is more serious and that the final sanction will be more severe than public censure or a short suspension, which is the usual sanction range for failure to file convictions.5
The next step is the consideration of mitigating and aggravating evidence bearing on the final disciplinary sanction. The lawyer may request a mitigation hearing or may submit mitigating evidence directly to the court. Notwithstanding the Uniform Rules for Attorney Disciplinary Matters, which were intended to even out procedural and substantive differences in disciplinary proceedings between the four departments, significant variations remain. In some departments, evidentiary hearings before a referee are routine, while in others, lawyers are limited to paper submissions and, occasionally, oral argument before the Appellate Division. After a mitigation hearing or submission of evidence, the Appellate Division imposes "such discipline as it deems proper under the facts and circumstances."6 If there was a hearing before a referee, the court considers the hearing record and the referee's report and sanction recommendation, but makes a de novo determination.
The relevant mitigating and aggravating factors in failure to file cases are the number of years of actual non-filing, the dollar amount of the tax liability (plus interest and penalties), whether the lawyer "lived large" while not paying taxes, the consequences of the conviction (loss of livelihood, adverse publicity, public shame and humiliation), character and professional reputation, health and family complications, substance abuse and psychological factors, as well as the lawyer's candor, remorse and full cooperation. So, what are the typical disciplinary sanctions imposed?
Appellate Division, First Department
Over the past 45 years, the Appellate Division, First Department, has disciplined more than 40 lawyers convicted of failing to file personal income tax returns. The overwhelming majority of them were publicly censured or suspended for periods ranging from three months to one year. Until 2009, public censure was the "default" sanction, although, between 1990 and 1996, at least seven lawyers received private reprimands.
In 2009, the Appellate Division disciplined four lawyers convicted of failing to file their income tax re-turns. Two lawyers were publicly censured, while the other two received one-year suspensions.7 This was an unusual number of non-filers coming before the court in a single year and it seems to have resulted in a course adjustment in the First Department. Since Eppner, the Appellate Division has meted out only suspensions to lawyers convicted of failure to file tax returns.8 While several lawyers have been suspended for as little as three months, there have not been any more public censures in the First Department in the last decade.
Appellate Division, Second Department
The Second Department has, in the past 40 years, disciplined at least 26 lawyers convicted of failing to file federal or state income tax returns. Nineteen of them received public censures,9 while seven lawyers were suspended for periods ranging from one to three years10 There does not appear to be a particular trend in the discipline of non-filing lawyers as recent cases have involved both suspensions and censures.
In 2015, in Matter of Duthley, the court censured an attorney who failed to file and pay taxes "for multiple years," noting, among other mitigating factors, the attorney's lack of prior disciplinary history, good reputation, the absence of venality, his custody as a single parent of three children and his modest income as a public interest attorney.11
But for lawyers who failed to file returns for many years or engaged in deceptive conduct, the Second Department has not hesitated to mete out substantial suspensions. For example, in Matter of Eagan, the court imposed a two-year suspension on a lawyer who failed to file New York State tax returns for a period of ten years and was convicted of misdemeanor failure to file New York State tax returns, with intent to evade. The court noted that although respondent had suffered personal and financial problems, he attempted to maintain his "lifestyle," which included running a horse farm, and made a calculated decision to pay his federal taxes, but not his state taxes.12
Appellate Division, Third Department
The Appellate Division, Third Department, has disciplined at least 15 lawyers over the past 43 years for misdemeanor convictions for failing to file income tax returns. Most of the lawyers received three-month suspensions.13
In Matter of Whiting, the court imposed a three-month suspension on an attorney who failed to file federal income tax returns for four years, noting that the attorney had been previously censured for professional misconduct, but that he was remorseful and had already been punished by the adverse publicity resulting from his conviction.14
However, the following year, in Matter of Kolodziej, the court adopted an approach that has been extremely successful in cases involving other types of professional misconduct, namely, a stayed suspension, with conditions. The court suspended Kolodziej, who pled guilty to failure to file his 2008 New York State income tax return in satisfaction of a multi-count indictment, but stayed the suspension on condition that he submit proof of timely filing and payment of income taxes during the period of suspension as well as proof of payment of, or an agreement to pay, all state and federal income taxes owed for the period 2002 through 2010.15
The Third Department's innovative approach has worked extremely well in cases involving escrow account violations and is likely to work with non-filers as well. Rather than removing an otherwise ethical lawyer from practice and impeding the lawyer's ability to repay back taxes, the court's approach allows lawyers to demonstrate their financial and professional responsibility and remain in practice, provided they repay their back taxes and file their tax returns or make a good faith effort to do so.
Appellate Division, Fourth Department
The Appellate Division, Fourth Department, has disciplined at least 12 lawyers over the past 47 years following their convictions of failure to file tax returns. Most of them received six-month suspensions.16
In the past five years, however, the court has adopted a more nuanced approach, imposing stayed suspensions on two lawyers. In Matter of Ianacone, in which an attorney was convicted of failing to file a New York State personal income tax return for one year, the court imposed a three-year stayed suspension with the condition that the lawyer document the filing and payment of income taxes during the period of suspension.17
Last year, in Matter of Burke, the court imposed a three-year suspension on an attorney convicted of "attempted repeated failure to file income tax returns," a New York State misdemeanor. The court balanced the mitigating and aggravating factors, payment of all state taxes due (but not interest and penalties) and an unblemished prior disciplinary record, but noted that the attorney had not filed state or federal returns for a "lengthy" period prior to 2016. The court permitted Burke to apply, after one year, to stay the suspension upon condition that he retain financial professionals to file his tax returns, remaining current with tax filings and have payment plans in place with the tax authorities.18
The conditional sanctions recently imposed on non-filers in the Third and Fourth Departments may presage a more enlightened approach to attorney discipline, particularly in matters in which client protection and the public interest are unlikely to be adversely affected. Conditional sanctions for non-filers leave otherwise ethical lawyers in practice, continuing to represent clients effectively and enhancing the likelihood that such lawyers will be able to repay their back taxes and be rehabilitated.
Convictions for Failure to Pay Taxes
Convictions for failure to pay taxes, as opposed to failure to file tax returns, typically result in lower disciplinary sanctions. As discussed above, a misdemeanor conviction for failure to file tax returns is defined as a "serious crime" under Judiciary Law § 90(4)(d). However, a conviction for failure to pay taxes is not a serious crime. It is professional misconduct and will result in professional discipline, but the procedural path is strikingly different. A lawyer convicted of failure to pay state or federal taxes, which are misdemeanor offenses, will face disciplinary charges that must be proved by a grievance committee. Liability may be established by the record of conviction, and the hearings will turn on issues of mitigation or aggravation. Most cases are ultimately referred to the Appellate Division for public discipline.
In Matter of Schnall, the First Department imposed a six-month suspension on an attorney convicted of failing to pay his New York State taxes. Schnall failed to file returns or pay federal and NYS income taxes for eight years and owed $360,000 in back taxes. The court noted the mitigation: Schnall was negotiating a payment plan with the IRS; had begun paying his state tax liability at a modest rate of $200 per month; did not live extravagantly; and had spent most of his career representing indigent children and adults. In addition, it bears mention that Schnall's reasons for not filing for so many years were insupportable - he claimed to have doubts about the entire taxation system.19 Interestingly, the Appellate Division conditioned Schnall's reinstatement upon his providing regular reports to the grievance committee concerning his progress in reaching a payment plan agreement with the tax authorities.20
Similarly, in Matter of Sullivan,21 the court imposed a six-month suspension on an attorney convicted of four counts of willful failure to pay federal income tax, notwithstanding a significant aggravating factor, namely, a prior stayed three-year suspension.22
Failure to File Returns or Pay Taxes - No Criminal Conviction
Lawyers fortunate enough to avoid criminal prosecution may nonetheless face serious professional discipline for failure to file income tax returns or pay their taxes. In Matter of Rogoff, the Fourth Department publicly censured an attorney who had failed to pay almost all of his federal and state income tax for 28 years and was not the subject of any criminal proceeding. The court noted in mitigation that the attorney had filed all of his tax returns in a timely manner.23
In two recent First Department cases, Matter of Bartley and Matter of Penkovsky, the Court imposed three-month suspensions on attorneys who have failed to file returns and pay New York State taxes for several years. The attorneys were not criminally prosecuted (or even charged), but admitted to the Grievance Committee, in the course of investigations of ordinary client complaints, that they were delinquent in filing their tax returns.24
In Matter of Liberti and Matter of Holliday, the Fourth Department, imposed public censures on lawyers who failed to file returns or pay taxes, but were not criminally prosecuted.25
These cases illustrate the willingness of the disciplinary committees and the Appellate Divisions to prosecute lawyers for the non-filing of personal tax returns and the non-payment of personal tax liability, even when the tax authorities themselves have not brought criminal charges against the lawyers. There is a disturbing aspect here, in that most non-filers are otherwise entirely ethical lawyers, properly and effectively representing their clients and well-respected by colleagues, adversaries and the bench. In the absence of any indicia of dishonesty or deceit, disciplining such lawyers should not be done without further and thorough consideration. Is this a productive use of limited disciplinary and judicial resources? What are the public policy goals which are furthered by such disciplinary prosecutions? There are good arguments to be made for deferring disciplinary prosecutions of non-filers who have not been convicted of any crime.
The personal and professional distress that is evident in almost all non-filing cases is serious evidence of the need for a different approach by the disciplinary authorities-indeed, the carrot and stick approach used by the Third and Fourth Departments for lawyers who have been convicted would work equally well with the non-filers who have not been criminally prosecuted. Surely we should encourage lawyers to file and help them do so when they have fallen behind.
In the meantime, lawyers who have not filed their returns for multiple years should consult counsel about the wisest course of action. Lawyers who are delinquent for a year or two should probably file their tax returns soon, whether or not they can pay their taxes. Lawyers who are not yet late-file by the deadline.