No Such Thing as a Broad Accountant-Client Privilege
When it comes to federal tax matters, one of the most common and dangerous misunderstandings of American taxpayers is their belief that all communications between an accountant and the client are privileged. They are not! That misunderstanding springs from a number of factors, not the least of which is the mistaken view, held by some accountants themselves, that Internal Revenue Code (IRC) 7525 creates a privilege between tax practitioners and taxpayers that is as robust as the privilege that clients have with their attorneys.
The Privilege Contained in 7525 is Narrow
Under 7525 of the IRC, a taxpayer may discuss tax issues with qualified tax advisers in noncriminal tax matters in the same manner they may consult with tax attorneys. While the privilege sounds broad, it isn’t. Consider the following:
- The practitioner must be authorized under federal law to practice before the IRS. Authorized tax practitioners include licensed attorneys, CPAs, enrolled agents, and enrolled actuaries. Many accountants who do not hold CPA credentials are excluded from the privilege.
- The privilege does not apply in criminal matters.
- The practitioner must be rendering tax advice with respect to a matter that is within the scope of the individual’s authority to practice before the IRS.
- At least one federal decision has determined that the privilege belongs to the tax practitioner, not the taxpayer.
- The privilege does not apply to written communications in connection with the promotion of, or participation in, a tax shelter.
- The privilege does not extend to communications related to tax return preparation.
- The privilege generally does not protect the accountant’s work product from disclosure.
IRS Conducts Parallel Investigations
Another difficulty in the so-called 7525 privilege is due to the fact that more and more, the IRS conducts what it calls “parallel investigations” simultaneous civil *and criminal* investigations of an individual or business entity. In other words, while one IRS agent indicates that he or she is conducting a civil audit, another agent is trying to uncover one or more criminal violations. Nothing prevents one agent from sharing information with the other!
You May Not Know of the “Parallel” Investigation Until It’s Too Late
Under current IRS policies, IRS personnel are advised not to inform the taxpayer when a criminal investigation is taking place, nor is the civil investigation required to stop when a criminal investigation commences. All too many taxpayers and accountants take a “tea and crumpets” approach to a civil audit, handing over to the IRS agent anything he or she requests. Doing so may only channel important and confidential information to the “spider” in the next room.
How Can Important Communications and Papers Be Protected?
Delicate tax-related discussions can be protected from IRS scrutiny, as long as they are carefully managed within an attorney-client privilege. Pursuant to United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), the attorney may engage an accountant to assist the attorney in the provision of legal services. Since Kovel, courts have generally recognized both a privilege protection that attaches to communications between the accountant and taxpayer client, as well as a work product protection that attaches to the accountant’s work papers and file.
Experienced Legal Counsel is the Key
The Criminal Defense Firm has represented clients in all sorts of federal proceedings, including civil and criminal tax investigations. Located in Dallas, Texas, The Criminal Defense Firm is a team of lawyers and courtroom warriors. The firm has the resources to provide the best defense possible. If you choose to work with us, we will use our decades of experience, including time spent as federal prosecutors, to help protect your vital interests. To start building your defense today, call 866-603-4540 or contact us online now.
Dr. Nick Oberheiden is a national litigation and trial criminal defense attorney who practices exclusively in the area of federal law.