Accountants Gain Partial Attorney-client Privilege in Civil Tax Proceedings
After much lobbying by accounting firms, accountants have gained a partial attorney-client privilege in certain federal tax matters. Act §3411 adds new Code §7525, which provides that a communication "with respect to tax advice" between a taxpayer and a "federally authorized tax practitioner" (i.e., a certified public accountant or enrolled agent) is privileged to the extent that such communication would be privileged if between a taxpayer and an attorney under common law protections of confidentiality.
This new privilege may only be asserted in tax matters before the IRS or the courts. In the courts, it may only be asserted if the United States is a party to the proceedings. The privilege is not available in the case of criminal prosecutions or proceedings before other administrative agencies, such as the Securities Exchange Commission. The privilege may also not be raised in private-party suits, such as in a product-liability suit brought against a taxpayer, or in state tax proceedings.
Thus, accountants should not encourage taxpayers to tell them confidential or embarrassing facts on the assumption that they are protected from public disclosure as in the case of the usual attorney-client communication. An accountant will usually not know in advance whether some private litigant, perhaps bringing a securities fraud suit or a divorce action, will force public disclosure or whether an IRS investigation will turn criminal, in which case disclosure could be forced.
Under traditional attorney-client privilege rules, once a conversation's substance is made public, the privilege has been waived, and the substance of the conversation can be introduced into evidence. Thus, if a private litigant forces the accountant to disclose the conversation in the private litigant's suit, the IRS will be able to make the accountant relate the same conversation in a civil tax matter. Moreover, accountants must be wary of violating the privilege by making unauthorized disclosure of the client's confidential communications, as such a violation could result in a malpractice action against the accountant.
Accountants should also be very conscious of the existing limitations on attorney-client privilege in tax matters: First, there is no attorney-client privilege if the client is involving the attorney in an ongoing fraud. Second, conversations connected to return preparation are not privileged -- on the theory that the return, in effect, discloses the information, so the conversation was never intended to be confidential. This latter limitation gives rise to constant litigation over what pre-return discussions were for tax planning (privileged) as opposed to return preparing (not privileged). There is no bright-line answer.
The only accountant who can feel fairly comfortable in being covered by the new privilege is the accountant retained specially to represent the taxpayer during an IRS examination -- i.e., not the accountant who prepared the return. Even such an accountant, however, should not encourage taxpayer disclosures, since persons other than the IRS might be able to learn their substance. The new privilege is best simply viewed as a defense available if the taxpayer, unprompted, tells the accountant something which the taxpayer would want kept confidential.
Finally, due to Congressional outrage over certain large accounting firms' marketing of corporate tax shelters, the new accountant privilege does not apply to any written communication between the accountant and a director, officer, or employee, agent, or representative of a corporation in connection with the promotion of the direct or indirect participation of such corporation in any "tax shelter." For this purpose, "tax shelter" is given the same broad definition contained in the accuracy-related penalty of Code §6662 -- i.e., any plan, arrangement, or entity, if a "significant" purpose (not even the primary purpose) is the avoidance or evasion of federal income tax.
Many accountants fear that this tax shelter communication exception may make even ordinary written communications to the client for routine tax planning discoverable. While some in Congress have stated that the exception does not apply to routine corporate tax planning advice, the question is still open and may only be resolved by future Treasury regulations or court opinions.
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