Testing the Limits to the Accountant-Client Confidentiality Privilege

By: Tyler B. Korn, Esq.

The Korn Law Firm, P.L. / Tel (239) 354-4300

In handling civil and criminal tax cases, I am often asked whether, and to what extent, an accountant-client confidentiality or work-product privilege exists.  The applicability of such a privilege is often of pivotal importance.  It can determine whether an accountant may lawfully be subpoenaed to testify in court against his client, or whether the accountant’s memoranda, e-mail or work papers can be used by the state or federal government against the client.

In 1998, Congress enacted certain accountant-client confidentiality protections, now codified under Section 7525 of the Internal Revenue Code.  Under Section 7525, the attorney-client privilege was made to extend to communication between a taxpayer and any federally authorized tax practitioner with respect to tax advice, to the extent the communication would be privileged if it were between a taxpayer and an attorney.

Superficially, the accountant confidentiality privilege of Section 7525 appears to provide sweeping protection to discussions between taxpayers and their accountants.  The privilege’s limits and exceptions, however, tend to render the privilege inapplicable just when it matters.

It should first be noted that the privilege generally applies to an accountant only if the accountant is a certified public accountant or registered as an enrolled agent with the Internal Revenue Service.

The privilege may only be asserted in a non-criminal tax matter before the Internal Revenue Service or in a non-criminal tax proceeding in federal court brought by or against the United States.  The privilege may not be asserted to prevent the disclosure of information to any regulatory body other than the Internal Revenue Service (such as the Securities and Exchange Commission), including in an administrative or court proceeding.  Thus, the privilege exists only for civil tax disputes with the Internal Revenue Service or the United States.  It arguably does not apply in a criminal tax matter or non-tax proceeding even if the subject communication originated in the context of a tax-related civil matter or proceeding.

Additionally, the privilege does not apply to any written communications in connection with the promotion of a tax shelter.

“The privilege’s limits and exceptions . . . tend to render the privilege inapplicable just when it matters.”

Perhaps most importantly, the privilege only applies to communications regarding tax advice.  “Tax advice” may include backup research or memoranda reflecting mental impressions of the accountant.  Yet no actual work-product privilege exists for accountants, so work papers, memoranda and the like will generally not be protected.

Furthermore, communications regarding return preparation are not considered to constitute tax advice.  An accountant arguably is able to make both privileged and non-privileged communications to a client.  In practice, however, the Internal Revenue Service and Department of Justice generally take the litigation position that no communications between an accountant and client are privileged if the communications relate to a tax year for which the accountant prepared a return.

Also, it is very important to note that unlike the attorney-client privilege, the accountant-client privilege can never be used to prevent disclosure of the underlying facts of which the accountant is aware.

Due to the numerous ways in which the applicability of accountant-client privilege under Section 7525 can be challenged, non-tax return-related documents (such as memos and work papers) should continue to be prepared by accountants only under the protection of a “Kovel” letter.  A Kovel letter (named after a Second Circuit Court of Appeals case by such name) is a letter by which an attorney may extend the protection of the attorney-client privilege to an accountant’s work, provided that the accountant is retained to assist in providing legal services to the attorney’s client. In order to extend the attorney-client privilege to a non-testifying accountant, the accountant’s services must be necessary for the attorney’s rendering of legal advice.

If you have any questions about whether your accountant’s work or work-product is privileged or exempt from disclosure, or needs to be, please feel free to call us.

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