Client Privilege – When you have it & when you don’t may surprise you.
By: Gary P. Bluestein
Many accountants incorrectly assume that their communications with their tax clients are always privileged and confidential. Unfortunately, sometimes tax cases can cross over into potential criminal exposure for a client, and not knowing the scope and limitations of privilege can be devastating, both to the practitioner and to the client. Although there is limited privilege provided for accountants and enrolled agents, the limitations, as described more fully below, are significant and do not eliminate the need to utilize an attorney where appropriate, to get the broader protection of attorney-client privilege in relation to confidential communications.
The IRS Restructuring and Reform Act (RRA) of 1998 provided for the creation of a privilege, granting confidentiality to certain communications between “authorized practitioners” and a taxpayer. See I.R.C. section 7525(a)(1). Although this privilege is modeled after the attorney-client privilege, it has some significant limitations that accountants and Enrolled Agents should be aware of. In order to understand this legislatively created privilege, it is necessary to understand the following:
- To whom does it apply
- What information is covered by the attorney-client privilege; and
- What are the differences between this new privilege and the attorney-client privilege?
FEDERALLY AUTHORIZED PRACTITIONER
The RRA states that the new privilege applies to “federally authorized practitioners.” Title 31 U.S.C. §330 defines authorized practitioners as, attorneys, certified public accountants, enrolled agents and enrolled actuaries. Under the statute, these professionals are authorized to practice before the IRS.
ATTORNEY CLIENT PRIVILEGE
Although codified in Section 501 of the Federal Rules of Evidence, the attorney-client privilege is founded in common law. The privilege of confidentiality exists for communications between an attorney and a client in relation to facts disclosed to the attorney, for the purpose of securing legal advice. An attorney can not be compelled to disclose the contents of communications falling under this definition. Moreover, if the communication is privileged, only the client, and not the attorney, can waive a claim to said privilege and the privilege even survives the death of the client.
Never-the-less, the attorney-client privilege is not as broad as often thought and there are many limitations. For example:
- The privilege can not be claimed where the purpose of the communication is the commission of a crime or a tort.
- The privilege only applies where the attorney is advising as to legal matters. Thus, it does not apply to communications relating to tax return preparation or where the attorney is acting in a capacity other than legal counsel.
- If the communication is made to another 3rd party, the privilege is waived
NON-ATTORNEY PRIVILEGE UNDER THE RRA
Since the “practitioner privilege” is not broader than the common law attorney-client privilege, all the above-cited limitations would apply. Moreover, there are many significant exceptions to the applicability of the “practitioner privilege” that do not impact on the attorney-client privilege. For example, the practitioner privilege:
- Only applies to tax advice.
- Only applies in Federal civil tax cases.
- Is not applicable to any regulatory body other than the IRS.
- Does not apply to communication with a corporate representative in connection with the promotion of, or participation in, a tax shelter as defined in section 6662(d)(2)(C)(iii).
Additionally, as with the attorney privilege, communications relating to tax preparation, accrual work papers or business advice are not covered. Also, as with the attorney-client privilege, a blanket “practitioner privilege” can not be asserted. In response to an IRS summons or grand jury proceeding, the witness must appear and assert the privilege on a question by question basis.
IMPACT OF I.R.C. SECTION 7525
The practitioner privilege may result in unintended pitfalls for the unwary practitioner. First, very few accountants or enrolled agents are well versed in the nuances of the attorney-client privilege and its limitations. The practitioner privilege may have created the potential for added exposure to a malpractice suit or some type of ethical sanction. In the past, if a non-attorney tax practitioner was summonsed or subpoenaed, he or she was required to provide the requested information or testimony with no fear of exposure to adverse action by the client. Now practitioners have to grapple with the difficult determination of what is a privileged communication. Moreover, accountants, like attorneys, will potentially have to choose between a contempt citation and a breach of what they believe to be a confidential communication.
Most importantly, the practitioner privilege does not apply to criminal matters, other non-tax Federal matters, or any State matter. The confusion that will be caused by the inconsistent application of the privilege is not difficult to predict. However, the most serious concern is the inapplicability of the privilege in criminal matters. This means the so-called privilege evaporates just when the client needs it most. It is imperative that non-attorney practitioners understand the significance of this limitation and explain it to their clients before confidential communications are made.
If there is potential for criminal prosecution, a referral should be made to an attorney. This does not mean that an accountant can not have a critical role in the representation of the client in a criminal context. Once an attorney is retained, communication necessary for the client’s representation will be covered by the attorney-client privilege. Under U.S. v. Kovel, 296 F. 2d 918 (2d Cir. 1961) the accountant can still be brought in to assist the attorney in the tax and financial aspects of a case, without waiving the attorney-client privilege.
The Kovel case held that an attorney could retain the services of an accountant or tax professional to assist in dealing with the tax-accounting issues of a case and communications with the accountant under such circumstances would be covered by the attorney-client privilege. Kovel analogized the role of the accountant to that of a translator who puts the client’s information into terms that the attorney can use effectively.
Still, although Kovel has been cited countless times with regard to the impact of a consulting accountant on an attorney-client privilege, it does not grant blanket protection for a communication to an accountant merely because an attorney was involved.
As a result of the “federally authorized practitioner privilege” the issues raised by Kovel will be less important in a non-criminal Federal Tax case. However, Kovel and its progeny will still be important in all other cases. Again, it is in the criminal context that the privilege may be the most important and attorneys and accountants should still try to ensure that the communications meet the Kovel test to qualify as privileged.
The professionals at Andreozzi Bluestein are well versed in the nuance of Kovel and Attorney / Client Privilege, and have extensive experience guiding clients through these matters. If you think you may have a concern about privilege with a client, please contact the professionals at Andreozzi Bluestein today with no obligation.
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