The Limits of the Accountant-Client Privilege

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The accountant-client privilege, commonly referred to as the tax practitioner privilege, is codified in section 7525 of the Internal Revenue Code. However, before you put much stock in the privilege, a word of warning: courts have interpreted the accountant-client privilege to be extremely limited in scope. For example, it does not apply in state court matters or in criminal matters, where it may be needed most. This post discusses the statutory tax practitioner privilege under the Code and without reference to any state-level common law principles or statutes regarding this form of privilege.

The Statute

The I.R.C. extends “the same common law protections of confidentiality . . . to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.”[1]Remarkably, however, the privilege does notapply to the preparation of a tax return.[2]That, of course, raises the question of what exactly it covers.

The privilege extends only to tax advice, which has been defined as advice given by a federally authorized tax practitioner within the scope of their authority under 31 U.S.C.A. § 330.[3]In this respect, it is important for practitioners to distinguish between the tax advice covered by the privilege, and general business or financial planning advice which is not covered by the privilege.[4]Importantly, the privilege is not available where it is needed most: it cannot be used in a criminal proceeding. Nor can it be used in state court proceedings (such as a divorce or civil suit). It can only be asserted in a noncriminal tax proceeding before the IRS or in a noncriminal tax proceeding in federal court.[5]

Exceptions

Even where it otherwise applies, there are two notable exceptions to this privilege. First, there is a crime-fraud exception. Where a communication is made in furtherance of a crime or fraud, the communication may not be privileged.[6]Another notable exception to the privilege is statutory. Under I.R.C. § 7525(b), any written communication “in connection with the promotion of the direct or indirect participation of the person in any tax shelter” is not privileged.[7]

Conclusion

While the I.R.C. has codified an accountant-client privilege for tax matters, it is very limited in its protection of communications. Because of this limited scope, accountants entering into sensitive discussions should always involve or consult legal counsel. In many situations, an attorney may be able to utilize a “Kovel” agreement to cloak a conversation that is necessary to render legal advice with an attorney-client privilege. Accountants who engage clients in sensitive conversations risk turning themselves into a witness against their client and may expose themselves to unwanted liability exposure.

[1]I.R.C. § 7525(a)(1).

[2]United States v. KPMG LLP, 237 F. Supp. 2d 35 (D.D.C. 2002).

[3]Id.at (a)(1), (3).

[4]Furthermore, the privilege does not protect communications between a tax practitioner and client simply for preparation of a tax return. United States v. KPMG LLP, 237 F. Supp. 2d 35, 39 (D.D.C. 2002).

[5]Id. at (a)(2).

[6]United States v. BDO Seidman, LLP, 492 F.3d 806, 819-21 (7th Cir. 2007), cert. denied, Cuillo v. United States, 552 U.S. 1242 (2008).

[7]“Tax shelter” is defined in I.R.C. § 6662(d)(2)(C)(ii).

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