The client-accountant communication has limited privilege under the current Tax Code. In non-criminal tax matters, privilege applies to any communication that would be considered privilege if it were between the taxpayer and an attorney. In criminal tax matters, no privilege applies to communication between the client and their accountant.
Due to the complexities, attorneys are prevented from handling their clients’ affairs without the help of others, including accountants. The assistance of others is indispensable to the attorney’s work and the client’s communication, and therefore, the attorney’s privilege includes all persons who act as the attorney’s agent.
Assisting an attorney in providing advice to a client may include analyzing the client’s books and records to determine if any tax problem exists, verifying the tax authority’s tax calculations, and preparing simulated tax returns that may include unreported income and or deductions to support an agreement relative to the tax due. These tasks are crucial in advising the client who could be facing a threat of criminal tax charges.
The Attorney-Client Privilege
The application of attorney-client privilege to communications with the accountant is questionable. The privilege DOES NOT apply to communications between the accountant and the client when the accountant is only providing tax return preparation services. Privilege does not apply to questions asked by the client about whether a certain deduction can be taken or which forms need to filed. Where the accountant conducts research, including Tax Court opinions, legal articles, this is not covered under privilege. The accountant’s advice provided may be quasi legal in nature, but it is not privilege. What is missing under the above is the involvement of an attorney whose legal advice is sought by the client.
When an attorney retains an accountant for his expertise to assist in client representation, privilege does apply to attorney accountant communications. The matters that apply include review of the client’s previously filed tax returns that includes new information. The accountant’s expertise is important for the attorney to advise the client.
Note: an accountant who later prepares tax return for clients that are filed with the taxing authorities is not deemed privileged.
The Courts have held that an accountant who performs routine accounting work, by being retained by counsel cannot automatically be protected by privilege. The accountant must be an agent to the counsel in providing legal advice.
If a client confides to his accountant who solely prepares his tax returns containing potential criminal issues and the accountant gives the client advice without the involvement of counsel, these communications will not be covered under privilege. If the accountant had been the interpreter for the client in a meeting with the attorney, privilege may be applicable. The attorney-client relationship may apply to post retention communications. In this case it is suggested that the accountant should maintain separate files; one for privilege and one for non-privilege materials.
When one is faced with an interview request or a subpoena from the government, one should immediately notify the retaining attorney. The attorney should assert attorney client privilege on behalf of the client. The burden of proving the confidentiality of communications is on the party who asserts the privilege.
Where an accountant is surprised by a government visit, he should inform the government that he is assisting the attorney in providing legal advice. Thus, he is unable to answer the questions without violating the attorney client relationship. Immediately after the government visit he must notify the attorney of this matter.
To be able to withstand the challenges of the attorney client privilege it is crucial to pay close attention to the engagement details and to not step over the lines between legal and accounting advice.
The Kovel Letter
The attorney should be retained by the client. The attorney should have the initial communication with the accountant in order to be retained by the attorney. The attorney should retain the accountant via a written agreement setting forth the terms of the engagement. This agreement is referred to as a Kovel Letter.
The attorney’s engagement letter will specify that:
- The accountant is assisting in the representation of the specific client under the attorney’s direction
- The accountant is reporting directly to the attorney
- All communications between the accountant and the client and between the attorney and the accountant are privilege for the purposes of assisting the attorney
- The attorney has ultimate control over the accountant’s work and without written permission by the attorney the accountant cannot disclose information to anyone
Where an accountant has a prior relationship with the client, and is later retained by counsel to assist in providing legal advice to the client, the attorney client privilege may apply.
For more information, contact your Friedman LLP advisor or Scott Ehrenpreis, Principal, Tax Controversy at firstname.lastname@example.org.