Limits on Client Confidentiality
and the Accountant-Client Privilege
  By Vernon K. Jacobs, CPA


Most people in the U.S. are probably familiar with the concept of the attorney-client privilege of confidentiality. If the information a client provides to an attorney is not confidential, then few clients will be open and candid with their counsel.  The effect would be to dramatically diminish the ability of the attorney to effectively represent the client.

While the primary value of this confidentiality privilege applies to the representation of a person accused of a crime, the attorney-client privilege also applies to many other communications between a client and an attorney. However, the privilege is not universal and is not available in every instance.

Until a few years ago, there was no legal protection for the communications between an accountant and a client. While the accountant (like the attorney) is bound by professional standards to treat all client information as confidential, the accountant can be required by a court of law to testify regarding specific kinds of communication -- such as discussions of tax avoidance methods.

Attorney-client privilege is not available when the attorney is acting in the capacity of a tax preparer. Essentially, tax preparation is a service that is for the purpose of disclosure and the courts have therefore held that the workpapers and discussions with clients relative to the preparation of tax returns are not protected.

In addition, the attorney-client privilege may be lost if the client has previously disclosed confidential information to a third party who then refers the client to an attorney. 

If you have failed to file any tax returns or have failed to report income in previous years, you should not disclose that information to me unless you are willing to forego the confidentiality of the attorney-client privilege.

If there is any possibility that you might choose to "take your chances" on not filing past due returns, you should first seek the advice of an attorney who specializes in tax law and particularly in taxpayer defense law. If you should then decide not to follow the advice of the attorney, the attorney can't be compelled to disclose the details of his or her discussion with you.

A New Accountant-Client Privilege for Tax Matters

The Internal Revenue Service Restructuring and Reform Bill of 1998 (HR 2676) introduced a very limited confidentiality privilege to certain non-attorneys. According to Internal Revenue Code Section 7525(a)(1)

With respect to tax advice, the same common-law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be a privileged communication if it were between a taxpayer and an attorney. (However, this rule) may only be asserted in (A) any noncriminal tax matter before the Internal Revenue Service, and (B) an noncriminal tax proceeding in Federal Court brought by or against the United States.

....For purposes of this subsection, ... the term 'federally authorized tax practitioner' means any individual who is authorized under Federal law to practice before the Internal Revenue Service ... The term 'tax advice' means advice given by an individual with respect to a matter that is within the scope of the individual's authority to practice.

In addition, this section of the tax code does not apply to any written communication between a federally authorized tax practitioner and a director, shareholder, officer, or employee or agent or representative of a corporation in connection with the promotion of the direct or indirect participation of such corporation in any tax shelter. [Tax Shelter is defined in IRC 6662(d)(2)(C) ]

A federally authorized tax practitioner includes an attorney, a certified public accountant, an enrolled agent or an enrolled actuary. 

The new accountant-client privilege only applies to tax advice. It does not apply with respect to the preparation of tax returns, general business consultations or even to personal financial planning advice. In addition, the advice must be treated as confidential by both the accountant and the client. If it is divulged to others then it is clearly not confidential.  Some legal and tax professionals feel that the privilege does not apply to state and local tax matters and that any written copies of such communications should be kept in separate files from other communications with the same clients.

Discussions between a CPA and client regarding tax matters may not be protected with respect to other government agencies such as the SEC, Homeland Security, Police, prosecutors, etc. In addition, the discussions may not be protected from inquiries by a bankruptcy court or in divorce disputes.

But the biggest and most difficult restriction is the one in the tax code that specifically excludes the use of this privilege with respect to any "criminal tax mater or proceeding". Thus, if a taxpayer contacts me as a CPA and discloses that he or she has failed to file some tax returns or to pay some taxes that were due, that communication is not subject to the new accountant-client privilege.

Communications with a lawyer regarding criminal tax issues is protected by the lawyer-client privilege.

The greatest risk occurs if I should be retained to assist with the preparation of some delinquent tax returns and the information provided to me by the client causes me to recommend that the client seek counsel from a tax defense lawyer. Any information the client had previously given to me would not be protected and I could be required by law to disclose any discussions with that client.

It hasn't happened; it's not likely to happen but it could happen.

Therefore if a prospective client contacts me for assistance with the preparation of delinquent returns, I strongly suggest that the only inquiry should be for a referral to some lawyers who are specialists in criminal defense law. 

If any attorney retains me for assistance with respect to various matters of international tax law, then I am working for the attorney and not for the client. Hence, any information I provide to the attorney is protected by the lawyer-client privilege. After I have been retained by the attorney, I can have direct contact with the client in order to assist the attorney with respect to tax advice matters.

However, neither the attorney nor the "federally authorized tax practitioner" can protect communications with a client relative to the preparation of any tax returns.  If the client is positive that he does intend to file any delinquent returns regardless of the cost and consequences, then the advice of an attorney would not be as critical.

Or if you are reading this and have not yet contacted me, you can link to my web page of Taxpayer Defense Lawyers and can contact the lawyers before you contact me.

Vernon Jacobs

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