on Client Confidentiality
and the Accountant-Client Privilege
By Vernon K. Jacobs, CPA
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.
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.
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.
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.
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.
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.
federally authorized tax practitioner includes an attorney, a certified
public accountant, an enrolled agent or an enrolled actuary.
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.
....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
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) ]
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.
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.
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.
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.
you are reading this and have not yet contacted me, you can link to my
web page of Taxpayer Defense
and can contact the lawyers before you contact me.