by Brian Mahany
First, lets clear up a popular misconception. What you say to an accountant is generally not privileged. What does that mean in English? It means the IRS can subpoena your accountant and compel him or her to testify, even if its against your interest. There are certain relationships that are still sacrosanct in the U.S.; for instance you can feel pretty secure confessing your sins to a priest, lawyer or psychiatrist. Unfortunately, Congress hasn’t added CPA’s to that list. (Some states have an accountant client privilege but that only works for state taxes, never the IRS.)
For years, the popular workaround was to have the client’s lawyer hire the accountant under the lawyer’s privilege. That doctrine comes from a 1961 federal appeals court decision, U.S. v. Kovel; hence the term “Kovel accountant” or “Kovel privilege.” Unfortunately, that privilege is eroding.
A recent case from a federal court in New York says that the Kovel privilege is quite limited (U.S. v. Sandra Hatfield, 2010 Eastern District of New York).
If the accountant is hired much like an “interpreter” and simply “aids attorneys in understanding accounting principles,” the privilege is protected. But if the accountant performs “accounting services,” then no privilege attaches. Sound a bit fuzzy? It is but there is a growing trend to not recognize the Kovel privilege.
The court next determined that the CPA’s work was not protected by the attorney work product rule either, even though the law firm had hired the accountant. Why not? Because preparing returns was something the company would have needed to do with or without a lawyer.
In practical terms, it means now more than ever, be careful what you tell your CPA. While we think government should encourage people to be truthful with their accounting professionals, the new direction has the opposite effect. This article is not intended to steer people away from accountants. The cold reality, however, is that if you have cut some corners on your tax return, talk to your lawyer first, not your accountant.
If you are the subject of an audit, enforced collection or criminal investigation, give us a call. Our tax lawyers can help you with a wide variety of tax matters. We can assist your accountant too. Now more than ever its important to find a lawyer who knows the extent of the privilege and how to best protect you.
Mahany & Ertl, LLC – America’s tax lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan & Portland, Maine. Services nationwide.