Many taxpayers think that conversations with their accountant are confidential. Only during an audit or criminal investigation do they learn otherwise. Unfortunately, by then it’s too late.
We have seen several taxpayers stunned when the IRS issues a summons (IRS speak for subpoena) to their CPA. Knowing when and what information is confidential is something to think about now and not when the IRS comes knocking.
Taxpayers enjoy a very broad privilege with their attorney. Although not absolute (more on that later), it is quite broad. Does that mean that taxpayers should not hire accountants? Of course not.
Here are the basics.
Section 7525 of the Internal Revenue Code governs the client – accountant privilege. That privilege protects many conversations and correspondence that a taxpayer may have with his or her practitioner but there are some exceptions. These include:
Allegations of fraud
Allegations of criminal activity
Tax return preparation
Participation in a tax shelter
So what is left? Good question. Discussions with your accountant seeking tax advice are covered by the privilege; unless of course they run afoul of one of the above exceptions.
The privilege enjoyed by lawyers is much broader. Unless the lawyer is assisting the taxpayer in the commission of a crime or fraud, virtually all communications are privileged.
Accountants can still play a valuable role in tax investigations and tax shelter cases. To maintain the privilege, the taxpayer should hire a lawyer and then have the lawyer hire the accountant. This so-called Kovell privilege is not absolute but comes close. By having the lawyer hire the accountant, the lawyer’s privilege extends to the accountant and their combined work is covered by the work product doctrine.
If a lawyer or accountant signs a tax return, however, the privilege may be waived. For that reason, some lawyers engage one accountant to assist in defending the client under audit or investigation while a second accounting firm signs returns.
Privilege can also be waived if the taxpayer, lawyer or accountant copies third parties on correspondence or allows third parties to be present when tax matters are being discussed.
Obviously, this is a very general description of the privileges that a taxpayer enjoys with his or her accountant and tax lawyer. The important takeaway is to consider hiring a lawyer if a tax audit could turn criminal or may involve fraud. The same is true if you are involved in tax shelter transactions.
Facing a tax audit or think you may have potential tax fraud problems? Give us a call. Our audit defense and criminal tax attorneys have helped many taxpayers with a wide variety of tax concerns.
For more information on audit defense, contact attorney Bethany Canfield at or by telephone at (414) 223-0464. Have a fraud or criminal tax issue? Contact the author of this post, attorney Brian Mahany at or by telephone at (414) 704-6731 (direct). All inquiries protected by the attorney – client privilege and kept in strict confidence. (But by reading this article, you already knew that!)
Tag as Kovel privilege, accountant privilege, tax audit defense, tax evasion