[Updated April 2020] Each time we post a new blog, we usually have a sentence that says, “all inquiries are protected by the attorney – client privilege.” That makes whistleblowers feel more comfortable in coming forward and in general, our promise to keep information is true and the privilege absolute.
Wait a second, did we just say, “in general”?
We did. The court holds the attorney -client privilege and sacrosanct. But there are exceptions.
For example, a casual conversation with a lawyer at a bar may not be privileged. If you are talking to your lawyer or a lawyer in contemplation of hiring him or her, what you say is privileged. A drunken conversation with someone that just happens to be a lawyer probably isn’t. In other words, if you call us for a consultation, what you tell us is privileged even if you don’t hire us.
A big exception is the situation in which a client says he is about to commit a crime. If you tell us that you just murdered your wife, the conversation is privileged. Otherwise no one could ever be comfortable speaking to their lawyer. But tell me that you planted a bomb that is going to explode in 6 hours, no privilege. Those statements are about a future criminal event that has not yet occurred.
In the case of taxes, things get a bit murkier. If a tax lawyer signs a tax return, there is also no privilege, at least over the conversations you had with your lawyer regarding information in the return. When a tax lawyer signs a tax return, she is acting as a tax preparer and not as your lawyer. It doesn’t make much sense to us or clients but those are the rules.
This month, a federal judge in San Antonio said the IRS could use a John Doe summons to obtain the names of a law firm’s clients suspected to have used the firm to help hide taxable income in foreign countries.
The tiny law firm of Taylor Lohmeyer is located in Kerrville, Texas. As a result of a previous audit, the IRS believed that the law firm “set up foreign accounts, foreign trusts, and foreign corporations to avoid paying U.S. taxes for which he was liable.” [The law firm has not been charged with any wrongdoing. If they have been assessed a preparer penalty, those penalties actions are not disclosed unless there is subsequent court action.]
The amount of unreported income in that one case was substantial, over $2 million.
Understandably, the IRS wanted to know if other clients similarly evaded taxes. But how to find out who were the clients? The IRS sought a John Doe summons. These can only be approved by a federal judge.
When the law firm got wind of the John Doe summons, it filed a motion to “quash” the summons. Having the IRS paw through a tax and estate planning law firm’s client list is not good for business!
The law for issuance a John Doe summons (26 U.S.C. § 7609(f)) says the IRS must demonstrate:
- the summons relates to the investigation of a particular person or ascertainable group or class of persons,
- there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and
(3) the information sought to be obtained from the examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.
These findings can be challenged in an enforcement proceeding. Once the summons is issued, the burden shifts to the recipient to prove that there is some reason why it should not be enforced.
Taylor Lohmeyer asserted the attorney – client privilege and said it should not have to turn over a list of its clients’ names. The law firm lost.
The court said, “It is well established that ‘(t)he identity of a client is a matter not normally within the privilege. Despite the general rule, under a limited and rarely available exception, an attorney must conceal even the identity of a client, not merely his communications. The exception applies when the disclosure of the client’s identity by his attorney would have supplied the last link in an existing chain of incriminating evidence likely to lead to the client’s indictment.”
In simple terms, the law firm doesn’t have to turn over client files but must identify its’ clients.
In opposing the motion to quash, prosecutors reminded the court that no privilege exists when attorneys act in some other capacity, such as an accountant or signing tax returns.
Update April 2020
The 5th Circuit Court of Appeals upheld the decision of the Texas Court which ruled in favor of the IRS. Unless the Supreme Court intervenes (which is unlikely), the case is over. A law firm’s client list is not privileged although the advice provided by the lawyer is. In the words of the court, “The firm’s clients’ identities are not ‘connected inextricably with a privileged communication,’ and therefore the ‘narrow exception’ to the general rule that client identities are not protected by the attorney-client privilege is inapplicable.”
The IRS says they want the client list because an unidentified client said the Taylor Lohmeyer firm had helped him hide money from the IRS. According to an IRS, their investigation
“revealed that Taxpayer-1 hired [Taylor Lohmeyer] for tax planning, which [Taylor Lohmeyer] accomplished by (1) establishing foreign accounts and entities, and (2) executing subsequent transactions relating to said foreign accounts and entities”. Additionally, “[f]rom 1995 to 2009, Taxpayer-1 engaged [the Firm] to form 8 offshore entities in the Isle of Man and in the British Virgin Islands” and “established at least 5 offshore accounts so [Taxpayer-1] could assign income to them and, thus, avoid U.S. income tax on the earnings”. “In June 2017, [however,] Taxpayer-1 and his wife executed a closing agreement with the IRS in which they admitted that Taxpayer-1 . . . earned unreported income of over $5 million for the 1996 through 2000 tax years, resulting in an unpaid income tax liability of over $2 [m]illion.”
“Ultimately, Taxpayer-1 paid almost $4 million to the IRS to resolve his unpaid federal tax, interest, and penalties for those tax years.”
We suspect that once the IRS gets Taylor Lohmeyer’s client list many other clients will soon find themselves the subject of an audit. (Ed. Note: Since the case was first it appears that the law firm has dissolved. There continues to be a listing in Kerrville Texas for the Lohmeyer Law Firm. We do not know if Fred Lohmeyer, the principal in the Lohmeyer Law Firm is involved. Neither the IRS nor the courts have identified the attorney accused of helping evade taxes.)
Am I Safe Discussing Taxes with a Lawyer?
Accountants have no real privilege and when lawyers prepare tax returns, they may have no privilege either. If you hire a lawyer to defend an audit or protect your rights in a criminal investigation, your conversations are privileged.
Ask you lawyer to do something illegal, however, and your conversations may not be privileged.
When we help clients in an IRS criminal case, we have an accountant prepare a pro forma return and a second accountant sign the return. There are things that can be done to keep your communications privileged. The better idea is to not play hide and seek with the IRS or ask an accountant or law firm to do so on your behalf.
IRS Whistleblower Program & Lawyers that Help Clients Evade Taxes
We have seen several lawyers prosecuted for helping clients evade taxes. Usually it is in connection with a bogus tax shelter. In this case, it appears that the IRS is looking at a law firm that helped clients build offshore tax constructs that were used to evade taxes. [Note: There is nothing in the court’s opinion that says the law firm engaged in criminal behavior.]
If you have information about a law firm, bank or accountant in the United States or offshore that is helping Americans evade taxes, contact us. You may be eligible for a reward. The IRS Whistleblower Program pays awards of 10% to 30% of whatever the Service collects in taxes, interest and penalties. One IRS whistleblower was paid $104 million for reporting UBS Bank. (The bank paid $780 million in fines for helping Americans evade taxes by using offshore accounts.)
In most cases, the IRS can protect the identity of whistleblowers and there is no requirement that you be a U.S. citizen in order to collect an award.
For more information, visit our IRS whistleblower page. Ready to see if you qualify for an award? Contact us online, by email or by phone 202-800-9791. Services are provided worldwide. All inquiries are protected by the attorney – client privilege and kept confidential. (Yes, we mean it! Just don’t ask us to hide or launder money, ask us to sign tax returns or ask us to design an illegal tax shelter!)