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May 18, 2019

IRS Summons and the Attorney-Client Privilege

Tax Litigation

Houston Tax Attorney

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The attorney-client privilege protects communications with a tax attorney from disclosure to third parties, such as the IRS. If the IRS discovers that a tax attorney advised a client on a transaction that wasn’t structured properly, should the IRS be able to use its power to issue an administrative summons to require the attorney produce information about his other clients? The court addresses this in Taylor Lohmeyer Law Firm LLC v. United States, SA-18-CV-1161-XR (W.D. Tex [San Antonio] 2019).

Facts & Procedural History

The law firm in this case filed suit to resist an IRS summons. The IRS’s summons asked for information about the identity and activities of the firm’s clients from 1995 – 2017. It was a John Doe summons (we covered the John Doe summons here).

The basis for the summons was one client who, according to the IRS, used the firm to to “set up foreign accounts, foreign trusts, and foreign corporations to avoid paying U.S. taxes for which he was liable.”

The law firm responded by filing a motion to quash the summons.

The Attorney-Client Privilege

The attorney-client privilege prevents an attorney from being compelled to disclose communications with his client in court. This often comes up in tax disputes litigated in court.

The privilege is intended to encourage full and frank communication between an attorney and his client.  The privilege is needed so that the client is fully informed by his attorney and the attorney can best represent the client.

The attorney-client privilege applies if the party asserting it can show that:

1.  The asserted holder of the privilege is or sought to become a client

2.  The person to whom the communication was made is an attorney (or his subordinate)

3.  The communication was made in connection with the performance of services as a lawyer

4.  The communication relates to a fact of which the attorney was informed by his client without the presence of strangers for the purpose of securing primarily either (a) an opinion on law or (b) legal services or (c) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort.

5.  The privilege has not waived by the client.

If these elements are met, the attorney cannot be forced to divulge communications between the attorney and the client in court.  

The Tax Practitioner Privilege

The common law attorney-client privilege and the statutory tax practitioner privilege can protect disclosure of tax advice.  

The tax practitioner privilege is more limited, as it only applies to attorneys, CPAs, and enrolled agents. It also does not apply in criminal cases or state tax cases.  

If the rules are met, communications between the practitioner and his client cannot be divulged in court.

The Powell Factors

For the courts to uphold an IRS summons, the IRS to establish that:

  1. The investigation must be conducted for a legitimate purpose,
  2. The information sought must be relevant to that purpose,
  3. The IRS must not already possess the information, and
  4. All required administrative steps must have been taken.

In the present case, the law firm argued that the first element was not satisfied as the IRS did not show any connection between the one firm client it audited and the firms other clients.

The only evidence the IRS presented, included:

  1. The IRS revenue agent’s self-serving affidavit saying that there is generally non-compliance for those who use foreign accounts.
  2. A statement by the then deceased attorney that he had counseled 20 to 30 clients on foreign entities between the 1990s and early 2000s.

The law firm countered that the client the IRS audited did not follow the firm’s advice and, basically, its other clients had received the same type of advice. This would seem to call into question whether the IRS had a legitimate purpose for the investigation.

It would also seem that the statement by the deceased attorney may be hearsay and not admissible in court….

Despite this, the court concludes that the communications should be disclosed. It did so primarily because the law firm made arguments, but it did not provide the court with a privilege log.

The Privilege Log

For a communication to be privileged, the party asserting privilege generally has to produce a privilege log. This requirement is found in the Federal Rules of Civil Procedure. This is set out in Rule 26(b)(5) which says:

When a party withholds information otherwise discoverable under these rules by claiming that it is privileged or subject to protection as trial preparation material, the party shall make the claim expressly and shall describe the nature of the documents, communications, or things not produced or disclosed in a manner that without revealing information itself privileged or protected, will enable other parties to assess the applicability of the privilege or protection.

The log has to a include sufficient information so the court or opposing party can assess the applicability of the privilege or protection. This typically includes a description of each document and for each document, the date it was created, the author, the persons who received the document, why it is relevant and why it is being withheld. Additional information can be included and other evidence, such as affidavits, can be submitted to support the privilege claim.

The Takeaway

This case is limited to its facts. It does not stand for the proposition that the IRS can ignore the attorney-client privilege. It does stand for the proposition that a privileged log should be provided to the court in cases like this.

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