Will My Tax Attorney Tell on Me?
When faced with a tax issue, it’s natural to have concerns about sharing sensitive information with your tax attorney. You may wonder, “Can I be completely honest with my tax attorney?” or “Will my tax attorney keep my information confidential?”
The good news is that you can and should be fully transparent with your tax attorney. This article will explain the various privileges and confidentiality rules that protect your communications with your tax attorney.
The Attorney Privileges
Communications with tax attorneys qualify for the attorney-client privilege and, for written communications between the client and tax attorney, the work-product privilege.
These privileges prohibit the tax attorney from disclosing confidential information in court. They also apply during IRS audits and attempts by the IRS to collect taxes.
- Attorney-Client Privilege: The attorney-client privilege is a long-standing legal principle that protects confidential communications between a client and their attorney. This privilege applies to both verbal and written communications, ensuring that your tax attorney cannot disclose your private information in court, during IRS audits, or in tax collection proceedings. The privilege belongs to you, the client, and can only be waived by you, except in rare circumstances such as the crime-fraud exception. Absent the crime-fraud exception, the attorney-client privilege is usually upheld by the courts.
- Work-Product Privilege. The work-product privilege specifically covers written communications between you and your tax attorney. This privilege prevents the disclosure of documents, notes, and other materials prepared by your attorney in anticipation of litigation. Like the attorney-client privilege, the work-product privilege is a powerful tool that shields your information from being used against you by the government.
You, as the taxpayer and client, have these privileges. You do so by directing your tax attorney not to answer specific questions or provide information. So your tax attorney just asserts these privileges. It is your privilege to waive, if, how, and when you choose to do so.
Ultimately, these privileges prevent the government from compelling the tax attorney to testify against their client or product records in court or during an IRS audit or collection case.
Extending the Privilege to a CPA or Others
A Kovel arrangement is a legal strategy used to extend the attorney-client privilege to communications between a client and a non-attorney expert, such as a CPA (“Certified Public Accountant”), hired by the attorney. This strategy, derived from the landmark case United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).
In the Kovel case, a former IRS agent working as an accountant for a law firm was subpoenaed to testify about his communications with the firm’s client. The accountant refused to testify, citing attorney-client privilege. Initially held in contempt, the court’s decision was overturned on appeal, with the Second Circuit Court of Appeals ruling that the privilege could extend to communications with the accountant since he was assisting the attorney in providing legal advice.
To establish a Kovel arrangement, the CPA must be engaged directly by the attorney, not the client. The CPA’s role is to assist the attorney in understanding the financial and tax aspects of the client’s situation, making the work necessary for the attorney to provide legal advice. A formal agreement, often a letter, should document the CPA’s engagement by the attorney, specifying that the work is being performed under the attorney’s direction and for the purpose of providing legal advice. The CPA must maintain confidentiality, ensuring that all communications and documents are shared exclusively with the attorney.
It should be noted that the extension of the privilege only applies to communications necessary for the attorney to provide legal advice, not to routine accounting services. Disclosure of privileged communications to third parties can waive the privilege, so careful handling of documents and information is crucial. Both the IRS and courts scrutinize Kovel arrangements, and if the arrangement appears to be a means to simply shield communications from discovery rather than a genuine need for the CPA’s assistance in legal advice, the privilege may not be upheld.
Kovel arrangements can be an effective tool to protect the confidentiality of communications involving tax attorneys and CPAs. By ensuring that the CPA is engaged by the attorney and the work is integral to the provision of legal advice, clients can safeguard sensitive information during tax disputes or investigations. However, careful documentation and adherence to legal standards are essential to maintain the privilege.
The Federal Tax Practitioner Privilege
The rules for communications between a non-tax attorney and their clients is not as clear. This includes communications with accountants or other persons holding themselves out as tax practitioners.
Our tax rules include a federal tax practitioner privilege. The federal tax practitioner privilege aims to extend similar protections to these professionals, but it has several limitations. For example, this privilege cannot be invoked in criminal tax cases and may not cover certain types of written advice. As the nuances of this privilege are still being tested in courts, its effectiveness in protecting client information remains uncertain.
The nuances of this privilege have not been fully tested. So the jury is still out on how much protection is provided by this privilege.
State Professionalism Rules
Out of court, licensed tax attorneys and certified public accountants are prohibited from disclosing confidential client information by way of local rules of professional conduct and professionalism rules. These rules are enforced through local bar ethics committees and state boards of accounting.
These rules generally prohibit the disclosure of all information provided to the tax attorney (1) that is not necessary for the representation of the client, (2) information that is not likely to result in imminent and substantial bodily injury to a third party, and (3) information used to defend the tax attorney against a civil lawsuit filed by the client or a criminal suit brought by the government against the tax attorney.
The penalty for a licensed attorney or certified public accountant disclosing confidential client information can be quite severe–including suspension or disbarment from practicing law or holding them out as a certified public accountant.
IRS Disclosure of Confidential Information
You may also be worried about your tax attorney providing information to the IRS and whether the IRS will keep it protected.
The tax code imposes strict confidentiality rules for IRS employees. These rules help ensure that your information is kept private.
Experienced Tax Attorneys
If you have additional questions about whether you can or should disclose information to your tax attorney, please discuss the topic directly with your tax attorney.
We are experienced tax attorneys located in Houston, Texas. We help clients with IRS problems. We also advise clients about client confidentiality questions.
Please call us at (713) 909-4906 or schedule an appointment to see how we can help with your IRS problem.
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