Voluntary Disclosure to IRS of Privileged Communication

Published Categorized as IRS Audits, Tax Procedure
Using Warrants To Make Future Purchases Of S Corporation Stock
Using Warrants To Make Future Purchases Of S Corporation Stock

The attorney-client privilege projects confidential communications with attorneys. It allows the attorney to avoid disclosing protected communications. But what if the attorney voluntarily discloses information and the disclosure is to the IRS about a tax matter? The court addresses this in Gaetano v. United States, No. 19-1122 (6th Cir. 2019).

Facts & Procedural History

This case involves a business attorney. The attorney’s client was a marijuana dispensary.

The attorney represented his client in selling the business. Improprieties were discovered and, after an ethics proceeding, the attorney was disbarred.

A few years later, the IRS sent a letter to the attorney about an IRS audit of his client’s tax returns. The attorney then demanded money from the client, threatening to disclose harmful information to the IRS.

The client did not pay the attorney and, eventually, the attorney talked to the IRS. During the conversation, the IRS agent told the attorney not to disclose privileged information and confirmed that the attorney knew the difference between privileged and non-privileged communications.

The attorney told the client about his conversation with the IRS and litigation ensued. This court case is the client’s attempt to prevent the IRS from communicating with their former attorney and to destroy records of confidential communications.

About the Attorney-Client Privilege

The rules of evidence say what evidence is admissible in court. With respect to privileged communications, the rules generally allow any privilege allowed by state or Federal law.

State and Federal law provides for the attorney-client privilege (in Texas, it is Rule 503). This privilege is intended to allow a client to freely communicate with their attorney, so the attorney can effectively represent the client.

The rules of civil procedure allow a party to a court proceeding to obtain information about communications related to a claim or defense. The rules do not allow discovery of privileged communications, such as attorney-client privileged communications.

The attorney ethics rules also address the attorney-client privilege. The specifics of these rules vary from state to state, but they generally prohibit attorneys from disclosing client communications. The punishment for violating the rules can be severe, including being disbarred and precluded from practicing law.

Taken together, these rules prevent the attorney from being forced to disclose client communications in court and provide a strong incentive for attorneys to not disclose protected client communications. But what if the attorney volunteers client communications and does so outside of court? And what if the suit is involving communications about a potential tax liability?

Violations of Attorney-Client Privilege

The attorney-client privilege only applies in court. The law makes this clear. As a practical matter, it also applies outside of court in that a government agency or other party would have to use the courts to force the attorney to testify if the attorney refuses to cooperate.

But again, this case involved an attorney who volunteered information (there are rules and numerous cases involving unintentional disclosures, which are different than the facts in this case). In doing so, the attorney waived the attorney-client privilege. What remedy does a client have in this situation? The attorney was already disbarred….

This case is unique as it involves an investigation into a tax liability. The IRS argued that the Anti-Injunction Act bars suits that restrains the assessment or collection of tax. The court agreed with the IRS.

The client turned to the Bill of Rights. Specifically, the Sixth and Fifth Amendments. The court considered prior court cases where the government acted in a way that would imperil the fairness of later court proceedings.

But in this case, the court didn’t find the IRS’s conduct nefarious. It noted that the IRS advised the attorney not to disclose attorney-client protected communications and confirmed that he knew the difference between protected communications and those that were not protected.

The Client’s Civil Remedy

While the client was not successful in barring the IRS from talking with their former attorney, the court might bar the attorney from talking to the IRS. This might need to be brought in a separate suit–one that doesn’t have the IRS as a named party. The suit might even seek damages, which itself might provide some protection.

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