Recently, in a criminal case involving a physician who hired an accountant to prepare and submit certain tax forms to the IRS on her behalf, the court denied attorney-client and work-product privilege claims and ordered the accountant to testify at the criminal trial. See United States v. Barrett, No. 22-cr-00071 (M.D. Louisiana). One of the allegations in the indictment was that the physician submitted an incomplete IRS Form 433-A to the IRS excluding certain assets from that form. The physician hired a law firm to help with collection issues and an accountant at the law firm assisted with the preparation, and signed, the IRS Form 433-A under penalty of perjury. The IRS Form 433-A apparently contained several errors that the government claimed were intentional and the defendant claimed were based on incompetence of the accountant. Both the physician and the law firm employing the accountant objected to the testimony of the accountant claiming attorney-client privilege and work product. This case reminds tax advisors, especially accountants, that they need to be very thoughtful about communications with clients.
The attorney-client privilege protects communications made in confidence by a client to his or her lawyer for the purpose of obtaining legal advice. The work product privilege is broader and includes materials assembled and created in anticipation of litigation, which includes the IRS administrative process. The court noted that the accountant is, obviously, not an attorney and that there is no attorney-client privilege under federal law and that no state create privilege is recognized in federal cases. The Internal Revenue Code does contain an accountant privilege under Section 7525, but it is a limited privilege. See 26 U.S.C. §7525. An accountant can sometimes invoke the attorney-client privilege when working in tandem with an attorney so that the attorney can provide legal advice to the client. See United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).
A federally authorized tax practitioner can be any individual authorized to practice before the IRS (e.g., CPAs, attorneys, enrolled agents, enrolled actuaries). These authorized practitioners may assert the privilege under Section 7525 of the Internal Revenue Code. However, it doesn’t protect communications made as part of the preparation of the tax return. Therefore, seemingly confidential information may not be protected by the Code Sec. 7525 privilege if it is sufficiently connected to the preparation of the return. Also, the Code Sec. 7525 privilege only applies to civil administrative proceedings with the IRS (e.g., examinations or appeals) or litigation before the U.S. Tax Court or other federal courts. Criminal tax proceedings or any other nontax proceeding is outside the scope of the privilege. See 26 U.S.C. §7525(a)(2)(A). As such, the Code Sec. 7525 privilege has potentially no value if there is criminal exposure or implications beyond tax. Another limitation is that the Code Sec. 7525 privilege will not apply if the communication is found to be in connection with the promotion or direct or indirect participation of any tax shelter. The definition of tax shelter is any entity, plan, or arrangement with a “significant purpose” of the avoidance or evasion of federal income tax. Although the statute doesn’t define “significant purpose,” courts have interpreted it broadly. For practical purposes, much of what the government may be interested in could fit into the definition of a tax shelter. This privilege is also sometimes narrowly interpreted to only cover items related to more complex tax and accounting items that are required for the lawyer to provide the necessary legal advice. See United States v. El Paso Co., 682 F.2d 530 (5th Cir. 1982). Therefore, more routine subjects may be determined to not require accounting expertise and fall outside the Kovel arrangement as well. Therefore, the specific facts are paramount in protecting privilege because it is those facts that must be documented and asserted if the communications are challenged. Privilege cases, similar to this most recent case, are won and lost on whether the only defense is a blanket assertion of privilege without specifics.
Ultimately, the Court decided that the law firm and the accountant failed to prove any claim of attorney-client or work product privilege and that the claims were mere blanket assertions. As such, the Court ordered that the accountant testify at the criminal trial and be cross-examined on relevant matters. Both accountants and their clients should be careful with communications with clients to avoid falling outside the scope of privileged protections under the Internal Revenue Code. Otherwise, they could find themselves witnesses forced to disclose information or communications they thought were confidential.