Posted by Fred Lake

Attorney/Client Privilege with Your Accountant

Attorney/Client Privilege with Your Accountant

Most of us realize (or we should) that even though our accountant prepares our taxes, we’re still on the hook for what is reported, as much as we hate to think about the topic.  Yes, there can be financial repercussions, but the risk is much higher than this, and most of us tend not to ponder the risks while rushing to get our yearly returns sent off with a sigh of relief when we meet the deadline.  We’ve all read about people convicted of white collar crimes and fraud, but it seems out of the realm of our possibility.  The truth is, it is not. These cases can feel restricted to highly visible people in the media and movies, but these events originate from real life, and can even affect a life as simple and unassuming as yours. 

 

It’s possible you’ve made some questionable claims on your returns whether currently, or in past years.  You may’ve wondered if you should amend your return, or hope for the best.  Can you safely inform your accountant about the concern, without adding additional risk?   Generally speaking, you can be at risk if the IRS contacted your accountant and he or she can expose information about you, no matter how incriminating it may be.  After all, by signing your tax return, you are doing so under penalty of perjury. If you’ve ever observed the fine print on your tax return, above your signature, you’ll find the very clear warning, “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.”


It's generally understood that one is protected under the attorney-client privilege, in that, you can divulge private, even incriminating information about yourself or your company to your attorney, yet still be protected under the attorney-client privilege.  In fact, the sanctity of this relationship even covers possible provision of documents, which could be requested from your attorney. This powerful protection is designed to allow clients to be 100% honest with their attorneys, without the risk of their secrets being revealed in court by the very person they’ve hired to protect their interests.  But, what about what you say to your accountant, are you afforded that same protection?  Unfortunately, accountants are not privy to the level of client protect-ability as an attorney.  Any documentation or information provided to your accountant can be released to the IRS.  While a “tax preparation” privilege was previously incorporated into the tax code, the actual applicability of the provision is quite limited.  In fact, it offers no relevant protection in criminal cases.  


According to U.S. Code Section 7525, the following limitations to confidentiality apply:

“(A) any noncriminal tax matter before the Internal Revenue Service; and

(B) any noncriminal tax proceeding in Federal court brought by or against the United States.”  


There are further limitations regarding tax shelters, in which case the Section states, 

“The privilege under subsection (a) shall not apply to any written communication which is—

(1) between a federally authorized tax practitioner and—

(A) any person,

(B) any director, officer, employee, agent, or representative of the person, or

(C) any other person holding a capital or profits interest in the person, and

(2) in connection with the promotion of the direct or indirect participation of the person in any tax shelter”


So, if you’re worried you could be in hot water with Uncle Sam, the protection offered under Section 7525 may not be as sturdy and unbreakable as you need.  Fortunately, following the case of United States v. Kovel, there is an alternative solution worth asking your accountant about.  The ruling has made it possible to hire a tax attorney who then, in turn, hires your accountant.  The relationship formed simulates a subcontracting arrangement, in which case, your accountant reports as a subcontractor to your attorney, which then affords you the more comprehensive protection of the attorney-client privilege.   

Of course, there are some exceptions or loopholes that can apply, so be sure to discuss in detail with your accountant or attorney, for a full understanding before proceeding with disclosure of your tax-related concerns.  


Fred Lake
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