IRS and Taxes are two things that fluster even the steadiest individual. There are so many questions to consider. How aggressive has your claiming process been? Do you have the right exposure for previous years, and would amending past returns make the situation worse or better? You also have to consider how much you can tell your accountant, to ensure it doesn’t get used against you.
You have to consider all of these questions as the wrong language could result in serious penalties. The truth is taxes are complicated and it’s difficult to know what you can or can say without getting into trouble. Most people think the concept of attorney/client privilege extends to other facets, but that isn’t always the case.
You don’t have attorney client privilege with your accountant. For instance, if you tell your lawyer a secret about any money you might be hiding offshore, that lawyer cannot be compelled to talk by the IRS. The IRS also cannot make your lawyer produce documents. The attorney-client privilege is decisively strong to ensure that clients remain forthcoming to their lawyers in both criminal and civil cases.
Accountants, however, do not have this privilege. If you provide documents or make statements to your accountant, they can be compelled to divulge the information, no matter how incriminating it is.
Now the question, “is there such a thing as attorney/client privilege for accountants?” has an answer. It is the statutory tax preparation privilege. This was added to the tax code in 1998. However, the IRC Section 7525(a)(1)’s scope is quite narrow and cannot be used in criminal tax cases. For this reason, it is of little value.
This is compared to the attorney-client privilege that has significant protection under the law. In certain cases, particularly sensitive tax matters, you can circumvent this disparity using what is known as the Kovel letter. The Kovel letter is named after the United States v. Kovel case. In this instance, you can hire a tax lawyer, who then hires an accountant.
In real terms, the accountant is processing your tax accounting and preparing your return, but they remain a subcontractor as they report directly to your lawyer. When this process is properly executed, it imports the attorney-client privilege to the work your accountant conducts, as well as their communications.
While there have been many IRS lawsuits trying to erode this practice, the Kovel letter has stood the test of time and is most likely to be around for generations. It can be a great way to import the attorney/client privilege you share with your lawyer to your accountant. Surprisingly, the simple fact that a Kovel arrangement exists makes it unlikely that the IRS will push for disclosure. Furthermore, having a Kovel arrangement can ensure your accountant is a lot more responsive and comfortable.
Pre-existing relationships between you and an accountant can be quite prickly. This is because a Kovel arrangement is founded on the premise that your accountant’s communications were made because they wanted to gain legal advice from the lawyer. This also means that the information an accountant gains under a Kovel agreement is different from information they gain in a capacity as an auditor.
Simply put, your communication and interaction with an accountant is protected under any privileged information act. However, with a Kovel agreement, you can find a way to ensure that the accountant deals with a tax lawyer, who then deals with you, ensuring your information is indeed privileged.
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