Attorney-Client Privilege Tax Return Preparation

Attorney-Client Privilege Tax Return Preparation

How Attorney-Client Privilege May Protect Tax Preparation: When it comes to Tax matters, the Attorney-Client Privilege and Tax Practitioner Privilege are designed to help to protect confidential information. While the Attorney-Client Privilege is one of the strongest privileges available in law, the Tax Practitioner Privilege is much less effective — and much more easily broken by the IRS — and US Government in general.  What makes the privilege so complicated in tax return preparation and other tax matters, is that when it comes to tax representation, there are typically two aspects to it: Legal Representation and Tax Preparation. This is where Attorney-Client Privilege and Tax Return Preparation intersect with each other. 

Offshore Disclosure & Attorney-Client Privilege with Tax Preparation

In practice, most experienced Tax Accountants/CPAs do not handle complex tax return preparation matters, such as offshore disclosure. That is because due to the confidential nature and complexity of international tax matters in particular — such as Streamlined Offshore Domestic and Foreign Offshore Procedures, Voluntary Disclosure (VDP) and Reasonable Cause — which involve both tax and legal components — most experienced accountants do not want to risk client confidentiality. If the Accountant does not have a deep legal knowledge, it is nearly impossible for them to effectively prepare tax returns in complex tax situations involving offshore disclosure and compliance. If the Taxpayer has to begin discussing legal issues with the Tax Preparer — this is where the trouble begins. Let’s review the basics of Attorney-Client Privilege Tax Return Preparation.

Tax Return Preparation

When Tax Return Preparation is involved, the Tax Attorney and their Client must carefully assess the situation to determine what portions or the representation may be protected and what portions may not. While there is no absolute protection for all tax matters under the umbrella of hiring a tax attorney who also handles tax preparation in-house — it provides the client with the best opportunity for protection, which is why most experienced Tax Attorneys handle the entire tax and legal matter in-house.

Tax Attorney-Client Privilege vs. Tax Practitioner

At the outset, there are two important concepts to keep in mind:

Attorney-Client Privilege vs. Tax Practitioner Privilege

The Attorney-Client Privilege is designed to protect all confidential communications between the client and the tax attorney. The Attorney-Client Privilege includes both civil and criminal matters — not just civil, and not just tax matters. When it comes to complex tax and legal matters (including those underlying a tax return), the Client must feel free to provide a comprehensive summary of the facts and circumstances. This way, it ensures that the attorney can provide the best legal advice possible — by getting a deep understanding of the case from the client.

Conversely, the Tax Practitioner Privilege is designed to provide limited protection between a client and their tax representative in accounting matters only. It does not provide any protection for criminal or quasi-criminal matters. Thus, the tax practitioner privilege does not protect against much in the way of IRS or other government investigations.

Kovel Agreements

There is probably no single concept that is misapplied by inexperienced tax attorneys more than the Kovel Agreement. A Kovel Agreement is used for the very limited purpose of a situation in which an Attorney (typically not a tax attorney) requires assistance from an accountant in order for the attorney to provide legal advice to the client. There is absolutely no protection for tax return preparation under a Kovel Letter. Some inexperienced attorneys go so far as to issuing Kovel Agreements to accountants/clients under the guise that the communications involving tax return preparation will be covered since the attorney issued the CPA or other accountant a Kovel.

Tax Return Preparation & Attorney-Client Privilege

A tax return is not confidential.

How can it be — when it is literally prepared in order to be submitted to the US Government. In other words, there is no expectation that a tax return that a person submits to the IRS is private or confidential — since it is literally prepared for submission to the US Government (e.g, publication to a 3rd party).

But, the information contained on the tax return and the legal information that underlies the tax return are not the same thing.

Talking to an Attorney vs CPA/Tax Accountant

Here is the difference between talking to an Attorney vs CPA/Tax Accountant on tax matters:

Attorney Client Privilege

When you are talking to a Tax Attorney about legal strategies, that information would be protected under the Attorney-Client Privilege. Just because that same firm prepares the tax returns does not mean all of the legal information told to the attorney is now non-privileged. In other words, just because a tax attorney’s firm prepares tax returns does not mean all the legal information discussed with the attorney and their firm is no longer privileged.

Tax Practitioner Privilege

When you sit down with your tax preparer/CPA who is not an attorney, it is impossible to discuss the complete tax and legal matters involved in an offshore disclosure without communicating about issues regarding the legal aspects of the case. In this type of situation the legal information you discussed is definitely not privileged under the attorney-client privilege — because it was not made to an attorney.

Here is a case study example of how it works.

Why Does My Attorney want to Use an outside CPA and Kovel?

Oftentimes, Kovel Accountants in offshore disclosure matters are typically retained by less experienced counsel seeking to puff up their fees.  They accomplish this by charging you one fee and then referring you out to a tax accountant who then charges their own fees. This is why you will find experienced counsel generally handle both tax and legal matters in-house.

While it does not guarantee attorney client privilege on certain matters, it goes much further to protect them — as was the case in US v Abrahams.

Attorney-Client Privilege in Tax Law Is Complicated

The attorney-client privilege is used to protect communications between the attorney and client. When it comes to tax matters, it can get very complicated. It is important to understand how the Attorney-Client privilege process works in tax and to carefully assess your tax and legal situation before moving forward — especially if an Attorney is trying to push a Kovel Agreement on you under false pretenses.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.

Contact our firm for assistance.