Accountant-Client Privilege: Opportunities and Limitations

The extension of confidentiality privilege to accountants, a provision included in the IRS Restructuring and Reform Act, protects communications between clients and their accountants, enrolled agents, and enrolled actuaries from disclosure in the same manner and with the same responsibilities as the attorney-client privilege. Accordingly, a refresher on those responsibilities is important for CPAs to understand what is and is not protected.

Privilege Belongs to the Client

First and foremost, just as with the attorney-client privilege, only the client, and not the accountant, may waive the privilege. The accountant is bound to keep privileged communications confidential unless and until the client determines otherwise. The cautious practitioner should appropriately document a client's waiver of this privilege.

Scope of Privilege

When conducting an investigation or audit, the IRS still can obtain from taxpayers the factual information on which the tax return is based. However, the agency has been accused of conducting "fishing expeditions" into the taxpayer's practices, strategies, and thought processes and has sought other nonfactually based material such as engagement letters, representation letters, and audit reports. One of the main objectives of the new privilege provision is to shield such information from the IRS.

Just as the attorney-client privilege works to encourage the free flow of information between a client and attorney to allow the attorney to render the best possible legal advice, so too is the purpose of extending such a privilege to federal tax practitioners in tax related matters. Accountant-client privilege allows clients to discuss riskier tax strategies directly with their accountants without seeking separate advice from tax attorneys, often necessary when only conversations with attorneys were protected from disclosure. The privilege will be helpful to taxpayers in those cases where the IRS tries to subpoena records of conversations or communications between accountants and clients.

Work Product Privilege?

The new provision does not address whether the confidentiality privilege extends to an accountant's work product, which generally would be protected from disclosure if prepared by an attorney. The attorney work product privilege derives from but is independent of the attorney-client privilege, and it protects from disclosure materials prepared by, or on behalf of, an attorney in connection with a client's representation. The statute's silence on this point leaves open for judicial interpretation whether such privilege should be extended to accountants and other federally authorized tax representatives.

Limitations and Exceptions to the Privilege

While the extension of privilege to accountants appears to liberate the practice of rendering tax advice, its application has exceptions. Accountants should be aware that the new provision is not as broad as the attorney-client privilege. It applies only to civil disputes over interpretations of federal tax laws, not to state taxes or criminal proceedings. Privilege also does not apply to the preparation of the client's tax return; communication between the accountant and the client of facts needed to prepare the tax return is not protected from disclosure.

Accountants should be cautious in rendering tax advice on state tax law matters, as those communications will not be protected unless a particular state separately recognizes accountant-client privilege. In addition, if advice concerning federal tax law interpretation has state law implications, the privilege may not apply.

When providing tax advice in an IRS investigation, accountants should advise their clients and should themselves be cognizant of the proceeding's climate and environment. If there is even the potential that a criminal investigation may result, the accountant should advise the client that all information would then be discoverable in court. In such situations, it may be necessary from the inception of the civil investigation for the client to seek advice from an attorney in order to shield all communications down the road. The attorney may then engage the accountant to "assist" in rendering tax advice. This maneuver effectively shields the accountant's advice from disclosure under the broader attorney-client privilege.

The new privilege extension does not apply to advice relating to tax shelters. The language of this exception is broad and practitioners should be aware that such advice will not be protected from disclosure.

The accountant-client privilege will not shield all tax advice in all situations. Accountants should recognize that the privilege is not a blanket of protection, and must proceed with caution when providing tax advice that may implicate areas of exception. Nevertheless, this legislation at least marks a step forward to affording federally authorized tax representatives parity with lawyers when representing clients before the IRS.*