\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The concept of attorney-client privilege is long standing; however, taxes have been around longer. As a CPA and attorney, I routinely field calls from fellow members of the Bar regarding the proper use of attorney-client privilege during an ongoing tax audit. The first question I ask is, "Who is being audited?" Answers fall into one of three categories: the client; a non-client third party; or the law practice and/or attorney individually. Questions arise on how to address inquiries from tax authorities for client records, and most attorneys follow proper protocol when the request originates from client or non-client third party tax audits. The purpose of this article is to address the proper use of attorney-client privilege during an ongoing tax audit of the attorney and/or the law practice.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0In most jurisdictions, the attorney-client privilege is based on the American Bar Association (ABA) Model Rule 1.61 with each respective jurisdiction making edits based on its legal ethics rules and procedures. Comment 2 of the ABA Model Rule 1.6 states:
A fundamental principle in the client-lawyer relationship is that, in the absence of the client's informed consent, the lawyer must not reveal information relating to the representation. . . . This contributes t o the trust that is the hallmark of the client-lawyer relationship.2
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0South Carolina mimics Model Rule 1.6(a) & (b) with a slight variation in section 1.6(b)(1) that permits a member of the South Carolina Bar to release confidential information "to prevent the client from committing a criminal act" compared to the ABA version which states "to prevent reasonably certain death or substantial bodily harm." South Carolina Rule 1.6 states:
(a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).
(b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary:
(1) to prevent the client from committing a criminal act;
(2) to prevent reasonably certain death or substantial bodily harm;
(3) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer's services;
(4) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client has used the lawyer's services;
(5) to secure legal advice about the lawyer's compliance with these Rules;
(6) to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer's representation of the client;
(7) to comply with other law or a court order; or
(8) to detect and resolve conflicts of interest arising from the lawyer's change of employment or from changes in the composition or ownership of a firm, but only if the revealed information would not compromise the attorney-client privilege or otherwise prejudice the client.3
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Client identity and fee arrangements
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The attorney-client privilege is one of the cornerstones of our profession. The historical basis of the privilege and how the attorney-client privilege applies is well documented in case law. Not only does it cover communications between a client and an attorney it bars an attorney from disclosing client identity to third parties. The Ethics Advisory Committee of the South Carolina Bar has stated that an "[a]ttomey may not voluntarily reveal to third parties the identity of his clients or the amount of work which he does for them without first obtaining their consent to the disclosure after full explanation of the circumstances surrounding the disclosure."4 A potential ethical dilemma rises during a tax audit when tax authorities seek a client list, general ledger, client invoices, cancelled checks and/or client trust account statements. While an attorney can raise the attorney-client privilege, the attorney has to ensure it is utilized in the proper format and cannot exploit it as an all-encompassing "hallway pass" to avoid proper tax reporting.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Use of the attorney-client privilege as a shield from tax authorities in an attempt to side-step proper tax reporting has been addressed by the federal courts on more than one occasion, including the disclosure of client identity and related fee arrangements. The four general elements of the attorney-client privilege were summarized in United States v. United Shoe Machinery Corp.5 According to that court:
The [attorney-client] privilege applies only if:
(1) the asserted holder of the privilege is or sought to become a client;
(2) the person to whom the communication was made
(a) is a member of the bar of a court, or his subordinate and
(b) in connection with this communication is acting as a lawyer;