Client privilege: CPA-client privilege doesn't extend to criminal proceedings.

• Author: Reicher, Janice W.
• Position: Professional issues

It's Monday morning and your client, who recently retained you for estate tax planning advice, informs you that the IRS is auditing her income tax returns from the past three years. In reviewing her tax returns and financial documents for the audit, you realize that she has underreported $3 million. When you reveal your findings to her, she does not sound surprised. She asks for advice on how to proceed with the IRS audit.

Knowing that this civil audit could turn into a criminal action, what should you do to ensure the maximum protection of your client's confidences under applicable privilege laws? The first step is to advise the client not to discuss this matter with you, as these communications may not be privileged.

Many taxpayers wrongly believe there is an "accountant-client privilege" in California that cloaks their communications and the tax return information itself. Although California recognizes an attorney-client privilege, it does not recognize a similar accountant-client privilege.

Federal and State Tax Practitioner Privilege

California and federal law do have a narrow statutory privilege that allows taxpayers to discuss tax advice with qualified tax advisers in noncriminal tax matters in the same manner they may consult with tax attorneys. Both statutes give tax-advice communications the same privilege protections that apply to a communication between a taxpayer and an attorney, as long as the communication would be considered a privileged communication if it were between a taxpayer and an attorney.

A privileged attorney-client communication is one made in confidence (and not shared with third parties) for the purpose of obtaining legal advice from a lawyer (Evid. Code. Secs. 952, 954).

So far, so good: The tax practitioner privilege would seem to apply to your communications with your client about her current estate tax planning matters. It also would apply if the IRS audit of your client remained civil--meaning the IRS could not force you to divulge oral tax advice given to the taxpayer. But that is where the scope of the protection ends. In practice, the tax practitioner privilege is narrow--whittled down by major exceptions that don't apply to attorney-client privilege.

For example, as noted, the privilege does not apply in criminal matters. If your client's income tax practices become the subject of a criminal investigation, the IRS is likely to argue that the information you obtained in regard to the estate tax planning matters fall within the ambit of the criminal investigation, and it will be difficult to draw a line for purposes of the privilege.

Indeed, even absent a criminal investigation, you could still be forced to divulge your client's...