CPAs and privileged communications.

• Author: Chambers, Valrie
• Position: Certified public accountants

Accountants may encounter issues regarding the privilege of client confidentiality in three general contexts. The first is codified in Sec. 7525, which covers tax advice between a taxpayer and a federally authorized tax practitioner. However, the Sec. 7525 privilege is limited by a number of important exceptions. For example, the privilege applies only in civil matters and may not be invoked in criminal cases.

The second context in which accountants may encounter privilege is when they prepare materials, such as reports, in preparation for litigation. These materials may be covered by a privilege referred to as the work-product doctrine. Here, too, the privilege has a narrow application. The doctrine generally applies only to the tangible materials produced in preparation for litigation, not to the communications or information contained in the materials. This means that a memo an accountant drafts in preparation for litigation may be protected by the work-product doctrine but not the communications the attorney had with the accountant regarding the project.

The third context is the attorney-client privilege. This privilege affords the most protection, as it applies in both civil and criminal cases. Furthermore, it protects communications and information, as well as prepared materials. 'While this privilege is generally limited to communications between attorneys and their clients, it may extend to accountants in limited circumstances. This third context is the focus of this item.

The attorney-client privilege has been called the bedrock of the legal profession. Originating in common law, it is the oldest doctrine protecting communications from being disclosed in court. As stated in Upjohn Co., 449 U.S. 383, 388 (1981), the purpose of the attorney-client privilege is to encourage "full and frank communication between attorneys and their clients." Even though the privilege was traditionally reserved for attorneys, as the world became more complex, the courts expanded privilege beyond attorneys to include accountants in certain situations.

Appreciating the details of how and when privilege applies to accountants will aid tax practitioners, as attorneys are increasingly turning to accountants for assistance. This item first provides a general background on how the attorney-client privilege applies to accountants, then discusses how to structure (1) the accountant's relationship with the attorney and the taxpayer and (2) the nature of the...