A Cultural Compulsion to Share All Gives Way to a Passion for Confidentiality and Non-disclosure in Tax Matters Section 7525 Federally Authorized Practitioner Privilege and the Work-product Doctrine in Today's World

• Jurisdiction: United States,Federal
• Citation: Vol. 27 No. 3
• Publication year: 2018
• Author: By Carolyn M. Lee
• topic: Tax Law

A Cultural Compulsion to Share All Gives Way to a Passion for Confidentiality and Non-Disclosure in Tax Matters Section 7525 Federally Authorized Practitioner Privilege and the Work-Product Doctrine in Today's World

By Carolyn M. Lee¹

I. THE FEDERALLYAUTHORIZED TAX PRACTITIONER & PRIVILEGED COMMUNICATIONS—IRC § 7525

In the real world, taxpayers with tax issues often turn first to accountants for understandable reasons: Accountants are more plentiful and perceived to be more approachable than tax attorneys; accountants are the go-to professionals for tax return preparation and—logically—problems arising from a filed return; and, in general, the accountants offer lower fees compared to tax attorneys. Yet there is no accountant-client privilege that parallels the attorney-client privilege protecting a client's confidential communications with the client's attorney. Why not? Wouldn't the same public policy favoring full disclosure between taxpayer and attorney apply to communications between taxpayer and accountant? Wouldn't an accountant-taxpayer privilege, shielding confidential communications from disclosure, result in more open disclosure by the taxpayer to the accountant, and more effective tax planning and tax reporting?

In fact, Congress did act to extend the zone of confidentiality afforded to attorney-client confidences to some communications between accountants and their clients. In 1998, Congress enacted Internal Revenue Code section 7525² protecting against disclosure of a limited range of confidential communications between qualifying tax practitioners and their clients. It does not extend to all accountants in all facets of the services they provide to their clients. Another restriction: The § 7525 privilege does not protect work product.³

There is no accountant-client privilege. There is, however, a limited federally authorized practitioner-client privilege afforded by § 7525 to protect confidential communications between tax practitioners and their clients.

There is no common law accountant's or tax preparer's privilege.⁴ Even if the taxpayer engaged an attorney to do the work of an accountant or other tax preparer, the attorney-client privilege would not extend to that work.⁵ "To rule otherwise would be to impede tax investigations, reward lawyers for doing nonlawyers' work and create a privileged position for lawyers in competition with other tax preparers—and to do all this without promoting the legitimate aims of the attorney-client and work-product privileges."⁶

Acknowledging that taxpayers often turn to accountants for tax advice, in 1998, Congress provided a limited shield of confidentiality with respect to tax advice between a federally authorized tax practitioner and her client in the form of § 7525. A federally authorized tax practitioner is any individual who is authorized under federal law to practice before the IRS if such practice is subject to regulation under Circular 230, including attorneys, CPAs, enrolled agents, enrolled actuaries and enrolled retirement plan agents.⁷ Tax advice means advice given by a federally authorized tax practitioner within the scope of a Circular 230 tax practice.⁸

"This [§ 7525] privilege is no broader than the existing attorney-client privilege. It merely extends the veil of confidentiality to federally authorized tax practitioners who have long been able to practice before the IRS [citation] to the same extent communications would be privileged if they were between a taxpayer and an attorney."⁹ Accordingly, as with attorney-client privilege protections, there are limits to the § 7525 confidentiality privilege. The federally authorized practitioner privilege does not apply to criminal tax matters before the IRS or before a federal court brought by or against the United States.¹⁰ Neither does the privilege apply to communications regarding tax shelters in connection with the promotion of the direct or indirect participation of a taxpayer in any tax shelter.¹¹ Nothing in the statute 'suggests that these nonlawyer practitioners are entitled to privilege when they are doing other than lawyer's work'"¹²

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This means that the success of a client's/taxpayer's claim of privilege attaching to communications with an accountant¹³ that the client intended to be confidential depends on whether the advice given was general accounting advice or legal advice. "Accounting advice, even if given by an attorney, is not privileged."¹⁴ The line between a lawyer's work and that of an accountant can be blurry, especially when it involves a large corporation seeking advice from a broad-based accounting firm such as any of the regional, national or international accounting firms. Consequently, courts have identified guideposts to help distinguish between the two.¹⁵The distance between those guideposts is narrow, "in sync with [the courts'] general take on privileges . . . because they are in derogation of the search for truth."¹⁶

• On one end of the spectrum, the preparation of tax returns is an accounting service, not a legal service; therefore, information transmitted by a client or an agent of the client to an accountant so that it might be used on a tax return is not privileged.¹⁷
• On the other end of the spectrum, communications about legal questions raised with an accountant within the context of active litigation (or in anticipation of litigation) are privileged.¹⁸

To the extent documents are used for both preparing tax returns and litigation, they are not protected from disclosure to the government.¹⁹

Section 7525 does not extend the work-product doctrine. Section 7525 applies only to communications, just as the attorney-client privilege applies only to communications.

Note that neither Congress nor the courts have extended work-product doctrine protections to accountants. The congressional legislative history expressly restricts § 7525 protection "only to matters of privileged communications."²⁰ "This [§ 7525 legislative] history, in short, reveals that the word 'communications' in the statute is no idle term, a view that has led virtually every court to consider the issue to conclude that section 7525 'does not protect work product.'"²¹

II. THE WORK-PRODUCT DOCTRINE BEYOND CONFIDENTIAL COMMUNICATIONS

The work-product doctrine protects a wide range of materials and communications created in preparation for litigation.²² It is concerned with implementing the adversary process. The doctrine underpins the procedure of addressing disputes in fair, measured ways. While "[w]hether work product protection should apply to [ ] documents is a legal question informed by the language of rules and Supreme Court doctrine, direct precedent, and policy judgments,"²³ "[h]ow far work product protection extends turns on a balancing of policy concerns rather than application of abstract logic."²⁴ In short, the work-product doctrine offers the most practical of disclosure protections.

The work-product doctrine may protect a client's information, documents and materials within the context of litigation.

The primary purpose of the work-product doctrine is to prevent a current or potential adversary in litigation from gaining access to the fruits of counsel's investigative and analytical efforts, and protecting disclosure of a taxpayer's strategies for developing and presenting the taxpayer's case. Put another way, work-product protection insulates an attorney's litigation preparation from discovery.²⁵

The protection is broader than that afforded by the attorney-client privilege in that it attaches to more than communications. The work-product that is the subject of the protection includes documents, information and materials. Yet, the attorney-client privilege is more powerful in terms of safeguards from disclosure. Basically, when the attorney-client privilege attaches to a communication, courts are loath to order disclosure. By contrast, the work-product shield may be pierced when doing so serves the interest of fair dispute resolution.²⁶ The Federal Rules of Civil Procedure allow a court to order disclosure when the requesting party can show a "substantial need" for the material and an inability to procure equivalent information "without undue hardship."²⁷

A tugboat sinks in 1943. People die. Survivors sue. The work-product doctrine is born. Hickman v. Taylor.

The tragic death in 1943 of Norman E. Hickman and four other crew members of the tugboat J. M. Taylor when the Taylor sank gave life to the work-product doctrine.²⁸

Within three days of the tug's sinking, the Taylor's owners and insurers retained a law firm to defend against potential lawsuits from the representatives of the deceased crew members.²⁹ Indeed, the survivors of the five deceased Taylor crew brought wrongful death suits against the Taylor's owners. The survivors of four of the crew settled; the estate of Mr. Hickman proceeded to trial.

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In the course of preparing for the expected litigation, the defendants' law firm interviewed survivors of the Taylor incident as well as other witnesses believed to have relevant information. In some cases, the firm made a written record of what the interviewers were told.³⁰ One year later, by interrogatories to the owners of the Taylor and other defendants, plaintiff Hickman asked "whether any statements of the members of the crews" were taken, and directed defendants to "[a]ttach hereto exact copies of all such statements if in writing, and if oral, set forth in detail the exact provisions of any such oral statements or reports."³¹ Supplemental interrogatories requested defendants to "set forth the nature of all such records, reports, statements or other memoranda" that had been made.³² Defendants refused to comply on the grounds that answering the requests "'would involve practically turning over not only the complete files, but also the telephone records and, almost, the thoughts of counsel.'"³³ As the discovery dispute proceeded, the court ordered defendants to produce for in camera...