The need for CPA-client privilege in federal tax matters.

• Author: Friedman, Ronald E.

EXECUTIVE SUMMARY

The attorney-client privilege has long been a part of the Federal law, while clients of CPAs enjoy no such confidentiality in their communications. The IRS has recognized that attorneys and CPAS assist taxpayers equally in representing them before it, and has accordingly granted those groups (along with enrolled agents) parity in their dealings with the Service. This article addresses the concept of attorney-client privilege, explores its parameters, and explains why the time is ripe to adopt a CPA-client privilege for Federal tax purposes.

Taxpayers have long enjoyed the special status of privileged communications in tax matters. However, this common-law-based attorney-client privilege is rather formalistic--that is, non-attorney tax advisers must filter their advice through an attorney to protect the taxpayer's privilege. Because legal advice in tax matters most often involves technical and procedural tax issues apart from litigation, it seems too formalistic to require the insertion of a lawyer merely to "protect the privilege."

Congress has granted parity to CPAs, lawyers and enrolled agents practicing before the IRS.(1) Circular 230(2) was promulgated to embody rules for the administration of practice before the Service. Because it is legally and commonly recognized that CPAs and enrolled agents represent taxpayers before the IRS in the same manner as do lawyers, taxpayers should enjoy the same special status of privileged communications when dealing with their non-legal tax advisers.

What Is a Privileged Communication?

Written or oral communications, made in confidence, in the context of soliciting legal advice, may constitute privileged communications, if the privilege has not been waived.(3) The attorney-client privilege is long founded in the common law and has been incorporated into the Federal Rules of Evidence.(4) The purpose of the attorney-client privilege "is to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice."(5) The privilege applies to corporations as well as to individuals as a defense to compelled disclosure of an asserted confidential communication in a tax controversy.(6)

Whether or not an attorney is involved, the privilege does not apply to matters such as the communication of business advice, tax return preparation, advice in committing criminal or fraudulent activity, or to facts or preexisting documents.(7) But legal bills and time records that describe the legal services provided may be privileged to the extent of the descriptions.(8) However, there is no privilege if it has been waived by a publication or sharing of the communication with someone outside the chain of the legal advice (i.e., with one who does not have a need to know).

Types of Advice or Information to Be Protected

Taxpayers (corporate or individual) must carefully and prudently consider a plethora of facts and applicable law to reach...