What's privileged? Taxpayers privilege for CPA tax advice reinstated.

• Author: Dellinger, Kip
• Position: Professionalissues

aB 129 (Ma), co-sponsored by CalCPA and California's enrolled agents, reinstates the expired taxpayer privilege enacted in 2000. This privilege is the same as the federal privilege of Internal Revenue Code Sec. 7525 (the statutory privilege) and purports to provide taxpayers the same confidential protections from discovery by the IRS or FTB with respect to tax advice communication with CPAs and enrolled agents that taxpayers would have with an attorney.

[ILLUSTRATION OMITTED]

However, there is a common misconception about the scope of the privilege as it applies to CPAs and enrolled agents. Indeed, the statutory protections afforded taxpayers with regard to CPA or enrolled agent communication are no less and no greater than the scope of the attorney-client privilege.

In practice, this misconception on the part of a CPA can be very damaging to a taxpayer as the privilege itself will not exist. This is because taxpayers generally communicate with CPAs and enrolled agents about tax services that differ from those provided by a tax attorney--namely preparation of returns rather than advice regarding tax planning or controversy matters.

Only under some circumstances are taxpayers entitled to treat communication with their lax professionals as confidential and privileged. If the communication (and physical information directly pertaining to it) qualifies as privileged, then that information is not discoverable by the IRS or government attorneys in the event of a tax controversy The claim of privilege actually belongs to the taxpayer with respect to communication between them and their attorney or any other federally authorized tax practitioner CPA, an enrolled agent or an enrolled actuary.

Nature of the Privilege

When the communication involves an attorney the taxpayer will assert the attorney-client privilege, which says communication between an attorney and client is protected from compelled disclosure in a controversy when the communication:

(1.) is made in confidence (with an expectation of privilege);

(2.) occurs in the course of soliciting advice from an attorney in his or her capacity as such (i.e., providing legal advice); and

(3.) is relevant to the advice sought.

There also must not be waiver of the privilege. Waiver may occur in a variety of ways, but happens most frequently when a communication is shared with someone other than the attorney (or CPA or enrolled agent in the case of the statutory privilege).

When the communication...