Do we really have privilege?

• Author: Moise, Robert M.
• Position: Tax shelter exception

Congress finally granted tax practitioners the ability to enjoy privileged communications with clients in much the same manner as attorneys with the enactment of Sec. 7525 in the IRS Restructuring and Reform Act, P.L. 105-206, passed by Congress in 1998. For tax advice, Sec. 7525 says that

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the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney. This ability to have a confidential, open, and honest conversation with a client regarding tax matters was at first considered a giant stride for tax professionals, making it much easier for practitioners to learn all the relevant facts needed to provide their clients with an opinion on the tax consequences of a given transaction or a proposed transaction. However, CPAs were quick to discover that the benefits of privileged communications were not without correlative burdens.

In order to understand the limitations on the privilege granted tax practitioners in Sec. 7525, a practitioner needs to have a good understanding of the privilege granted to attorneys. This privilege originated in ancient Rome and later was recognized in the English common law. Privilege was provided to communications with attorneys so that clients would feel safe in providing information to them, thus making it more likely that attorneys would be able to properly represent their clients without the impediment of not knowing the full story. The basic rules are as follows:

* The person asserting the privilege must be a client or someone attempting to establish a relationship as a client;

* The person with whom the client communicates must be an attorney and be acting in that capacity;

* The communication must be between the attorney and client exclusively;

* The communication must be for the purpose of securing a legal opinion, legal services, or assistance in some legal proceeding and not for purposes of committing a crime or fraud; and

* Only the client may claim or waive the privilege.

It should he noted that these elements of the privilege can vary among jurisdictions. Sec. 7525 applies the federal interpretation.

Sec. 7525, as enacted, is applicable to communications between a taxpayer and a federally authorized...