Your federal tax privilege checklist.

• Author: Simmens, Todd

During a tax examination, the IRS may request documents and other information, such as testimony. Indeed, Sec. 7602(a) provides broad authority to the IRS in requesting information:

(a) Authority to summon, etc. For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, the Secretary is authorized -

(1) To examine any books, paper, records, or other data which may be relevant or material to such inquiry;

(2) To summon the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry; and

(3) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry.

The IRS's authority, however, is not unlimited. Before a court will enforce a summons for information, for example, the IRS must prove that the information sought (1) is relevant; (2) is sought for a legitimate purpose; (3) is not already in the possession of the government; and (4) is being sought after the IRS has followed required administrative steps (Powell, 379 U.S. 48 (1964)).

While a request for information may meet the broad standards of Powell, the IRS may not obtain information that is protected from disclosure under an evidentiary privilege. This column reviews those privileges and related doctrines that are most applicable during an IRS examination.

Privilege in general

There are several specific privileges that may protect the disclosure of confidential communications. Rule 501 of the Federal Rules of Evidence, for example, refers to the following privileges: required reports, attorney-client, psychotherapist-patient, spousal, communications to clergy, political vote, trade secrets, state secrets, and informer identity. Irrespective of which privilege may apply, in cases where it does, it allows the person claiming the privilege to prevent disclosure of the communication or other evidence about the subject to which the communication relates. Indeed, rules of privilege are generally rules of evidence--where privilege applies, it can work to properly prevent the disclosure or introduction of testimony or documents.

Waiver of privilege

The disclosure of confidential information to a third party by the privilege holder can constitute a waiver of the privilege. Such disclosure can be voluntary or inadvertent; it can be by the client (holder of the privilege) or by the adviser (attorney). In the case of a waiver, the confidential communication may then lose its privilege.

Attorney-client privilege

The attorney-client privilege protects confidential communications between an attorney and client for the purposes of the client's obtaining legal advice. In a tax matter, this can protect communications between the attorney and the client dealing with the provision of tax advice...