New CPA-Client Privilege

Article excerpt

The recently enacted Internal Revenue Service Restructuring and Reform Act of 1998 includes a provision creating a confidentiality privilege between clients and the CPAs who represent them in noncriminal federal tax matters (see JofA, Sept.98, page 83).

The new law extends the common-law attorney-client confidentiality privilege to most tax advice furnished to a client (or prospective client) by any individual authorized under federal law to practice before the IRS. This includes CPAs, attorneys, enrolled agents and enrolled actuaries.

TAX ADVICE

Tax advice is defined as advice given by a CPA (or one of the other authorized tax practitioners) within the scope of authority of his or her practice with respect to matters under the Internal Revenue Code.

Direct tax advice given to a client (such as personal discussions, letters, memoranda, notes or reports) and tax advice documents (describing tax interpretations, opinions, mental processes, thoughts, tax positions, likelihood of success) should be protected.

There is an important exception to the privilege rules for certain written communications regarding corporate tax shelters.

Practice before the IRS. The privilege is available only in matters brought before the IRS or proceedings in federal court brought by or against the United States. Thus, the privilege is not available to prevent disclosure of information to any other regulatory body (for example, the SEC or FTC) or in private civil matters (such as domestic relations and employment disputes), even if tax matters are involved.

In addition, tax advice on state and local tax matters is not protected, although 36 states have some form of accountant-client privilege, which would include tax advice.

Criminal tax matters. The privilege also does not extend to criminal tax matters. A critical issue is determining at what point an ordinary tax matter becomes a criminal matter. …