The Privilege and Perils of Public Accounting

Article excerpt

If you feel as if there are not enough hours in the day to read all the current information on tax law changes, it's understandable. To stay up-to-date in this continually evolving field, public accountants need to track temporary, proposed and final tax regulations, IRS rulings, Revenue Rulings, Technical Advice Memoranda, Revenue Procedures, General Counsel Memoranda, and Chief Counsel Advice.

Once that information has been deciphered, there are court decisions by the hundreds to review.

This information onslaught recently included a very important item of Chief Counsel Advice on accountant/client privilege--an item you can't afford to miss. According to the Chief Counsel, the IRS now says that once a tax investigation moves from the civil into the criminal arena, any privilege that you may have had evaporates. This is a decision that could leave you, and your client, in peril.

Learn the Limitations

The new IRS decision is just one more bend in a long and winding road. The accountant/client privilege is a complicated legal issue that is frequently misunderstood and often over-valued. Let's review the basics.

The privilege is limited to "tax advice." The preparation of a tax return may not qualify as "tax advice." Without knowing precisely what the privilege applies to, the privilege may be inadvertently waived by the client or the accountant. Moreover, the new federal accountant/client privilege applies only to federally authorized tax practitioners--CPAs, enrolled agents, enrolled actuaries, and attorneys who provide accounting services.

The accountant/client relationship has the same privilege as the attorney/client relationship. However, this privilege applies only in non-criminal tax matters before the IRS. If the audit of the tax return turns into a criminal matter, it is as if there had never been a privilege.

Many states have laws treating accountant/client communications as privileged. These laws differ from state to state, but they are not recognized by the courts in federal tax cases.

The federal accountant/client privilege is applicable only to communications that occurred after the law was enacted on July 22, 1998. Any communication before that date is not privileged.

Review the Risks

The IRS stand on loss of privilege is a clear warning to accountants. You are always at risk since criminal investigations often begin as civil audits.

However, loss of privilege is not the only risk facing accountants. Trying to meet your clients' demands can also jeopardize your career.

For example, as a professional tax return preparer, you may not agree with an IRS ruling or regulation. …