* ATTORNEY-CLIENT PRIVILEGE EXTENDS to accountants under the Kovel rule when a CPA acts at the direction of the lawyer to provide information for the client. Inadvertent disclosure of confidential information may lead to loss of the privilege.
* A PRACTITIONER WHO DOES LITIGATION CONSULTING should document the circumstances of his of her hiring, log relevant phone calls and appointments, obtain an engagement letter from the lawyer, label the project's work product confidential, properly conduct client meetings, directly in voice the attorney (not the client), send reports directly to the lawyer and make sure engagement report materials are segregated from other work files.
* COLLABORATING CPAs AND ATTORNEYS SHOULD obtain client consent to communicate their business using cordless or cell phones and take precautions to ensure use of electronic communications tools such as cell phones and faxes doesn't cause confidentiality to be waived.
* SCRAMBLERS AND ENCRYPTION TOOLS can substantially reduce the likelihood of waiver of privilege due to inadvertent disclosure but can be expensive ways to foil interception.
* A CPA SHOULD BE AWARE that for work involving a corporation it is preferable that outside counsel rather than in-house counsel hire the CPA. If outside counsel cannot engage the accountant, in-house counsel is preferable to corporate management. The probability of a successful claim of privilege is diminished when management hires the CPA.
* IF A CLIENT'S LOSS OF A CASE turns on the inadvertent disclosure of an electronic communication, the attorney and/or accountant could be sued for malpractice or subject to disciplinary proceedings.
In a landmark case Louis Kovel, a former IRS agent and accountant, had been hired by a law firm to help advise its clients. Kovel met with and received information from a client under IRS investigation for tax fraud. When subpoenaed by a grand jury, Kovel refused to answer questions about the client and was sentenced to a year in prison for contempt of court. The Second Circuit Court of Appeals reversed the contempt citation. It ruled there was no reason in the case to exclude accountants from the list of those who assist lawyers in providing legal services (United States v. Kovel).
As Kovel established, CPA-client communications may be privileged under a specific set of conditions. Not meeting them can result in loss of privilege--and can cause a legal strategy to fail. Today's technology such as e-mail, voice mail, cell phones and faxes makes those conditions difficult to maintain. This article will discuss the framework in which attorney-client privilege extends to accountants and will suggest practical ways CPAs operating in a technological environment can avoid inadvertent disclosure of confidential information to preserve attorney client privilege.
SOME BACKGROUND ON PRIVILEGE
Although some states have statutes to protect the communication between accountants and clients in limited circumstances, such privilege isn't recognized under federal common law and is of little value in federal cases (Couch v. United States). Moreover, the CPA-client privilege established by IRC section 7525 applies only to tax advice in noncriminal matters before the IRS and noncriminal tax proceedings in federal court. For federal proceedings communications between a client and a third party such as a CPA may be privileged when an attorney retains that agent (see "Third-Party Privilege," page 65).
Proposed rule of evidence 503 (also known as Supreme Court standard 503) established the general scope of the attorney-client privilege under federal common law: "A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional services to the client."
The communications can be
* Between the client or client's representative and his attorney or the attorney's representative. …