Academic journal article Journal of Accountancy

Accountant/client Privilege

Academic journal article Journal of Accountancy

Accountant/client Privilege

Article excerpt

In 1998, Congress added section 7525 to the Internal Revenue Code, creating an accountant/client privilege. Like the privilege that already exists between attorneys and their clients, it extends to tax advice but not tax return preparation. A recent decision by the Seventh Circuit Court of Appeals examined the scope of this privilege.

Taxpayers Randolph and Karin Lenz, and their corporation, KCS Industries, were under IRS investigation. They hired Richard Fredrick, an attorney and accountant, to represent them. The IRS issued summonses to Fredrick asking him to turn over hundreds of documents. Fredrick refused to do so. The district court ruled that some of the documents were not protected by privilege. He appealed the decision.

Result. For the IRS. This case presented a number of different privilege-related issues. The first question the Seventh Circuit addressed was whether numerical information was subject to privilege. The court held that, although rare, it was possible for such information to be privileged. It used as examples an attorney's estimate of damages or the amount a client stole. Based on these examples, it appears few, if any, of an accountant's numerical workpapers will be eligible for privilege.

The second issue the court considered concerned dual-purpose documents--those an attorney or accountant creates for use in preparing a client's tax return, as well as for use in litigation or providing tax advice. …

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