Accountant - client privilege
From Wikicpa
Tax Practitioner-Client Privilege is a confidentiality privilege available in United States federal tax law. It is defined in the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206 (H.R. 2676) (July 22, 1998), codified as Internal Revenue Code section 7525:
- With respect to tax advice, the same common-law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be a privileged communication if it were between a taxpayer and an attorney. (However, this rule) may only be asserted in (A) any non-criminal tax matter before the Internal Revenue Service, and (B) a non-criminal tax proceeding in Federal Court brought by or against the United States.
- ...For purposes of this subsection, ...the term 'federally authorized tax practitioner' means any individual who is authorized under Federal law to practice before the Internal Revenue Service...The term 'tax advice' means advice given by an individual with respect to a matter that is within the scope of the individual's authority to practice.
According to Internal Revenue Code Section 7525(a)(1):
The privilege applies only to communications made on or after July 22, 1998. The privilege does not apply to any written communication before October 22, 2004, between a federally authorized tax practitioner and a director, shareholder, officer, employee, agent, or representative of a corporation in connection with the promotion of the direct or indirect participation of such corporation in any tax shelter. [Tax Shelter is defined in IRC 6662(d)(2)(C)]. Section 7525 was amended by the American Jobs Creation Act of 2004, Pub. L. No. 108-357, so that the privilege does not apply to written communications made on or after October 22, 2004, involving a federally authorized tax practitioner with respect to the participation of any person (not just a corporation) in a tax shelter. This is a further limitation of the privilege.
A federally authorized tax practitioner includes an attorney, a Certified Public Accountant, an enrolled agent, or an enrolled actuary. The privilege does not apply to accountants who are not CPA's; and probably does not apply to certified public accountants who are not licensed to practice in the state in which the client lives. For example, if the client lives in New Jersey but works in New York, where he consults a CPA who is licensed in New York but not in New Jersey. Because the CPA is not licensed to practice in the state where the client resides, the communication might not qualify for the privilege (emphasis on "might").
This tax practitioner-client privilege applies only to tax advice. The advice must be treated as confidential by both the accountant and the client to be covered by the privilege. If the communication is divulged to third parties, then it is not confidential. It does not apply to general business consultations or even to personal financial planning advice.
Tax return preparation
With respect to communications involved in the preparation of tax returns, there is a split of authority. Much of the relevant case law was rendered prior to the creation of the tax practitioner-client privilege in 1998, and relates to attorney-client privilege.
Most of the case law indicates that a communication in connection with tax return preparation is not covered. Under the argument accepted by the U.S. Court of Appeals for the Ninth Circuit, communication pertinent merely to preparing a tax return does not involve giving or receiving legal advice (see e.g., United States v. Gurtner, 474 F.2d 297 (9th Cir. 1973)). The Eighth Circuit, meanwhile, has held that tax returns are not privileged because they are intended for disclosure to a third party, i.e., the Internal Revenue Service; so there can be no expectation of confidentiality, which defeats any claim that the return or pertinent communication is privileged (see, e.g., United States v. Cote, 456 F.2d 142 (8th Cir. 1972)).
One minority view finds the privilege might apply to a communication about what to claim on a return (see United States v. Abrahams, 90-1 U.S. Tax Cas. (CCH) paragr. 50,310 (9th Cir. 1990)). Another minority view is that such communications could be considered "legal" advice (see generally Colton v. United States, 306 F.2d 633 (2d Cir. 1962); contrast with Gurtner above).
On balance, however, the weight of authority is that communication in connection with tax return preparation is probably not protected by the privilege.
State and local tax matters
The privilege created by U.S. federal law only applies to the federal government and to tax practitioners who are qualified to practice before the I.R.S. It cannot apply to communications pertinent to state or municipal taxes because the Congress has no authority to legislate on behalf of state governments.
