Privilege of Accountant-Client Communications
One major difference between the practice of attorneys and that of accountants has historically been the privilege of confidentiality extended in attorney-client communications, and the lack of confidentiality in accountant-client communications. Now, in the United States, accountants have finally been granted a limited privilege of confidentiality under certain circumstances.
Under the Internal Revenue Service Restructuring and Reform Act of l998 the privilege of confidentiality in non-criminal federal tax matters, formerly available only for certain communications between attorneys and clients was partially extended to CPA's and other federally authorized tax practitioners.
Section 7525 has been added, which extends the common law attorney client confidentiality privilege to tax advice furnished to a taxpayer-client (or potential taxpayer-client) to any individual authorized under federal law to practice before the IRS. While similar to the attorney client privilege, the confidentiality privilege is limited to certain tax advice.
Sec. 7525 does not modify or expand the attorney-client privilege of confidentiality other than to extend it to EA’s and CPA's. In addition, the new privilege does not apply to written communications regarding corporate tax shelters.
Here are some of the key features of the Law:
- Both oral and written tax advice given by a CPA to a taxpayer-client can be protected.
- Tax advice on state and local tax matters are not covered, but may be protected under state CPA-client confidentiality laws.
- The confidentiality privilege does not extend to criminal tax matters, which should be referred to a criminal tax attorney. A letter which provides that the CPA is employed by an attorney may protect CPA-client communications.
- Separate engagement letters, billing statements and files are essential to preserve the confidentiality privilege for tax advice communications, including tax advice documents.
- Engagement letters should address the confidentiality privilege but it is the client's responsibility to establish and assert the privilege. The engagement letter should include an indemnity clause to reimburse the CPA for defending the client's rights under the confidentiality privilege.
- The CPA's notes to the client file, mental impressions and thought processes may be protected under the confidentiality privilege.
- If a CPA does not communicate a tax advice document to the taxpayer-client, but retains it in his or her file, and if the document is closely related in time and materiality to the tax discussion, it may qualify for the confidentiality privilege.
- If the tax advice document is not communicated to the taxpayer-client, and is remote in time and materiality to the tax discussion, the document may still be protected under the work-product doctrine if prepared "in anticipation of litigation" or pursuant to employment by an attorney under an engagement letter.
- The confidentiality privilege may be waived if a CPA communicates a tax advice document to the taxpayer-client and sends a copy, to the latter's banker or financial adviser. This disclosure to a third party may cause the privilege to be waived.
At Taxes for Expats we have implemented measures to protect client information to the fullest extent possible.