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Tax Law

The Confidentialilty Privilege for Federal Tax Practitioners

Congress adopted IRC Section 7525, which specifically extends the common-law attorney-client privilege for communications to federal tax practitioners. The common law attorney-client privilege applied only to attorneys, and did not extend to other kinds of tax practitioners.

Author David Altman writes: Courts have not generally accepted that communications between a taxpayer and his accountant regarding the taxpayers taxes should be confidential. For example, the U. S. Supreme Court had held that a claim of an accountant-client privilege could not stop enforcement of an IRS summons for tax accrual workpapers prepared by an independent accounting firm during an audit of its clients finances. United States v. Arthur Young & Co., 465 U.S. 805 (1984).

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However, there have been some instances when confidentiality has been extended to accountants. United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), ... The Second Circuit held that given the complexities of modern legal cases, attorneys often need the assistance of an outside professional to effectively represent their clients. Thus, the presence of an accountant, whether hired by the lawyer or by the client, while the client is relating a complicated tax story to the lawyer, does not destroy the attorney-client privilege. For the privilege to apply, the communication must be made in confidence for the purpose of obtaining legal advice from the lawyer.

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[However], [i]n a case in which a taxpayer separately retained an accounting firm and a tax attorney, the court held that documents prepared for the taxpayer by the accountant were not privileged in the absence of proof that these documents were prepared to assist the attorney in litigation. United States v. Brown, 349 F. Supp. 420 (N.D. Ill. 1972), modified on other grounds, 478 F.2d 1038 (7th Cir. 1973).

The IRS Restructuring and Reform Act of 1998 added new IRC Section 7525, which makes confidential some communications between taxpayers and federally authorized tax practitioners. Pub. L. No. 105-206, § 3411(a) (1998). Section 7525 is effective for communications made on or after July 22, 1998. It provides that, for tax advice, the same common-law protections of confidentiality which apply to a communication between a taxpayer and an attorney also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney. IRC § 7525(a)(1). However, this privilege may only be asserted in any noncriminal tax matter before the Internal Revenue Service, and any noncriminal tax proceeding in Federal court brought by or against the United States. IRC § 7525(a)(2).

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[T}the application of the statutory privilege only to communications between the client and the practitioner has been held to mean that the privilege does not apply to the work product of practitioners... Evergreen Trading, LLC v. United States, 80 Fed. Cl. 122 (2007).

The privilege for federally authorized tax practitioners does not apply to any written communication between the practitioner and any person, any director, officer, employee, agent, or representative of the person, or any other person holding a capital or profits interest in the person, if the written communication is in connection with the promotion of the direct or indirect participation of the person in any tax shelter. IRC § 7525(b)...

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