Tax advice is defined as advice given by a CPA (or one of the other authorized tax practitioners) within the scope of authority of his or her practice with respect to matters under the Internal Revenue Code.
Direct tax advice given to a client (such as personal discussions, letters, memoranda, notes or reports) and tax advice documents (describing tax interpretations, opinions, mental processes, thoughts, tax positions, likelihood of success) should be protected.
There is an important exception to the privilege rules for certain written communications regarding corporate tax shelters.
Practice before the IRS. The privilege is available only in matters brought before the IRS or proceedings in federal court brought by or against the United States. Thus, the privilege is not available to prevent disclosure of information to any other regulatory body (for example, the SEC or FTC) or in private civil matters (such as domestic relations and employment disputes), even if tax matters are involved.
In addition, tax advice on state and local tax matters is not protected, although 36 states have some form of accountant-client privilege, which would include tax advice.
Criminal tax matters. The privilege also does not extend to criminal tax matters. A critical issue is determining at what point an ordinary tax matter becomes a criminal matter. Clearly, this is the case when the IRS refers a case to the Justice Department, which accepts the referral; many situations, however, may not be as clear-cut. To best serve clients, the CPA should recommend, at the first hint of criminal activity (usually when an IRS special agent appears), that the client consult an experienced criminal tax attorney.
SCOPE OF THE PRIVILEGE
This privilege applies only when the practitioner advises the client on legal matters; it does not apply when the tax practitioner acts in another capacity (such as a business adviser) or when the adviser is working at some other profession.
Because tax returns are intended to be disclosed to revenue officials (and thus are not confidential), there is no privilege for them or to the basis for the numbers and calculations on them. (This is equally true for returns prepared by attorneys.)
If a communication is voluntarily disclosed to anyone other than the tax practitioner, the client or certain persons under the direction and control of the practitioner or client, the privilege is considered waived. This may occur by express and voluntary surrender of the privilege, by partial disclosure of a privileged document, by selective disclosure to some (but not all) outsiders or by inadvertent overhearing or disclosure. Usually, an intent to maintain confidentiality is necessary to avoid waiver.
If a tax opinion or other document involving privileged tax advice is sent to a client's banker, financial adviser or securities broker, the privilege may be waived (unless he or she has a role in the tax advice process).
For a detailed discussion of this new law and the critical issues it raises, see "The New CPA-Client Confidentiality Privilege," by Dan Mendelson, Donald Herskovitz and Alan Einhorn, in the October 1998 issue of The Tax Adviser .
Nicholas Fiore, editor
The Tax Adviser