Confidential and privileged communications

As tax advisers, accountants should understand when communications and work product are privileged and when they are not. The IRS is granted significant power to pursue information in examining a tax return or collecting a tax liability, and the courts have interpreted this summons power as broad authority to obtain confidential information in work product produced for and communications with a taxpayer. Some communications and work product, however, are considered privileged and not subject to summons enforcement when specific criteria are met. An accountant may assist in protecting a client’s confidential information by taking steps to ensure that these criteria are met.

Two privileges may apply to an accountant’s tax advice to a client: the Sec. 7525 practitioner-client privilege and the work product privilege, codified in the Federal Rules of Civil Procedure. Sec. 7525 extends the common law protections of attorney-client privilege to a client who is communicating with a federally authorized tax practitioner regarding tax advice. However, it is more limited in scope than the attorney-client privilege, in that it applies only in noncriminal proceedings before the IRS and federal courts. It does not apply to written communications in connection with the promotion of, or participation in, a tax shelter, nor does it protect against disclosure of communications to any regulatory body other than the IRS.

The work product doctrine protects materials that are collected or prepared in anticipation of litigation unless the adverse party can demonstrate that the materials are indispensable to the party’s case and there are no other means of obtaining them. Both privileges are subject to confidentiality rules; thus, disclosure to a third party may waive the privilege.

The application of each privilege is based on specific criteria that are carefully weighed by the court when the privilege is claimed. Practitioners should remember that these privileges belong to the client, and it is the client who decides whether they will be waived. This is true even when privileged information would substantiate claims of deductions or losses on the taxpayer’s return. It is at the taxpayer’s discretion whether to provide that information to the IRS. It will also be up to the taxpayer whether to waive the privilege in order to raise a defense against certain penalties by claiming a good-faith reliance on the advice of counsel or a qualified practitioner. In such cases, advice from counsel can support a claim of substantial authority or reasonable cause for good-faith reporting on the tax return.

By properly clarifying their role as tax adviser—as well as documenting engagements, protecting confidentiality, properly addressing communication, and monitoring its content—accountants can serve clients’ interest in preserving the privileges that may apply to their communications and work product.

For a detailed discussion of the issues in this area, see “Protecting Communications and Documents From IRS Summons Enforcement,” by Linda Burilovich, CPA, Ph.D., in the April 2013 issue of The Tax Adviser.

—Alistair M. Nevius, editor-in-chief
The Tax Adviser

Also look for articles on the following topics in the April 2013 issue of The Tax Adviser:

• A discussion of the liquidation-value safe harbor in the Sec. 108(e)(8) regulations.
• An analysis of using bankruptcy to avoid the trust fund recovery penalty.
• A look at recent updates to the rules on disclosing or using taxpayer information.