Client communications protected by Sec. 7525

By Nicholas Nebolsine, CPA

Sec. 7525 provides a limited privilege to communications between a federally authorized tax practitioner and a taxpayer to the extent the communication would be considered privileged if it were between an attorney and a taxpayer. For this privilege to apply, the communication must be for the purpose of securing tax advice with an expectation of confidentiality. This privilege is limited to noncriminal matters before the IRS or a federal court and generally does not extend to communications regarding tax shelters. Similar to the attorney-client privilege, if the communications are disclosed to others, the privilege can be waived.

FEDERALLY AUTHORIZED TAX PRACTITIONER

A federally authorized tax practitioner is any individual authorized under federal law to practice before the IRS and can include professionals such as CPAs, attorneys, enrolled agents, enrolled actuaries, and other types of professionals (Sec. 7525(a)(3)(A) and Section 10.3 of Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10)). A tax practitioner may also include in-house practitioners who are eligible to practice under Circular 230 (Eaton Corp., No. 12 MC 24 (N.D. Ohio 8/15/12)).

CLIENT-TAXPAYER

For the Sec. 7525 privilege to apply, the person asserting the privilege must be a client or be in the process of becoming a client of the tax practitioner. The Sec. 7525 privilege does not apply to communications between the tax practitioner and other parties outside the professional client relationship.

Case law provides guidance on who, in the corporate context, constitutes the "client" for purposes of the attorney-client privilege (and, by extension, the Sec. 7525 privilege). For example, in Upjohn Co., 449 U.S. 383 (1981), the Supreme Court held that the attorney-client privilege applies to communications by any corporate employee, including lower- and middle-level employees and in-house counsel, where the communication is for the purpose of the corporation's obtaining legal advice. This holding specifically rejected the lower court's ruling limiting the privilege to individuals empowered to act on behalf of the corporation (the control group). The Supreme Court declined to establish a specific test but rather held that each case must be evaluated individually to determine whether the purpose of the communication would enable the legal counsel to provide well-reasoned advice to the client.

Other cases have expanded the underlying rationale of Upjohn to include former corporate employees and employees of domestic and foreign subsidiaries (see In re Coordinated Pretrial Proceedings in Petroleum Products Antitrust Litigation, 658 F. 2d 1355 (9th Cir. 1981), cert. denied, 455 U.S. 990 (1982); Admirals Ins. Co., 881 F.2d 1486 (9th Cir. 1989); In re Teleglobe Communications Corp., 493 F.3d 345 (3d Cir. 2007); and Mobil Corp., 149 F.R.D. 533 (N.D. Tex. 1993)). These cases support a determination that communications between a tax practitioner and employees beyond the control group, including those of non-U.S. entities, may be subject to the Sec. 7525 privilege, as long as the employees are acting under the direction of the corporate control group concerning matters within the scope of their corporate duties in order for the corporate taxpayer to obtain tax advice from the tax practitioner.

For a detailed discussion of the issues in this area, see "Tax Practice Responsibilities: The Sec. 7525 Privilege Relating to Taxpayer Communications" in the August 2018 issue of The Tax Adviser.

Nicholas Nebolsine, CPA


The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques.

Also in the August issue:

  • An analysis of taxation of rewards program points.
  • A discussion of PechaKucha in the classroom and in practice.
  • A look at basis issues with cryptocurrency.

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