By: A.J. Cook


Now you can talk confidentially to your tax advisor. Oh, you thought you could before.

Well anyway, here are the new rules.

A law extending the attorney-client confidentiality privilege to certain non-attorneys in noncriminal tax proceedings became effective this year. It has been heralded as a watershed for the accounting profession and some other tax consultants.

In the past, the only people with the right to have tax communications with clients confidential were an attorney and someone the attorney hired to assist in giving tax advice.

Why do we have confidentiality? Attorneys are allowed to conceal communications so the defendant can receive proper advice. The privilege, available to attorneys since 1888, is to encourage clients to make full disclosures, knowing they will be kept secret. Sound legal advice depends on the lawyer being fully informed.

Congress extended the privilege in certain situations to tax advisors authorized to practice before the Internal Revenue Service - primarily CPAs and former IRS agents.

These are some of the rules:

• The new shield protects non-criminal matters only. The tax crime privilege is available only to attorneys.
  
• The new law does not apply to tax return preparation. Return confidentiality isn't available to attorneys either.
  
• The privilege extends to others assisting the advisor. It should, for example, include an appraiser hired by the consultant.
  
• This privilege, like the attorney privilege, is waived when any of the communication is disclosed to a third party not assisting the advisor. That means, for example, allowing an IRS agent to read a consultant's opinion or telling the agent what the opinion says removes the communication from the confidentiality umbrella.
  

Advisors should be alert to the following:

• Privileged communications may not be disclosed without the client's consent. Even an inadvertent slip may open the advisor to a lawsuit.
  
• The confidentiality requirement may conflict with a CPA's duty to disclose in an audit report. A conflict of interest might exist.
  
• Accounting firms are subject to a quality review by other accounting firms. Many question how confidentiality can be maintained during this so-called peer review.
  
• Tax preparation and tax advice material should be kept separate. The advisor could maintain two files: one for tax return information, this is available to the IRS and another for tax advice, this is not.
  

Some of the rules can be illustrated in this example: The tax advisor's client brings in a shoe box full of receipts and scraps of papers and dumps them on the desk and says: "Call when my return is ready." Anything on that desk and discussions related to the return are fair game for the IRS. Since it is tax return information, the agency can have it — even under the new law.

But, add one fact. The taxpayer asks the same preparer at the same meeting: "Should I try to accelerate some of next year's deductions into this year?" That involves tax advice and should not be disclosed to the IRS nor should any documents related to it. Previously the IRS could get the advisor's opinion or analysis disclosed in notes or correspondence.

In summary, if an agent asks a question or requests documents from you as an advisor, think twice before you comply. If it relates to the preparation of the tax return, you must comply; if it relates to tax advice, you must not.


A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
This information is not intended for use without professional advise.
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Released 9-14-98