The Attorney/Accountant’s Privilege is not all it is cracked up to be. In, United States v. Frederick, 1999-276(7th Cir. 1999), the Appellate Court affirmed a lower Court decision enforcing a summons that the Internal Revenue Service issued to an attorney, CPA. In this regard, Mr. Frederick provided both legal representation and tax preparation services to the taxpayers at issue as well as their corporation. During the course of an IRS investigation of the taxpayers and their company, the IRS issued a summons to Mr. Frederick, the Attorney CPA, to provide the hundreds of documents that may be germane to the IRS investigation. Mr. Frederick did not provide all such documents and claimed that some were protected either by the attorney client privilege, the work product privilege, or both. An enforcement proceeding within 26 U.S.C. Sec. 7604(b) resulted. The district court judge examined the documents in camera and ruled that some were privileged and others were not. An appeal to the Seventh Circuit challenged the lower Court’s ruling.
The Court provided a historical approach relative to the issue that there was and is no common law accountant’s or tax preparer’s privilege. A taxpayer, according to the Seventh Circuit, "must not be allowed, by hiring a lawyer to do the work that an accountant or other tax preparer would normally do, to obtain greater protection from government investigators by using an attorney as a tax preparer". The Court further stated that the attorney-client privilege was intended to encourage people who find themselves involved in actual or potential legal disputes to be candid with any attorney they retained to advise them.
In Upjohn Co. v. US, 449 U.S. 383, 389 (1981), the court stated that "the work-product privilege is intended to prevent the litigant from taking a free ride on the research and thinking of his opponent’s lawyer and to avoid the resulting deterrent to a lawyer’s committing his thoughts to paper." US v. Nobles, 422 U.S. 225, 236-239 (1975). Information that one furnishes a tax preparer is furnished for the purpose of enabling the preparation of a tax return, not the preparation of a legal brief or an opinion letter. Therefore, the information is not privileged. Further, "if the client transmitted the information so that it may be used on the tax return, such a transmission destroys any expectation of confidentiality." US v. Lawless, 709 F 2d. at 487. The Court further stated that it could not be argued that numbers in the hands of an accountant are different from numbers in the hands of a lawyer. As such, and in accordance with US v. Arthur Young & Co., 465 U.S. 805 (1984), 53 a lawyer’s privilege is no greater than an accountant’s when the lawyer is doing accounting work.
The mere fact that an attorney produces a worksheet, to be used as an accountant would use them, is still an accounting worksheet, and it is unprotected no matter who prepares it.
Or as the Court stated, "put differently, a dual-purpose document – a document prepared for use in preparing tax returns and for use in litigation – is not privileged". Id. at. 279.
The Court further went on to distinguish when an accountant, rather than an attorney, represents a taxpayer in front of the IRS and an attorney. The Court attempted to distinguish the difference between verifying the accuracy of a tax return on a numeric basis, versus arguing statutory interpretation or case law. The Court alleged that ifa n attorney goes to an audit solely to deal with statutory interpretation or case law then the lawyer is doing lawyer’s work and the attorney client privilege may attach. The Court, unfortunately, did not distinguish between the many CPAs who have advanced degrees in taxation who also interpret the Internal Revenue Code and case law, as they are permitted to do, by the Internal Revenue Service.
The Court also addressed the new statute, 26 USC Sec. 7525 which extends the attorney-client privilege to a "federally authorized tax practitioner". CPAs have long been federally authorized tax practitioners, as well as other practitioners, licensed to practice before the Internal Revenue Service. The new statute merely protects communications between a taxpayer and a federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between an attorney and a client. IRC Section 7525(a)(1). It does not protect the accountant’s or authorized tax practitioner’s workpaper.
Therefore, the federal authorized tax privileged communication statute does not extend any type of privilege to taxpayers dealing with their accountants or even with their attorney on a tax return issue relative to preparation. It does, however, provide a limited, qualified privilege relative to communications to the extent that such communications were between a taxpayer and an attorney.
This area will be quite troubling; as most state Courts have not distinguished on a statewide basis as to what constitutes the practice of law versus the practice of accounting. Until there is a definitive explanation as to which hat one is wearing it will be difficult to determine when the privilege actually does apply.
Richard M. Colombik, JD, CPA, is the principal in the law firm of Richard M. Colombik & Associates, P.C. Richard is also a published author and frequent lecturer at various bar associations, civic groups and professional organizations on asset protection as well as the former host of a weekly radio show, "The Lawyer Line".