A New Similarity Between Types of
Tax Advisers - Expansion of the Client Privilege:
In television courtroom dramas, you may recall scenes
where an attorney refused to divulge information about
his or her client on the basis that the information was
"privileged." The privilege of confidentiality
that exists between a client and his attorney means that
others cannot force the attorney to disclose the
privileged information, and the client can take legal
action to prevent such disclosure. The privilege applies
to legal advice where the information isn't known to
third parties, and the communication occured for the
purpose of obtaining legal advice from the attorney. This
privilege belongs to the client. For federal tax law
purposes, this common law privilege has only been
available for covered communications between a taxpayer
and his attorney. This changed somewhat in July 1998.
In July 1998, the IRS Restructuring and
Reform Act of 1998 was enacted, which included a
provision to extend the confidentiality privilege to
clients of CPAs and Enrolled Agents. However, the
privilege may only be asserted in federal tax matters
that are before the IRS or in the federal courts where
the IRS is a party. Thus, it would not be available for
matters before other government agencies, such as the
Securities and Exchange Commission (SEC) or Social
Security Administration. The extension of the privilege
also does not apply to criminal matters, state law
matters (although a few states allow for an
accountant-client privilege), matters that do not involve
the furnishing of tax advice (such as information related
to a divorce proceeding or a product liability lawsuit),
and does not apply to certain tax shelter activities.
[IRC Section 7525]
Why was this change made? As stated in
the Senate Finance Committee Report: "The Committee
believes that a right to privileged communications
between a taxpayer and his or her advisor should be
available in noncriminal proceedings before the IRS and
in noncriminal proceedings in Federal courts with respect
to such matters where the IRS is a party, so long as the
advisor is authorized to practice before the IRS. A right
to privileged communications in such situations should
not depend upon whether the advisor is also licensed to
practice law."
Note: While the expanded privilege with
respect to certain federal tax matters puts clients in a
similar position with respect to the availability of the
privilege whether they dealt with an attorney, CPA, or
EA, the attorney-client privilege is still broader
because it applies to more types of communications.