(Spoiler: only in a razor-thin slice of civil tax work—and it disappears the moment criminal tax exposure surfaces. Everything else you say to a non-lawyer tax preparer is fair game for subpoenas.)
When an IRS examiner, CID special agent, or California, FTB, CDTFA or EDD investigator shows up, every question can easily be designed to elicit criminal tax admissions that can be used later. Attorney–client privilege and the attorney work-product doctrine allow a lawyer to seal off sensitive conversations, draft analyses, and mental impressions. A stand-alone CPA, Enrolled Agent, bookkeeper, or unlicensed “tax preparer” enjoys no comparable, all-purpose shield. If an audit turns into an exponentially worse and life-changing criminal tax investigation, an accountant can be subpoenaed to testify against the very client who hired them.
The Narrow, Fragile Nature of IRC § 7525
Congress created IRC § 7525 in 1998 to extend a limited “tax-adviser privilege” to federally authorized tax practitioners, but the statute is riddled with traps:
- Civil-only. The protection applies solely in non-criminal federal tax matters. Once IRS-CI or DOJ Tax is involved, § 7525 is no longer applicable.
- Return-prep communications excluded. Anything said or exchanged while drafting a return is discoverable. A tax return is considered a public disclosure and thus negates any intended confidentiality even if prepared by an Attorney.
- No shelter for tax-shelter advice. Planning, promotion, or implementation of tax avoidance “arrangements” falls outside the statute.
- No help in state proceedings. California courts have held that § 7525 does not bind the FTB, CDTFA, or EDD.
- Qualified, not absolute. The government can override it via the crime-fraud exception or by showing “direct relevance.”
Accountant Privilege Myths Shattered by the Courts
- United States v. Arthur Young, 465 U.S. 805 (1984): Supreme Court: no common-law accountant privilege; audit work papers are fair game.
- United States v. Textron, 577 F.3d 21 (1st Cir. 2009): Tax-accrual memos by in-house accountants not shielded; their “driving purpose” was financial, not legal.
- United States v. Rutherford, 555 F.3d 190 (6th Cir. 2009): Statements taxpayers made during a civil audit—while represented only by a CPA—were admitted at their criminal tax trial.
- Ninth Circuit (2023) “Primary Purpose” ruling: The court rejected a broad “because-of” work-product test; communications whose primary aim is business or tax-prep advice are not privileged, even when a lawyer prepares the returns.
Many CPAs still believe that § 7525 fully protects their discussions. It does not. Courts limit the privilege to civil tax advice unrelated to return preparation or future criminal risk. Once a civil tax audit shows badges of fraud—or if the accountant prepared the original return—no privilege exists. The Sixth Circuit’s Rutherford case confirms that civil-audit statements made through a CPA conduit can be presented in a criminal courtroom.
How a Kovel Arrangement Restores Protection
In U.S. v. Kovel, 296 F.2d 918 (2d Cir. 1961), the court held that when an attorney hires an accountant to help render legal advice, the accountant’s work may share the lawyer’s privilege. A valid Kovel set-up requires:
- Engagement originates from the attorney, not the client.
- Written Kovel letter making the CPA the lawyer’s agent.
- Controlled information flow—files routed through counsel.
- Legal—not mere accounting—purpose. Forensic calculations for anticipated litigation qualify; routine return prep does not.
Correctly structured, a Kovel arrangement allows the same CPA to assist without becoming the government’s future witness.
Privilege Pitfalls in Eggshell and Reverse Eggshell Audits
An eggshell audit is a civil examination that can reveal potential criminal tax issues, such as unreported offshore income, cryptocurrency gains, and worker classification fraud. A reverse eggshell audit occurs when IRS-CI shadows or cloaks a criminal tax investigation as a “civil” tax audit. In both scenarios, letting a CPA handle examiner interviews risks self-incrimination. Only an attorney can:
- Control questions,
- invoke the Fifth Amendment,
- and prevent voluntary disclosures from morphing into sworn admissions.
Why Privilege Changes the End-Game: Three Common Fact Patterns
Offshore Account Gap Revealed Mid-Audit
When a taxpayer is guided only by a CPA, the IRS can subpoena that CPA’s e-mails, spreadsheets, and work papers. If those documents reveal unreported foreign interest or high balances, Criminal Investigation (CI) can treat them as direct evidence of willfulness and recommend felony FBAR charges (civilly, up to 50% of the highest annual balance). With an Attorney-CPA (or a CPA engaged under a Kovel agreement or employed directly by a law firm), every bank statement and translation is reviewed under attorney-client privilege; nothing leaves the file until counsel decides on the safest corrective path—typically a Streamlined filing or Voluntary Disclosure that resolves the issue before CI ever opens a case.
California EDD Payroll Exam Hinting at Cash-Pay Fraud
A CPA alone must hand over whatever the auditor requests, including three years of bank reconciliations that can expose unexplained cash withdrawals. Those records often spark referrals to the Department of Industrial Relations for wage-and-hour penalties and, in severe cases, criminal payroll-tax charges. An Attorney-CPA can legally limit production to the records the CUIC (§§ 1085, 1092) requires, keeping surplus ledgers privileged while crafting an AB 5/Borello independent-contractor defense. Because the privileged analysis is never disclosed, counsel can usually confine the audit to a single test year and negotiate a modest or zero assessment.
Undisclosed Crypto Gains
If a stand-alone CPA prepares draft gain calculations, wallet spreadsheets, or chain analysis, those drafts can be subpoenaed later and used to prove the client knew the income was under-reported. An Attorney-CPA team keeps the forensic reconstruction under privilege, refines the numbers, and files precise amended or qualified amended returns at the moment they are most defensible, avoiding self-incrimination and sharply reducing penalties.
Takeaway:
In high-risk situations, relying solely on a CPA’s records often means that your own records become the government’s strongest evidence. Involving a dual-licensed Attorney-CPA (or a Kovel CPA working for counsel) keeps sensitive analyses shielded, gives you room to fix problems proactively, and maximizes the chance of a civil, rather than criminal, outcome.
Why You Should Hire the Dual-Licensed Attorney-CPAs at the Tax Law Offices of David W. Klasing
At the tax law offices of David W. Klasing, every engagement is led by a professional who is licensed as both an Attorney and a CPA, has nearly 30 years of experience and also has earned a master’s degree in taxation. That means each conversation, draft calculation, and strategy memo is locked behind attorney–client and work-product privilege from day one, shielding the very evidence that, in lesser hands, might send you from an “informational” interview to a felony criminal tax indictment.
Our dual-licensed Tax Attorneys and CPAs combine that legal firewall with heavyweight forensic accounting horsepower. Our in-house team reverse–engineers crypto wallets, reconciles Amazon, Shopify, and Stripe data to bank deposits, and rebuilds cash-basis ledgers that can withstand the most rigorous CDTFA, EDD, FTB, or IRS audits. Because we have successfully litigated and won cases before the U.S. Tax Courts and have appeared before the federal district courts, opposing agencies are aware that we are prepared to litigate rather than accept a suboptimal deal. That credibility frequently turns draconian initial proposals into “no-change” letters or single-digit settlements.
Equally critical, we play multi-agency chess, not checkers. An EDD reclassification can trigger IRS trust-fund penalties; a CDTFA sales-tax adjustment can create a nightmare of a franchise-tax nexus; a missed FBAR can morph into a DOJ criminal tax referral. We coordinate every moving part— voluntary disclosures, Kovel CPA work product, installment agreements, Offers in Compromise, and lien releases—so you are never blindsided by a domino you didn’t know existed.
Finally, we speak plainly about stakes. Under 18 U.S.C. § 1001, a false statement to a federal agent carries up to five years in prison; under 8 U.S.C. § 1101(a)(43)(M), a $10,000 tax-evasion conviction is an “aggravated felony” that guarantees deportation for green-card holders. One careless answer can cost you your freedom, your livelihood, and even your legal right to remain in the United States. Our job is to make sure that never happens. If you value your liberty and your net worth, entrust your case to the dual-licensed Tax Attorney-CPAs at the tax law offices of David W. Klasing—where privileged strategy meets unassailable numbers, and fear-inducing audits are turned into controlled, winnable engagements.
Call the tax law offices of David W. Klasing at (800) 681-1295 or schedule a confidential, reduced-rate consultation online HERE.
