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Attorney Client Privilege Discussion

Attorney Client Privilege

What is attorney client privilege (ACP)?
Attorney-client privilege is a legal concept that protects communications between a client and his or her attorney and keeps those communications that qualify for the privilege confidential and private.
What public policy is promoted by the Attorney Client Privilege?
The policy underlying this privilege is that of encouraging open and honest communication between clients and attorneys, which is thought to promote obedience to law and reduce the chance of illegal behavior, whether intentional or inadvertent. As such, the attorney-client privilege is considered as one of the strongest privileges available under law.

California state law only protects the attorney’s confidential communications pertaining directly to a pending legal proceeding and thus is narrower than the privilege under federal law.

What are the consequences of an attorney violating the attorney client privilege?
An attorney speaking publicly about a client’s personal business and private affairs can be reprimanded by the bar and/or disbarred, regardless of the fact that he or she may be no longer representing the client.
Are communications surrounding the seeking of tax advice protected by the Attorney Client Privilege?
The bulk of tax attorney-client privilege cases involve federal evidence law. Federal Rule of Evidence 501, which states simply: "The privilege of a witness, person, government, State, or political subdivision thereof shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in the light of reason and experience." Thus, the basic rules of the federal attorney client privilege are not codified and are established entirely through case law.

A number of federal cases have held that confidential attorney-client communications associated with the giving of tax advice are protected by the attorney-client privilege. A number of courts, however, have also long expressed that the privilege does not protect certain documents and communications in the return preparation context-hereafter referred to as the return preparation exception." Unfortunately, the return preparation exception has not always been well explained or consistently applied by the courts.

When a taxpayer/client follows an attorney’s advice with respect to tax issues, that advice will in some fashion ultimately be reflected on the taxpayer/client’s tax returns filed with the government. In this sense, almost all tax law advice is, in some regard, associated with return preparation activities. As a result of this relationship to the tax return, a minority of the legal community have held that the return preparation exception is so broad in scope that the attorney client privilege simply does not apply at all to the "practice of tax." Consequently, amongst the Tax Bar, tremendous uncertainty exists as to the scope of protection available.

The "better view" seems to be that communications related to tax return preparation are protected by attorney-client privilege as long as they relate to substantive legal issues and contain material beyond that which is to be disclosed on the return.

Are the underlying facts contained in a communication between a client and an attorney protected under the Attorney Client Privilege?
Courts have emphasized that only communications-and not facts-are protected. The privilege only protects disclosure of communications; it does not protect disclosure of the underlying facts by those who communicated with the attorney: . . . "A fact is one thing and a communication concerning that fact is an entirely different thing. The client cannot be compelled to answer the question, ‘What did you say or write to the attorney?’ but may not refuse to disclose any relevant fact within his knowledge merely because he incorporated a statement of such fact into his communication to his attorney."
Does the Attorney Client Privilege apply to documents that I provide to an Attorney?
Since the underlying facts contained in a document themselves are not protected by the attorney-client privilege, courts have regularly refused to find that privilege attaches to pre-existing documents given by the client to the attorney. For example, pre-existing business books and records are considered "independent documents," and not client communications to an attorney.
Are documents provided to an attorney that the client intends to be shared with third parties subject to the Attorney Client Privilege?
In order for privilege to attach, case law also requires that at the time the attorney and client communicate, the client must intend the communication to remain confidential. When a client communicates information with his or her attorney so that the attorney can share it with third parties, the privilege never attaches to such attorney-client communications. As a result, items such as "corporate documents, real estate documents, contracts, leases, and other business documents" are themselves generally not considered privileged even when prepared by the client’s attorney because such documents are by their nature intended to be shared with third parties; they are prepared so that they will be filed with governmental authorities or given to private parties with whom the client is conducting business. Thus, the initial intent for confidentiality is considered to be lacking.

However, when attorneys and clients communicate confidentially in the course of preparing such documents, not everything communicated between them will ultimately be shared with third parties. Communications about some of the issues discussed may not be intended to be published or otherwise revealed to third parties; in which case such communications should remain privileged.

What happens where a client that initially wishes a communication with his attorney to be confidential discloses the contents of the communication at a later date?
In addition to the required intent for confidentiality when the attorney-client communication first takes place; confidentiality also must be maintained subsequently. To the extent the substance of those, initially privileged communications are later disclosed to third parties, courts have found the privilege to have been waived.
Are communications with my accountant subject to the Attorney Client Privilege?
The U.S. Supreme Court has long established that there is no federal accountant-client privilege. Thus, communications with accountants on federal tax matters have historically not been privileged except in certain circumstances when the accountant is assisting an attorney as an "interpreter" of accounting concepts so that the attorney can provide legal advice to the client. By contrast, to the extent an accountant provided his or her own advice on tax issues, the communications have not traditionally been privileged.

However, this traditional approach to tax accountant communications changed dramatically in 1998 when Congress enacted I.R.C. § 7525, which extends to "federally authorized tax practitioners," including certain accountants, "the same common law protections of confidentiality which apply . . . between a taxpayer and an attorney" with respect to "tax advice." Rather awkwardly, to determine the boundaries of § 7525, courts have had to superimpose on federally authorized tax practitioners the already muddled federal case law involving questions of privilege with respect to tax attorney-client communications. Because the attorney-client privilege and the § 7525 privilege are intended to be coexistent in most respects, this process has unfortunately created even more confusion as to which tax attorney communications are within the scope of the attorney-client privilege.

Is there a methodology whereby an Attorney can reinforce the "privilege" available to accountants to the same strength as the Attorney Client Privilege?
Attorney’s often enter into a third party agreement with a client’s accountant, through a Kovel Letter, in an effort to extend the Attorney’s – Attorney Client Privilege to communications between his client and the accountant. In the landmark case, United States v. Kovel, 296 F.2d 918, 922 (2d Cir. 1961) the court stated (…if the lawyer has directed the client, either in the specific case or generally, to tell his story in the first instance to an accountant engaged by the lawyer, who is then to interpret it so that the lawyer may better give legal advice, communications by the client reasonably related to that purpose ought fall within the privilege; there can be no more virtue in requiring the lawyer to sit by while the client pursues these possibly tedious preliminary conversations with the accountant than in insisting on the lawyer’s physical presence while the client dictates a statement to the lawyer’s secretary or is interviewed by a clerk not yet admitted to practice.")
What are the types of communications falling within the return preparation exception and thus not subject to Attorney Client Privilege?
Three distinct types of communications tend to fall within the return preparation exception under existing federal case law. First, some cases involve assertions of privilege to protect pre-existing documents. Typically, the pre-existing documents in question were the financial or accounting records of the client taxpayer, which were relevant to the preparation of the tax return. As previously discussed, pre-existing documents are not privileged, "Work papers" are the second type of communication commonly encountered in the return preparation exception case law. Typically, these cases involve work papers created by an attorney preparing the client’s tax return. However, sometimes the cases involve work papers prepared by an accountant-who is not also an attorney. Such work papers are almost universally regarded as outside the scope of the attorney-client privilege.

A third genre found in the case law is client communication of factual information to the attorney-return preparer. In such cases, the factual information provided is often at least potentially important to one preparing the tax return. The courts’ holdings, as well as their reasoning, have varied greatly. This genre of communication has produced the greatest amount of controversy, as well as the bulk of the courts’ analyses on the scope of the return preparation exception. Through such cases, the courts have developed the two legal rationales offered for the return preparation exception.

One line of cases justify the exception on the theory the attorney was not serving the client in his or her legal role, or was not providing legal services to the client. The other line of cases hold that privilege only applies when communication is directed to an attorney when he or she is acting in the role of an attorney and that the client be seeking some type of legal services from the lawyer.

Does the Attorney Client Privilege apply where an attorney is acting in a non-legal role? Is the preparation of a tax return by a Tax Attorney a legal or non-legal role?
Courts have consistently held that the attorney-client privilege does not apply when the attorney is acting in a non-legal role. For example, privilege claims have failed when they were asserted with respect to an attorney providing business advice, communicating in a managerial role, engaging in social conversation, or giving investment advice. Communications with an attorney have also been held not privileged when the attorney is providing nonlegal services such as maintaining a bank account, making bank deposits, collecting rent, or relaying factual information to employees.

In the landmark Ninth Circuit case, United States v. Abrahams, the court noted that although communications made "solely" for tax return preparation were not privileged, communications made "to acquire legal advice about what to claim on tax returns may be privileged."

Other cases began to adopt the view that attorneys preparing tax returns were not doing so in their capacity as lawyers unless other legal services were also being performed for the same client. The courts reasoned that the attorney-client privilege did not apply to communications involving "services . . . typically rendered by an accountant."

Yet another court announced the rule that "the preparation of tax returns is sufficiently within the professional competence of an attorney to be protected by the privilege but only if the preparation of the returns is part of a bona fide attorney-client relationship evidenced by significant other legal services rendered by the attorney for the taxpayer." Because there was no evidence in that particular case that the lawyer had performed any "legal services for the taxpayer other than the preparation of the tax returns," the court stated it had to presume that the return preparer was acting in the capacity of an accountant and not as an attorney and therefore Attorney Client Privilege was denied.

What happens where a communication between and attorney and a client was not meant to be confidential in the first place or is not kept confidential after it takes place?
The elements of privilege require communications that were initially "made in confidence." Communications that were initially confidential, however, will cease to enjoy the protections of privilege if confidentiality is not maintained but is subsequently lost. If communications are not confidential initially, then they are never privileged and subsequent disclosures cannot trigger a waiver.
Is the law settled on Attorney Client Privilege?
After reviewing the general rules of attorney-client privilege and the cases applying the return preparation exception, it is evident that the law is not settled and significant ambiguities certainly remain. Nonetheless, it is possible to make some generalizations as to the types of tax lawyer communications that are-and are not-protected by the attorney-client privilege.
How do we find certainty where a body of law is unsettled?
From studying the cases that apply the return preparation exception, it is obvious that the law is still evolving. Due to the variance in the courts’ approaches to the issue, as well as the doctrine of stare decisis, the result in any given case may ultimately depend on the specific body of case law in the circuit where the case is actually litigated. However, there are certain trends across the circuits that one can use to make broad generalities about the state of the law.
What can be generalized about the ACP in the return preparation context?
Whenever an attorney is preparing returns for a client-or is directing a non-attorney to prepare returns on behalf of the attorney’s client-there is a heightened risk that the privilege will not apply to communications associated with that return preparation service. In particular, pre-existing documents are unlikely to be protected by the attorney-client privilege. This is especially true if the pre-existing documents were either prepared by someone other than the client, or were prepared by the client for initial disclosure to someone other than the attorney. Work papers created by a return preparer are also likely to be held beyond the protections of privilege. A different result is possible, however, especially if the work papers contain information not communicated on the return.

To the extent a client communicates factual information to an attorney in the return preparation context, there is a risk that privilege may not apply, but the result is much more uncertain than in the case of pre-existing documents and return work papers. Communications of factual information are likely to be scrutinized much more closely in light of the two legal justifications underpinning the return preparation exception.

What can be generalized about the ACP in the Tax Controversy context?
It seems clear that the attorney-client privilege will generally apply when an attorney is advising or representing a client with respect to returns that have already been filed. Unless an issue is raised as to amended returns, it is self-evident that after a return has been filed, the attorney’s tax services do not involve return preparation and by definition cannot fall within the scope of the return preparation exception to the attorney client privilege. Thus, the privilege is likely to apply to the extent communications facilitate an attorney’s representation of a taxpayer in the context of a post-filing tax controversy with the IRS.

There does not appear to be any dispute that an attorney representing a client in tax litigation is serving in an attorney role, and the elements of privilege are generally satisfied. Indeed, court rules generally prohibit non-attorneys from representing non-family members in court. There appears to be no principled reason why attorneys in tax litigation should be viewed differently for purposes of the attorney client privilege than those litigating non-tax cases.

It is also likely that the attorney-client privilege applies when an attorney is advising a client in the course of a tax controversy in an administrative setting. Indeed, several cases have concluded that the attorney client privilege does apply when an attorney is representing a taxpayer before the IRS in an audit.

Privilege seems especially likely to apply in the audit context to the extent the attorney is advising the taxpayer with respect to legal issues involving statutory interpretation or case law, and not merely assisting the IRS to verify the accuracy of the information in the return.

It seems even more likely that the attorney-client privilege applies when an attorney is representing a taxpayer before the IRS Office of Appeals (Appeals). Representation before Appeals is similar in many respects to litigation. It is considered an adversarial setting analogous to non-binding arbitration. Appeals is also understood to satisfy the "litigation" requirement of the work product doctrine. Further, if courts have already extended the protections of attorney-client privilege to the audit context, it would be difficult to imagine courts would not also do so in the context of Appeals.

What can be generalized about the ACP in the Pre-Transaction v. Post-Transaction settings?
Although it appears clear that the privilege applies to protect attorney- client communications involving tax issues arising subsequent to the filing of the return, there has been more confusion in the pre-filing context. When counsel is provided before the return is filed, to some degree, all attorney tax advice is associated with and facilitates the preparation of a client’s return. This is true even when an attorney does not actually fill out the return or even communicate directly with the client’s return.
What can be generalized about the ACP where an Attorney accompanies a client to an IRS audit?
When a revenue agent is merely verifying the accuracy of a return, often with the assistance of the taxpayer’s accountant, this is accountants’ work and it remains such even if the person rendering the assistance is a lawyer rather than an accountant. If, however, the taxpayer is accompanied to the audit by a lawyer who is there to deal with issues of statutory interpretation or case law that the revenue agent may have raised in connection with his examination of the taxpayer’s return, the lawyer is doing lawyer’s work and the attorney-client privilege may attach.
What can be generalized about the ACP where an Attorney provides client tax planning advice?
It seems uncontroversial to conclude based on case law that tax-planning advice is protected by privilege; there does not appear to be any serious argument that it is within the scope of the return preparation exception. It simply appears to be too remote temporally and conceptually from return preparation activities. Indeed, numerous cases have explicitly held that communications to facilitate an attorney’s tax planning advice are within the scope of the attorney-client privilege. Tax planning advice has been defined as "before-the-fact" advice to a client who is contemplating a potential course of action. Such a client may want such pre-transaction advice to determine the best way to pursue the potential course of action while minimizing any tax consequences.

Alternately, tax planning may be aimed at helping the client to understand the resulting tax consequences from a contemplated course of action. Understanding and quantifying the tax costs of a proposed transaction can help the client make a final decision as to whether to pursue and consummate the contemplated transaction. Attorney-client communications associated with both types of pre-transaction tax planning advice are clearly privileged according to the existing case law.

Is there ever a situation where an Attorney’s advice concerning the preparation of a return would be privileged?
As a result of the complexity of our federal tax laws, there are many tax compliance issues that are not easy to resolve without legal assistance. Particularly in the case of taxpayers with sophisticated financial affairs, a non-attorney return preparer may be unable to prepare a return without tax advice from an attorney.

The Internal Revenue Code is a sprawling tapestry of almost infinite complexity. The Code, after all, is a finite system of rules designed to apply flexibility to an infinite variety of situations. There are many "gray areas" in the tax world, twilight zones in which one may only dimly perceive how properly to treat a given accretion to wealth or given expenditure of funds. To the extent a taxpayer is seeking a lawyer’s advice as to a tax characterization that is ambiguous under the law, the attorney-client privilege should be applicable.

What are the Policy Implications of the ACP in the tax arena?
Because the attorney-client privilege is generally viewed as an impediment to the courts’ truth-seeking function, some may query whether it is desirable from a policy perspective to have the attorney-client privilege apply to communications with tax lawyers. The strength of the policy arguments supporting an application of privilege may depend on the context where the communication takes place.

On the other hand, representation by an experienced lawyer generally expedites resolution of a taxpayer’s case, which saves the IRS and the courts time. For example, without the reality check provided by Tax Attorneys, pro se taxpayers might continue to prosecute a case they are destined to lose, which wastes the finite resources of both the IRS and the courts. For this reasons, in the tax controversy setting, taxpayer representation by attorneys promotes efficiency in the administration of the tax laws. Such representation is encouraged by the protection of privilege in this setting.

What actions does the Tax Law Offices of David W. Klasing take to protect a client’s ACP given that David is both a Tax Attorney and CPA?
Keeping the privilege while preparing returns is not easy, whether as a Combo Attorney – CPA or just as a tax attorney. The only safe way is to keep the legal and accounting functions scrupulously separated, but in the real world there is no clear dividing line between these functions. Many Combo Attorney – CPAs deal with this problem by simply ceasing to practicing as CPAs and tell their clients they no longer practice accountancy although they have the training and keep up their licenses.

Since the ACP analysis turns on the nature of the work performed and courts have been quite reluctant to bless tax return preparation with privilege except in a few unusual cases, clients may not be willing to risk loss of the privilege by having an attorney prepare their returns. In these situations, the Tax Law Offices of David W. Klasing has historically made extensive use of Kovel arrangements and careful coordination with the Client’s tax preparer, so that the attorney is not involved in return preparation but contributes to the legal analysis and advice on possible legal challenges or even possible criminal issues where needed. In these situations our engagement letters are carefully worded because these letters are Exhibit A in any challenge to the privilege, the wording of client billing statements is carefully prepared because such statements are Exhibit B in any such challenge, and clients are educated and their tax preparers are educated to avoid inadvertent risks to the privilege. The Tax Law Offices of David W. Klasing is very careful about what is said to whom and in what context and for what purpose, and documentation and other evidence on these matters is created and maintained.

Where the Tax Law Offices of David W. Klasing is preparing returns in a situation where the privilege may be important, communications and meetings regarding return preparation are separated from those concerning the legal analysis; this is risky because what is an accounting (or legal) function for one judge (e.g., a former prosecutor who has H&R Block do her tax returns) may not be for another (e.g., a former business lawyer with tax sophistication), and we can never tell in advance who your decision maker will be.

Moreover, the privilege rules themselves as discussed at length above are narrowly construed by the courts in order to support the general policy of getting as much relevant evidence as possible before the court. Therefore, unless a function is clearly legal, the court may well find it to be an accounting function or as intended to lead to disclosure to a third party accountant or (via an eventual return) to the government and thus not privileged.

Where did the vast majority of the information contained in this section of your website come from?
The Tax Law Offices of David W. Klasing would like to gratefully acknowledge the work of: Claudine Pease Wingenter cited extensively in this website’s coverage of the Attorney Client Privilege.

Does the Attorney-Client Privilege Apply to Tax Lawyers?: An Examination of the Return Preparation Exception to Define the Parameters of Privilege in the Tax Context

722 Washburn Law Journal Vol. 47

Claudine Pease-Wingenter is a corporate tax lawyer in Houston, Texas. She earned her B.A. from the University of Texas at Austin in 1992, her J.D. cum laude from the University of Houston Law Center in 2000, and her LL.M. in Taxation from the University of Houston Law Center in 2008. She is a member of the Order of the Coif and the Order of the Barons.

The Tax Law Offices of David W. Klasing would like to gratefully acknowledge the work of:

Langon Owen of Parson Kinghorn Harris cited extensively in this website’s coverage of the Attorney Client Privilege.

Tax Advisor’s Privilege Under IRC § 7525

Langdon Owen – Parsons Kinghorn Harris

July 28, 2005