When facing an eggshell audit, an audit with underlying criminal issues, or criminal tax charges, a taxpayer faces important choices that can determine his or her likelihood to avoid a worst-case result. One of these choices involves the type of representation that taxpayer seeks. If he or she makes the wrong choice, it can potentially harm his or her chances of mitigating the potential consequences of the situation he or she faces irrevocably.
After receiving a tax audit notice or some other indication that they are about to face criminal tax proceedings, many people are often tempted to go back to the original preparer. After all, in our society, we preach personal responsibility and standing behind your work. Therefore, if a tax preparer’s or accountants actions or inflated claims led to an audit or another tax proceeding against the taxpayer it would seem to make sense that they should fix it. Unfortunately, while this line of argument is superficially appealing, taxpayers who fall into the trap frequently face bad outcomes and significant additional problems. In many cases, going back to their preparer has just created government witness number one.
This is because, at the outset, there is a clear conflict of interest between the original preparer and the taxpayer. On one hand, the taxpayer wants the situation remedied and that means that he or she typically wishes to avoid being cast as having a knowing, voluntary, or willful involvement in the mistake or scheme. This means that the taxpayer is typically willing to blame the preparer for the error and minimize his or her role. While the taxpayer can’t deflect all blame in a strategy of this type since the taxpayer is responsible for the contents of his or her return and certifies it under the penalty of perjury, such may serve to mitigate the alleged conduct.
On the other hand, a professional tax preparer makes his or her living on the basis of reputation. If potential clients hear that the preparer botched or otherwise made grave errors of judgment on a filing, few people are going to seek the preparer’s services. A preparer is also aware of their own exposure under circular 230 and maintain their reputation with the taxing authorities is paramount to remaining in business and also in avoiding preparer penalties. Thus, the preparer is likely to be more than willing to shift blame to the client and turn over the information provided to the preparer by the client that then resulted in the contents of the tax return. Since the accountant is likely to be significantly more knowledgeable about taxes, he or she is likely able to deflect blame perhaps aided by anything additional you have disclosed subsequent to the return coming under audit.
Taxpayers who are not well-versed in the law may be thinking that their disclosures to their accountant may be protected. Unfortunately, this is not typically the case. Only a patchwork of states recognizes the accountant-client privilege. For instance, California does not recognize an accountant-client privilege. Rather, the state only has a statute that requires accountants to maintain the confidentiality of client materials. However, the statute Cal. Code Regs. tit. 16, § 54.1, contains a provision that permits for the disclosure of validly subpoenaed information. Therefore, if your accountant is ordered by a court to disclose your information, he or she almost certainly will provide the court the information it seeks.
Furthermore, while federal law recognizes an accountant-client privilege, this privilege is extraordinarily narrow. The privilege applies only to advisors authorized under federal law to practice before the IRS. Furthermore, the privilege does not apply to criminal proceedings or communications regarding tax shelters. If you are accused of tax crimes and your accountant is subpoenaed, the privilege will not apply. It is highly likely that he or she will provide the government what it wants to protect his or her reputation and credibility while avoiding the risk of being found in contempt.
In contrast to the narrowly construed accountant-client privilege, where it exists, the attorney-client privilege is broad and recognized in all 50 states and in federal court. The attorney-client privilege protects the vast majority of attorney-client communications made in confidence by the client when seeking legal advice or guidance. If you make a disclosure to an attorney, in nearly all cases that disclosure will remain confidential. Furthermore, since an important element of an attorney’s reputation is based on the ability to keep client confidences, he or she is much more willing to take it too the matt to protect confidential information.
Additionally, accountants who are called on to consult in a criminal tax matter typically operate under what is known as a Kovel letter. A Kovel letter can create a derivative attorney-client privilege for the accountant when he or she is working under the supervision and direction of a lawyer. Thus, an accountant cannot typically engage in a criminal matter without working through an attorney
Furthermore, the work-product doctrine will also protect any materials the attorney prepares in anticipation of litigation. Under the doctrine, “all tangible material or its intangible equivalent” collected or prepared in anticipation of litigation is protected. The work-product doctrine protects the work of anyone directed by the attorney as well.
It is important to understand the risk you face and the importance of selecting the right type of representation. If you are facing a tax audit or a criminal tax matter, you should seek an attorney because only the attorney-client privilege can provide for the confidentiality that is required to defend in matters of this type.