We frequently emphasize the fact that if you are worried about facing criminal tax charges, generally, only the attorney-client privilege can protect the disclosures you may make when seeking legal advice. Remember, if you disclose potentially criminal tax actions to an accountant or to another third party, the government can theoretically subpoena your accountant and compel him or her to testify against you. In fact, we have frequently written about the importance of only making potentially criminal disclosures to an attorney. For more information regarding the attorney-client privilege and how it can protect you, please see our Attorney-client FAQ entry or one of our previous blog posts on this topic.
However, one area we have not frequently explored is how the attorney work product rule can also provide a client protection regarding subsequent criminal tax disclosures. While the attorney-client privilege is often the first area of inquiry regarding shielding disclosures, the work product rule may apply in situations where the attorney-client privilege does not.
It has long been held by the U.S. Supreme Court that the work product of an attorney can, in certain scenarios, be granted a qualified immunity from discovery in judicial proceedings including a potential criminal tax prosecution. Whereas the attorney-client privilege generally protects statements and communications made by the client to the attorney, the work product rule can protect items prepared by the attorney including:
Essentially, the work product rule can protect certain items that may not be protected by the attorney-client privilege. In certain scenarios, the rule can also protect disclosures where the attorney-client privilege may have been waived due to an accidental or inadvertent third-party disclosure.
Traditionally, the work product rule is set forth by the Hickman case and codified in the Federal Rules of Civil Procedure, Rule 26(b)(3). Hickman, Admr. v. John Taylor, (1947, S Ct) 329 US 495, 91 L. Ed. 451.Under Rule 26, a party to a litigated matter is entitled to make discovery requests. Under Rule 26(b)(3) requests, even for documents and tangible things otherwise discoverable and prepared in anticipation of litigation or for trial, is to be granted. These requests are only to be granted upon a showing that the party seeking discovery of the materials has a substantial need for the materials in the preparation of its case and, without undue hardship, is unable to get equivalent materials by any other means. Essentially, in most circumstances, the work product rule protects materials “prepared for litigation” by the party’s attorney and the attorney’s agents. It sets forth a high bar that must be overcome for a party to obtain these documents or disclosures.
Unfortunately, due to a split among the various federal circuits, the exact treatment a work product rule claim will receive is dependent on the court in which it is filed. To illustrate this split, consider that in matters filed in the First Circuit of Appeals, the Textron “prepared for litigation” test will apply. For firms utilizing and filing documents adhering to generally accepted accounting principles (GAAP), there is a serious risk that the underlying analysis could be discovered. This results in an extremely limited work product rule in this jurisdiction. By contrast, in the Sixth Circuit, the courts have crafted an expansive work product rule in Roxworthy. However, the IRS has contributed to additional uncertainty in this regard by stating that it would not follow the Sixth Circuit’s ruling.
Further complicating analysis for the tax layperson in California, the Ninth Circuit Courts, in which California is located, has issued seemingly contradictory rulings regarding the proper approach to the work product rule and when it applies. In U.S. v. Richey the court held that work product protections did not apply to an appraiser who worked at the direction of an attorney. The court viewed the appraiser’s services narrowly as being made to “substantiate” a charitable donation rather than as being prepared in anticipation of future litigation. This determination was made despite the fact that no evidence existed showing that the appraiser would have acted differently in the absence of potential litigation.
However, contrast this ruling to the one in U.S. v. Sanmina Corp & Subsidiaries where the court found that taxpayer memos related to valuation issues concerning a worthless stock deduction were prepared in anticipation of litigation. Here, the distinguishing factor seems to be the sheer size of the deduction in the latter matter should have put the taxpayer on notice that an IRS challenge was likely.
If you have serious concerns regarding a potential audit or a criminal tax audit, it is never too soon to prepare. However, the actions you take early on can affect your approach and likelihood for success. Therefore, don’t delay in seeking an experienced tax professional. Understanding the law that applies to your matter and whom you can and cannot make disclosures to is a key step in handling any tax concern.
At the Tax Law Offices of David W. Klasing, our founding attorney, David Klasing, is a dually certified tax attorney and CPA. As a former public auditor, he can frequently anticipate and plan for the approach and strategies utilized by auditors. He can advise you as to the steps you need to take to secure legal counsel for a tax matter without jeopardizing the protections provided by the work product rule or the attorney-client privilege. To schedule a confidential, reduced-rate consultation call us at 800-681-1295 today.