What the Privilege Protects in Tax Matters (and What it Does Not)
Attorney-client privilege protects confidential communications between a client and a lawyer made for the purpose of seeking or obtaining legal advice. Two closely related protections often arise in IRS matters:
(1) the work-product doctrine, which shields materials prepared in anticipation of litigation (with robust protection for attorney mental impressions), and
(2) the limited tax practitioner privilege in IRC § 7525, which extends attorney-client-like confidentiality to communications with federally authorized tax practitioners (e.g., CPAs)—but only in noncriminal federal tax matters (and not for tax shelter promotion communications).
None of these protections applies to underlying facts; privilege protects communications, not the existence of records or the facts they reflect.
A common nuance in tax controversy is that communications made solely for tax return preparation are generally not privileged; courts repeatedly hold that return-preparation work, even by attorneys or accountants, falls outside the privilege unless it is integral to providing legal advice. When a lawyer needs accounting help to render legal advice, the privilege can extend to an accountant engaged by the attorney under a Kovel arrangement (from United States v. Kovel), provided the accountant functions as the lawyer’s agent to help the lawyer advise the client. Without a properly structured Kovel engagement, looping in an accountant or other consultant typically destroys privilege.
Work-product protection in tax disputes is qualified and turns on purpose. If a memo or analysis would not have been prepared but for anticipated litigation, courts tend to protect it (See United States v. Adlman). But “dual-purpose” materials prepared for ordinary business/audit purposes (e.g., financial-statement tax-accrual workpapers) often lose protection, particularly if shared with independent auditors, as illustrated by the First Circuit’s en banc decision in Textron.
The Most Common Ways Privilege is Accidentally Waived in IRS Exams
Privilege is fragile. In civil IRS examinations and especially in high-risk eggshell or reverse-eggshell situations, minor missteps can waive protection:
CC’ing or Forwarding to a Third Party
Emailing your lawyer’s advice to your outside CPA, bookkeeper, banker, or business partner (without a Kovel or valid common-interest arrangement) waives attorney-client privilege by voluntary disclosure to a third party. Most courts generally reject selective waiver (disclosing to one government actor but not others).
Allowing a Non-Kovel Accountant to Sit in With the IRS
If a non-lawyer preparer attends meetings or helps draft responses without being adequately retained by counsel, the presence/participation of that third party can waive privilege. Section 7525 won’t save you in criminal contexts and is narrower than the attorney-client privilege even in civil exams.
Relying on “Advice of Counsel” to Defeat Penalties
Putting your lawyer’s advice at issue (e.g., to rebut willfulness or negligence penalties) can affect a subject-matter waiver over that advice and related communications. Courts enforce fairness by preventing a party from using privilege as both sword and shield.
Producing Documents to the IRS (or Your Auditor) Without a Privilege Screen
Once privileged materials are voluntarily made to the IRS or shared with independent auditors, privilege is typically waived; work-product protection may also be lost where the purpose was business compliance rather than litigation (Textron). Use privilege logs and staged reviews for summons or IDR responses.
Assuming the CPA–Client Privilege Exists
Outside of § 7525 (limited, noncriminal, federal-tax scope with specific exceptions), there is no general accountant-client privilege. Courts routinely compel the testimony of accountants and the production of files absent a valid attorney-client or work-product privilege claim.
Remember that the IRS can compel records and testimony through an administrative summons; privileges still apply, but you must assert them properly (often via a privilege log) and be prepared to litigate scope if necessary.
Guardrails to Preserve Privilege in IRS Civil Exams and High-Risk Matters
The proper protocols maintain confidentiality while still providing the IRS with the facts it is entitled to. At the Tax Law Offices of David W. Klasing, our experienced dual-licensed Attorneys and CPAs can:
Act as the Hub (and Adequately Document the Engagement)
Serve as the lead representative under Form 2848 and, where specialized accounting is required, retain CPAs through counsel under a written Kovel agreement so that their work functions as an extension of the legal team and is positioned under attorney-client and work-product protections.
Segregate Return-Prep From Legal Defense
Keep tax-return preparation and routine bookkeeping outside privileged channels; keep legal analysis, defense strategy, and forensic accounting inside counsel’s Kovel structure. Do not assume communications “about returns” are privileged (they usually are not), and remember IRC § 7525 does not apply in criminal tax matters or to certain tax-shelter communications.
Control Written Submissions
Provide the IRS with facts and documents responsive to IDRs while avoiding verbatim legal advice in administrative filings. Where showing reasonable cause or similar defenses is necessary, weigh at-issue waiver before asserting advice-of-counsel; tailor narratives and exhibits to keep privileged strategy out of the administrative record.
Run Staged Privilege Reviews and Log Appropriately
For IDRs or summons responses, perform multi-layer reviews, withhold where a valid privilege applies, and produce a privilege log identifying the basis (attorney-client, work-product, § 7525/Kovel). If something is inadvertently produced in litigation, use FRE 502(b)/(d) to mitigate or prevent waiver; at the administrative stage, negotiate clawback and non-waiver understandings in writing.
Use Common-Interest Correctly
When multiple parties share a standard legal (not merely commercial) interest, such as partners in a TEFRA/BBA partnership, memorialize a common-interest agreement to ensure that privileged sharing does not waive protections. A simple NDA is not a substitute.
Manage Interviews and Third-Party Contacts
Coordinate any IRS interview through counsel; decide whether the taxpayer should attend or whether the authorized representative will appear. Monitor and address planned third-party contacts in a timely and adequate manner, asserting privileges as needed.
Document the Purpose for Work-Product
Label and structure litigation-sensitive analyses so that they are prepared in anticipation of litigation (not routine compliance), thereby preserving work-product protection consistent with controlling case law.
Special Risks in “Eggshell” and “Reverse Eggshell” Audits (and Why Not to Default Back to Your Original Preparer)
Most IRS exams remain civil. However, where the facts suggest willful conduct (unreported income, fabricated records, or skimming), a civil tax audit can escalate into an exponentially worse and life-altering criminal tax exposure. In these high-risk eggshell or reverse eggshell audits, two missteps cause the most damage: (i) speaking directly with the IRS without counsel (anything you say is a party admission), and (ii) returning to the original preparer to “explain” the file. Communications with non-lawyer preparers are not privileged in criminal matters, § 7525 does not apply in criminal tax investigations, and preparers can be summoned and compelled to testify, sometimes becoming key government witnesses. A properly structured attorney-led Kovel team keeps your forensic accounting inside privilege while counsel manages the civil exam to minimize the risk of referral to IRS Criminal Tax Investigation.
Contact the Tax Law Offices of David W. Klasing if You Need to Preserve Privilege in an IRS Examination
When an IRS exam turns sensitive, privilege is your first line of defense and the easiest thing to lose by mistake. At the Tax Law Offices of David W. Klasing, our dual-licensed Tax Attorneys and CPAs move your matter immediately under the attorney-client and work-product umbrellas, assume representation with Form 2848, and (where accounting horsepower is needed) engage CPAs through counsel under a written Kovel arrangement so that communications and workpapers flow as part of the legal team, not as discoverable accountant files. We also navigate the narrow boundaries of IRC § 7525 (the limited tax-practitioner privilege), which does not apply in criminal matters and does not protect routine communications related to return preparation. This disciplined structure is the difference between safeguarding candid strategy discussions and inadvertently creating evidence that will shape the government’s future.
From there, we operationalize privilege protection while delivering the facts to which the IRS is entitled. We control IDRs, interviews, and scope; stage multi-layer privilege reviews; and, when appropriate, provide privilege logs identifying attorney-client, work-product, and § 7525/Kovel bases. In high-risk eggshell or reverse-eggshell settings, we keep your forensic accounting and narrative development within counsel’s file. These craft factual submissions avoid waiving the right to legal advice and prepare for escalation up to and including defense against a summons without sacrificing protections. This is not theory for us: we publish extensively on eggshell audits, Kovel mechanics, and privilege pitfalls precisely because we handle these scenarios every day.
At the Tax Law Offices of David W. Klasing, we help you avoid the common missteps that waive privilege: forwarding legal advice to a non-Kovel preparer, letting a preparer “explain” numbers directly to the examiner, or relying on “advice of counsel” as a penalty defense without planning for the resulting subject-matter waiver. With our dual-licensed Civil and Criminal Tax Defense Attorneys & CPAs, you get one integrated team that knows how IRS examinations develop, how privilege can be lost, and how to keep strategy insulated while efficiently resolving the audit. If you have received an IDR, Letter 566/2205, a CP2000, or signs your audit has eggshell characteristics, engage us before another word or document leaves your file. Begin with a confidential, reduced-rate initial consultation with the Tax Law Offices of David W. Klasing. Call (800) 681-1295 or contact us online through our form HERE today.
