For decades, accountants considered it a professional slight. Attorneys, under the shield of law, could protect most sensitive communications with clients, under the argument that unbuttoned, protected dialogue between the two sides would increase the likelihood of lawful client behavior.
Now that they’ve won the privilege — as a result of aggressive lobbying by major accounting firms — the profession might yet come to regret it.
“In some respects, this will make your life easier,” Ulmer & Berne’s Steven Marcus recently told a room packed with accountants, who came out in droves for a professional session on the topic of the new accountant-client privilege, even though it was scheduled in the heart of tax season. “However, it will further complicate your lives and increase your already significant exposure to professional liability claims.”
In other words, the new privilege comes with its own double edge, threatening to make it easier for clients to sue their CPAs.
That’s because Congress, as is its wont, left crucial gray areas unanswered and important terms such as “tax advice” undefined when it extended the privilege to accountants almost as an afterthought to last year’s IRS Restructuring and Reform Act. While the legislation symbolically brought accountants on the same professional footing as lawyers when it comes to protecting sensitive client communications, the new privilege is technically is not new at all, but merely an extension of the attorney-client privilege which dates from ancient English common law.
In practice, though, the crafting of the bill will leave accountants in a far less privileged position than their counterparts in the bar. As one tax expert, Ulmer & Berne’s John Goheen, chair of the firm’s tax practice, said at the conference, “This new privilege is not as broad as the attorney-client privilege.” It applies to tax “advice,” but at least in this bill, that doesn’t cover much of the actual work accountants routinely perform for their clients.
Similarly, the new privilege — which covers those communications which took place on or after July 22, 1998 — extends only to matters before the Internal Revenue Service. But even then, it provides no protection for communications involving tax shelters or criminal cases. And it can be accidentally forfeited in cases where there is disclosure of the communication to a third party. Finally, the privilege is reserved not to accountants at all, but to their clients.
“These limitations may be a trap for the unwary,” said Goheen. The upshot for clients? Go slow and be wary in releasing sensitive information, as you always should have been in the first place. There’s a good chance your accountant won’t be able to keep your secret, even if he or she wants to.
For instance, there’s a large gray area in what constitutes tax advice, since Congress didn’t define what it meant by the term. It’s pretty clear that simple preparation of tax returns, including the process of converting financial statements to tax returns, doesn’t count. Until the IRS issues related regulations, as it sometimes does to put some flesh on the bones of new legislation, or a body of case laws emerges from tax and other courts as the issues are litigated, that will be one important question left without light.
The problem, as Lewis Barr put it, is deciding “how much of a flavor of legal advice will tax advice have to have to be privileged.”
It seems clear that tax advice does include, and thus will be covered by the privilege for, “advice that you give to your clients, discussions, letters, especially if it’s dealing with thoughts, mental impressions, likelihood of success, those types of communications, especially if you memorialize them in memoranda,” Goheen maintained.
There’s a thorny issue of what happens if a bit of tax advice is first issued concerning a matter before the IRS, but later ends up in the courts. The House of Representatives didn’t deal with that important issue, leaving it to the Senate to hastily address it, Barr points out.
“But this kind of last-minute addition was only half thought out, and it raises all kinds of questions,” he said.
Despite those as-yet-unanswered questions, the legal community seems to be tentatively edging toward a rough early consensus on how to proceed, if this session was a fair guide. Where the matters under discussion are clearly subject to privileged communications, accountants and their clients are being counseled to get in the habit of memorializing such conversations in memoranda, and stamping associated work papers with terms such as “privileged and confidential” or the like, as lawyers have always done.
In the end, legal experts are suggesting that the new privilege will almost certainly introduce a new and potentially troublesome “tension” between an accountant’s traditional duties to the public and his professional responsibilities to best represent his client.
“There’s no good answers to this tension right now,” says Goheen. “But what’s going to have to prevail is the duty to disclose to the creditors and investors, and that this confidentiality privilege may have to fall away.”
