Long a staple of Constitutional confrontations, as well as courtroom melodramas, the attorney-client privilege has been a source of repressed friction between attorneys and their briefcase-toting brethren, accountants. If journalists, clergy members and attorneys enjoy special legal protections for their communications with clients, accountants have long grumbled, why don't they rate the same professional respect?
The profession's yearnings were partly addressed this July, when Congress passed the IRS Restructuring and Reform Act of 1998. One little-noticed provision shields communications on certain tax advice matters between clients and federally authorized tax practitioners-which include CPAs, enrolled agents and actuaries and attorneys authorized to practice before the IRS.
There are a host of footnotes which have the effect of watering it down, however. The confidentiality privilege applies only in non-criminal cases, and if a case were to seep from the jurisdiction of the IRS to, say, the Securities & Exchange Commission, all bets are off. And for practitioners, there is a cost associated with their clients' new limited privilege: Practitioners now have some new responsibilities to report to the authorities any malfeasance they observe.
In effect, the provision repeals a U.S. Supreme Court ruling more than a decade ago in a case involving the firm of Arthur Young, a forerunner of Ernst & Young LLP. The High Court ruled in that case that accountants' "tax accrual work papers" could not be shielded under a professional privilege. The case has rankled the accounting profession ever since, especially since the court never got around, then or since, to defining what it meant by work papers.
"I think accountants felt the need to be able to counsel their clients in confidentiality" just as attorneys do, says Don Herkovitz, a Washington, D.C.-based senior technical advisor to Deloitte & Touche LLP's national tax group, who has authored an article on the topic for an upcoming issue of an accounting industry publication.
The IRS can't be happy about this latest crimp in its enforcement powers, which is part of a larger movement recently to begin shifting the burden of proof in tax cases from taxpayers to the tax agency (though only at the tax court, not field, level). "The honest answer," says the former chief of the IRS Cleveland office, Jack Chivatero, "is that this is going to make the IRS's job somewhat more difficult." Prior to this provision, he says, "the IRS could issue a summons to an accountant or an accounting firm, while they couldn't do it to attorneys, because of attorney-client privilege."
But the biggest question left unanswered for now concerns precisely what falls under the heading of "tax advice." D&T's Herkovitz thinks it will undoubtedly include standard letters of tax advice sent from accountants to clients, as well as all related tasks and conversations.
"Let's say somebody is planning a transaction, and they want to sell a building or depreciate some equipment. Even after you've sent the letter of advice, you're still working on the matter, writing a memo to the file or discussing the issue with a colleague. That would be privileged," he says. Where it may get dicier, though, is in cases where accountants are advising clients on interpretations of underlying tax provisions.
In the end, this qualified privilege may prove to be much ado about very little. At least that's the view of veteran Cleveland tax attorney Gary Zwick, a partner in the law firm of Walter & Haverfield, and for 25 years also a practicing CPA with such firms as Cohen & Co. "If it only applies in civil cases, it will have limited impact," he says. "I don't think it's that big a deal." After all, he says, "attorneys have always been concerned about accountants infringing on their territory. But accountants have always been better bush-shakers [rainmakers] than attorneys. If they'd all work together, they'd all do better."