Attorney-Client Privilege with My Accountant? Tax Lawyer Rob Wood Tells You How
Almost everyone is a taxpayer, and some taxpayers have complicated financial affairs that require expert tax assistance. The problem is that tax accountants don’t have anything like an attorney-client privilege to shield their work from the IRS. Anything a tax accountant prepares for you, even as a preliminary, hypothetical version, can be gotten to by the IRS. How can you protect yourself? Tax lawyer Rob Wood explains that taxpayers and their lawyers can work together to solve the problem. He wrote about the subject in a recent Forbes article, “Do You Have Attorney-Client Privilege With Your Accountant? Here's A Workaround.”
Wood says that the solution to the problem can be a “Kovel letter.” The letter takes its name from a tax case, United States v. Kovel. The case concerns lawyers hiring accountants to perform work. How a Kovel letter works today is that a taxpayer hires a lawyer, and the lawyer hires an accountant to work on tax matters for the lawyer’s client. In that situation, the accountant’s tax work becomes part of the lawyer’s work product, and it is protected by the attorney-client privilege.
That is a big change from the situation where the taxpayer hires the accountant directly, and the accountant does some planning work for the taxpayer, using several scenarios and possible tax strategies. This material would not be safe from the IRS. Tax accountants might point to a “tax preparation privilege” created by Section 7525(a)(1)) of the tax code. That privilege, however, does not apply in criminal cases, so it is of very limited use. Attorney-client privilege, on the other hand, applies in all cases.
Wood points out that many lawyers do not prepare tax returns. The beauty of the Kovel letter is that it lets any lawyer hire the accountant to do work for the taxpayer in a way that the tax accountant’s work is exempt from the reach of the IRS. Wood says that these letters are very safe if done properly. One possible problem can be a preexisting relationship between an accountant and a taxpayer that may come into question in a case where a Kovel letter is in use.
Wood says that the IRS does not usually attack the privilege concept. The use of a Kovel letter is not a controversial topic. The use of the Kovel letter also helps a tax accountant deal with a demand from the IRS for tax materials that the taxpayer does not want to have disclosed.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.