Accountant-Client Privilege

SYNOPSIS

This term paper offers an overview of the federal government’s newest appointed privilege given to accountants, which is known as, the accountant-client privilege. For the many reasons that other professional-client privileges exist the rationale behind the accountant-client privilege is mainly, to give the client more options in seeking tax and estate planning advice. As with other privileged communications there are exceptions as to what is privileged and what is not.

For whatever reason, many taxpayers have viewed this limited privilege as equivalent to the attorney-client privilege. Sadly, even some tax pros don't quite understand the protection afforded the client under Code Section 7525, and the few recent rulings are giving the tax preparers less sense of security. Communications between professionals and their clients other than those between an attorney and his or her client are not privileged under federal law. In cases involving federal law, state-provided rights to confidentiality of accountant-client communications are not recognized.

To get around this issue, in the past, in order for a CPA to seek communication privilege with their client an attorney would have to be hired in order to invoke the attorney-client privilege which would also extend to the accountant. This was a two tier process which in most cases would be costly and troublesome. In 1998 an Internal Revenue Service Restructuring and Reform Act was enacted. This reform contains a provision that created confidentiality privilege between clients and CPA’s who represent them in non-criminal tax matters. Now taxpayers can discuss directly with their accountants riskier tax strategies without having the need to hire or seek the advice of a tax attorney.

CPAs and enrolled agents should not feel like their professional efforts are given any less respect than given to tax lawyers because, as the Frederick case made it clear, the common law attorney-client privilege enjoyed by lawyers affords them and their client’s precious little protection in the area of tax advice.

CPA’s should also take all the proper precautions when trying to invoke the accountant-client privilege. This is because some courts have held that even accidental disclosures can waive the attorney-client privilege. Thus, if a client loses a case because of an inadvertent disclosure both the attorney and the accountant could be sued for malpractice.

With this in mind the accountant should treat this privilege as being limited and avoid thinking of it as a shield or security blanket because what an accountant may think is privileged may actually be not.

BACKGROUND

Privileged communication has been often thought to be only for attorney-client, doctor-patient, and clergymen. Now this privileged communication has been extended to cover CPA’s and their clients. Similar to all other privileges only the client and not the accountant may waive the privilege. As with the other privileged communications there are exceptions as to what is privileged and what is not.

The most comprehensive of these privilege rules apply to clergy members and their parishioners. Although this privilege was dropped from the common law and was no originally part of the federal statutes, this privilege is only limited by mandated reporting laws, which state that a number of professionals, including policeman, clergy, teachers and attorneys, must report suspected child abuse cases to the authorities. All 50 states have laws protecting these privileges, and the federal laws followed in suit in 1981 in the federal rules of evidence, after which some of the states changed their laws to be more in line with the federal guidelines. Different states interpret this privilege differently, the main differences being who can be considered a clergyman and what types of communications are subject to privilege. In most cases, the clergyman may waive this privilege if she/he feels another person is at risk, but in some states, the parishioner must first waive his rights to the privilege.

Doctor-patient and therapist-patient privilege are similar to the clergy privilege, especially in that states have different standards and they are subject to mandatory reporting. One key difference is that these professionals, especially therapists, are required to break privilege if they believe a third party is in danger from their patient.

In the past, in order for a CPA to seek communication privilege with their client an attorney would have to be hired in order to invoke the attorney-client privilege which would also extend to the accountant. This was a two tier process